Cap rate on a short term rental vacation home

9 Replies

Background - Looking at a property that we would also use as a vacation home and STR so it's not 100% about maximizing the return on the property. In this sellers market there also appears to be no real future property appreciation to get here, just utility and cost offsetting and possibly cash flow.

What CAP rates are y'all targeting for your STR's?

Cap rate is for multi family. Better to use COC.

But bigger picture…. As long as you pick an actual vacation market: 

The question is not WILL it MAKE MONEY 

The question is….. can I handle drunk people on vacation sleeping in my house. 

CAP rates are useful if you could someday sell your STR based on the income it produces. Unfortunately, you can't do that. Appraisers will use comps, not income, to determine its value.

So, COC return, or the more complicated IRR are more useful. You will see a huge range on this forum of what people "expect." I'd say 15-70% COC is possible. If you are in the 20' did good imo.

Also, I'm gonna disagree that there is "no real property appreciation."  No one knows that.  Currently the government is pumping historically unprecedented amounts of cash into the economy, we have a global pandemic (round 2) on our hands, and telework is changing the way people think about living and working in one place.  There could be huge appreciation in the coming years...or maybe 50% of the population dies of a virus.  No telling! :)

@Alex S. Thanks. At this property, I'm looking at a $200k increase in sales price in 4 years. I think it's insane, but people are getting it with multiple offers and sales under a week (on lake Hartwell in SC)..

Originally posted by @BRAD THOMAS :

@John Underwood people thought the same thing in 2008 and have lost value and have not recovered even during this sellers market. I think this particular property has an intrinsic value I wouldn't go over ever. Thanks!

 We are in a way different situation than 2008. There are just not enough properties available for the demand.

I have spoken to several professionals and they have all told me that this is not a bubble but this is the new normal. 

If I thought this was a bubble I would be selling off some of my long term holdings. I am hanging onto everything and acquiring more when possible.