Airbnb Cap Rate by City

Thinking About Cap Rates for Your Airbnb Investment?

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Disclaimer: This article is for informational purposes only and not investment advice. Cap rates and market conditions may have changed since publication. Always consult with qualified professionals before making investment decisions.

Introduction: Understanding Airbnb Cap Rates in 2025

What is a good cap rate for Airbnb investments in today’s market? If you’re looking to invest in a profitable short-term rental, the Airbnb cap rate is one of the most important metrics you should pay attention to. Cap rate, short for capitalization rate, tells you the percentage of your property’s value that will be generated from your rental income each year, making it essential for comparing investment opportunities across different markets.

The cap rate for Airbnb properties has become increasingly important as the market matures and investors seek data-driven approaches to maximize returns. While traditionally a cap rate between 4% to 10% is considered good for rental properties, Airbnb properties often experience different dynamics due to higher gross incomes from short-term rental rates, but also potentially higher operating costs and vacancy rates.

Understanding cap rates by city helps investors identify the most profitable markets while balancing potential returns with investment risk. In this comprehensive guide, we’ll explore what constitutes good cap rates for Airbnb properties, analyze the best markets by cap rate performance, and provide actionable insights to help you make informed investment decisions in 2025.

What is Cap Rate for Airbnb Properties?

Cap rate, or capitalization rate, is the ratio between the net operating income (NOI) the property generates annually and its purchase price or current market value. For Airbnb properties specifically, this metric helps evaluate the attractiveness of a short-term rental investment independent of financing methods.

The cap rate formula is straightforward: Cap Rate (%) = (Net Operating Income / Purchase Price) × 100

To calculate your Airbnb cap rate, you need three key components:

Annual Gross Rental Income: The total revenue your property generates from bookings over a year. This includes all rental income from platforms like Airbnb, VRBO, and direct bookings.

Annual Operating Expenses: These include cleaning fees, maintenance, property management, utilities, HOA fees, insurance, and taxes. Importantly, you should not include mortgage payments in this calculation, as cap rate assumes a cash purchase.

Net Operating Income: Simply subtract your annual operating expenses from your annual gross rental income.

For example, if your Airbnb property generates $50,000 in annual rental income with $20,000 in operating expenses, your NOI is $30,000. If you purchased the property for $400,000, your cap rate would be 7.5%.

What’s a Good Cap Rate for Airbnb Investments?

Determining what constitutes a good cap rate for Airbnb properties depends on several factors, including location, property type, and your risk tolerance. Generally, Airbnb cap rates fall between 2-10%, with most successful investments targeting the 4-8% range.

High Cap Rates (8-12%+): These typically indicate higher-risk investments, often found in:

• Secondary and tertiary markets with lower property values
• Areas with seasonal tourism patterns
• Properties requiring significant management attention
• Markets with less established short-term rental infrastructure

Moderate Cap Rates (4-8%): These represent the sweet spot for most investors, offering:

• Balanced risk and return profiles
• Steady tourism markets with year-round demand
• Properties in established vacation rental markets
• Good potential for both cash flow and appreciation

Lower Cap Rates (2-4%): Often found in:

• Premium markets with high property values
• Major metropolitan areas with strong appreciation potential
• Properties with luxury positioning and stable demand
• Markets with limited inventory and strong barriers to entry

Understanding that cap rates are also a measure of risk is crucial. Higher cap rates generally correspond with higher-risk investments, while lower cap rates typically signal less risky investments with more stable markets.

Top Performing Markets: Airbnb Cap Rates by City 2025

Based on current market analysis and data from leading industry sources, here are the top-performing markets for Airbnb cap rates in 2025:

Large Cities with Highest Cap Rates

The following metropolitan markets offer attractive cap rates while maintaining strong tourism infrastructure:

Cleveland OH: 12.7% Cleveland continues to surprise investors with its strong cap rate performance, driven by affordable property prices and growing tourism to its cultural attractions and lakefront areas.

Pittsburgh PA: 11.9%
The Steel City has transformed into a tech and healthcare hub, attracting business travelers while maintaining reasonable property acquisition costs.

St Augustine FL: 11.5% America’s oldest city continues to draw tourists year-round, with its historic charm and coastal location driving strong rental demand.

Louisville KY: 11.0% Home to the Kentucky Derby and bourbon tourism, Louisville offers consistent seasonal demand with affordable entry points.

Memphis TN: 10.9% Music tourism and cultural attractions drive steady demand, while property prices remain investor-friendly.

Mid-Size Cities with Highest Cap Rates

These markets offer excellent cap rates with strong growth potential:

State College PA: 16.8% University town dynamics create consistent demand, especially during football season and graduation periods.

South Bend IN: 13.8% Notre Dame University and growing business sector provide multiple demand drivers throughout the year.

Augusta GA: 13.7% Masters Tournament and military presence create diverse revenue opportunities.

