What’s a Good Airbnb CAP Rate

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What's up guys, it's James here. And in today's video, I'm going to be answering a question that I've gotten a few times now, which is what is a good cap rate for an Airbnb investment property. And for those of you who aren't familiar with the term cap rate is basically just a method of calculating the return on investment that you're going to get from a real estate investment property. And basically, it's calculated by taking the net operating income, in other words, how much you're actually earning off of a property after expenses divided by the purchase price, and that net operating income is taken without factoring in any kind of a mortgage payment, because that's going to vary from property owner to property. And depending on how much you put down what kind of interest rate you get all these other factors. So it