Charleston SC: 12.2% Historic charm and coastal location continue to attract premium rates, though property values have increased.

Rapid City SD: 12.0% Gateway to Mount Rushmore and Black Hills, offering strong seasonal performance.

Small Cities and Rural Destinations

These emerging markets offer the highest cap rates with unique investment opportunities:

Logan OH: 18.1% Hocking Hills State Park proximity drives strong outdoor tourism demand with very affordable property prices.

Waco TX: 14.8% Magnolia Market and Chip and Joanna Gaines phenomenon continues to drive tourism growth.

Freeport TX: 12.7% Coastal location with industrial and recreational tourism creating diverse demand sources.

Oxford MS: 12.1% University of Mississippi and literary tourism provide consistent booking patterns.

Oshkosh WI: 12.0% EAA AirVenture and lakefront recreation drive seasonal peaks with strong returns.

Mountain and Coastal Markets

Premium locations balancing cap rates with appreciation potential:

Broken Bow OK: 14.6% Luxury cabin market serving Dallas-Fort Worth metropolitan area with consistent high-end demand.

Ithaca NY: 12.4% Cornell University and Finger Lakes region tourism create year-round revenue opportunities.

Albrightsville PA: 12.1% Pocono Mountains gateway serving New York and Philadelphia metropolitan markets.

Kailua Kona HI: 12.0% Hawaiian market with strong cap rates despite higher property values, driven by consistent tourist demand.

Tobyhanna PA: 12.0% Another Pocono Mountains market benefiting from proximity to major East Coast cities.

Factors Influencing Cap Rate Performance

Several key factors determine why certain markets achieve higher cap rates than others:

Property Values vs. Rental Income Ratio: Markets with moderate property prices but strong rental demand often produce the best cap rates. This explains why secondary cities often outperform major metropolitan areas.

Tourism Seasonality: Year-round tourism destinations typically offer more stable, if sometimes lower, cap rates compared to highly seasonal markets that might spike higher but carry more risk.

Regulatory Environment: Markets with favorable short-term rental regulations tend to maintain stronger cap rates, while restrictive markets may see compressed returns despite high demand.

Market Maturation: Emerging markets often offer higher cap rates as they haven’t yet reached full market saturation, while mature markets may have lower cap rates but more predictable performance.

Local Economic Drivers: Markets with diverse economic bases (tourism, business travel, events, universities) tend to maintain more consistent cap rate performance than those dependent on single revenue sources.

Regional Analysis: Where to Find the Best Cap Rates

Southeast Leading the Way

The Southeast continues to dominate cap rate performance, with markets like Augusta GA, Charleston SC, and St Augustine FL offering attractive combinations of tourism demand and reasonable property values.

Key advantages of Southeast markets:

• Year-round tourism seasons
• Reasonable property acquisition costs
• Generally favorable regulatory environments
• Strong infrastructure for vacation rentals
• Growing population and economic bases

Rust Belt Renaissance

Cities like Cleveland OH and Pittsburgh PA are experiencing a renaissance in short-term rental performance. These markets benefit from:

• Significantly undervalued real estate
• Growing tourism and business travel
• Cultural and recreational attractions
• Strong transportation infrastructure
• Urban revitalization efforts

Texas Triangle Opportunities

Texas markets like Waco and smaller coastal towns continue to offer strong cap rates due to:

• No state income tax attracting more visitors
• Diverse economic drivers
• Strong tourism marketing efforts
• Favorable business climate
• Growing population and job markets

Mountain West Emerging Markets

Rural and mountain markets in states like Colorado, Utah, and Wyoming are seeing increased interest, though cap rates vary widely based on accessibility and seasonal patterns.

Analyzing Cap Rates vs. Other Investment Metrics

While cap rates provide valuable insights, successful Airbnb investors consider them alongside other key metrics:

Cash-on-Cash Return: Unlike cap rates, this metric factors in financing costs and shows your return based on actual cash invested rather than total property value.

Average Daily Rate (ADR): Higher ADRs can compensate for lower occupancy rates, and premium markets might justify lower cap rates through higher nightly rates.

Occupancy Rates: Consistent 60%+ occupancy is generally preferred, as it indicates steady demand and reduces revenue volatility.

Revenue per Available Room (RevPAR): This metric combines ADR and occupancy to show true revenue performance, providing context for cap rate analysis.

Market Growth Trends: Cap rates should be analyzed alongside market growth projections, as emerging markets may offer higher cap rates with additional appreciation potential.

Property Type Considerations for Cap Rate Analysis

Different property types in the same market can produce varying cap rates:

Single-Family Homes

• Often provide highest cap rates due to lower acquisition costs
• Greater control over property management and renovations
• Appeal to family and group travelers willing to pay premiums
• Best markets: Chesapeake VA, Canton OH, Arlington TX

Condos and Apartments

• May have HOA restrictions affecting rental operations
• Often lower maintenance responsibilities
• Good for urban markets with business travel demand
• Best markets: Fayetteville NC, Birmingham AL, Colorado Springs CO

Townhouses

• Balance between single-family and condo benefits
• Shared wall construction can reduce costs
• Appeal to mid-size groups and business travelers
• Best markets: Jackson MS, Chico CA, Johnson City TN

Unique Properties

• Cabins, tiny homes, and specialty properties often command premium rates
• Higher cap rates possible but require more specialized management
• Appeal to experience-seeking travelers
• Best markets: Mountain and lake destinations with distinctive offerings

Limitations and Risks of Cap Rate Analysis

Understanding the limitations of cap rate analysis is crucial for making informed investment decisions:

Excludes Financing Costs: Cap rates assume cash purchases, so actual returns will differ when using mortgage financing. Use cash-on-cash return calculations for leveraged investments.

Misses Capital Expenditures: Cap rates focus on operating income and don’t account for major future expenses like roof replacements, HVAC systems, or significant renovations.

Market Variance: Desirability of cap rates varies significantly by location, making direct comparisons across different markets less reliable without considering local context.

Seasonal Fluctuations: Annual cap rate calculations may not capture significant seasonal variations in revenue and expenses that affect monthly cash flows.

Regulatory Risk: Cap rates can change quickly due to regulatory changes, making historical performance less predictive of future returns.

Strategies for Maximizing Your Airbnb Cap Rate

Property Selection: Focus on markets with strong fundamentals rather than just high cap rates. Look for diverse economic drivers, year-round appeal, and favorable regulatory environments.

Revenue Optimization: Implement dynamic pricing strategies, maintain high property standards, and focus on guest experience to maximize both ADR and occupancy rates.

Cost Management: Efficiently manage operating expenses through strategic vendor relationships, energy-efficient improvements, and streamlined operations.

Market Timing: Consider purchasing during market downturns or off-seasons when property prices may be more favorable, improving your cap rate calculation.

Value-Add Opportunities: Look for properties where improvements can justify higher rental rates, effectively increasing your NOI and cap rate over time.

Frequently Asked Questions

What is a good cap rate for Airbnb properties? A good cap rate for Airbnb properties typically ranges from 4-8%, balancing return potential with risk. Higher cap rates (8-12%) may indicate higher-risk investments but offer greater returns, while lower cap rates (2-4%) often represent more stable, premium markets with strong appreciation potential.

How do Airbnb cap rates compare to traditional rental properties? Airbnb cap rates are often higher than traditional rental properties due to higher gross rental income potential. However, they also typically involve higher operating costs and more management intensity, which factors into the NOI calculation.

Which cities offer the best Airbnb cap rates in 2025? Current top performers include Logan OH (18.1%), State College PA (16.8%), Waco TX (14.8%), and Broken Bow OK (14.6%). However, these should be evaluated alongside other factors like market stability, tourism trends, and regulatory environment.

Should I only invest in markets with high cap rates? Not necessarily. While high cap rates indicate strong return potential, they often come with higher risks. Consider factors like market stability, appreciation potential, regulatory environment, and your personal risk tolerance when making investment decisions.

How often do cap rates change? Cap rates can fluctuate based on changes in rental income, operating expenses, and property values. Market conditions, seasonality, regulatory changes, and economic factors can all impact cap rates over time. Regular analysis is recommended.

Do cap rates account for property appreciation? No, cap rates only measure current income return relative to property value. They don’t account for potential property appreciation, which can be a significant component of total investment returns in many markets.

What’s the difference between cap rate and cash-on-cash return? Cap rate assumes a cash purchase and uses total property value in calculations, while cash-on-cash return accounts for financing and uses only your actual cash investment. Cash-on-cash return is more relevant for leveraged investments.

Can I find reliable cap rate data for specific properties? While market-level cap rate data is readily available, property-specific cap rates require detailed analysis of that property’s income and expense projections. Use market data as a starting point, but always calculate specific property cap rates based on actual or projected performance.

Ready to Find High Cap Rate Airbnb Investments?

Understanding Airbnb cap rates by city provides a powerful foundation for making informed investment decisions, but remember that cap rates are just one piece of the puzzle. The most successful short-term rental investors combine cap rate analysis with thorough market research, regulatory due diligence, and operational planning.

Markets offering strong cap rates in 2025 span from emerging secondary cities to established vacation destinations, each presenting unique opportunities and challenges. Whether you’re drawn to the high cap rates of emerging markets like Logan OH and Waco TX, or prefer the stability of established markets like Charleston SC and St Augustine FL, success depends on matching your investment strategy with market fundamentals.

The cap rate landscape continues to evolve as the short-term rental market matures. Stay informed about market trends, regulatory changes, and emerging opportunities to maintain and improve your investment performance over time.

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Remember: Always consult with qualified financial and legal professionals before making investment decisions.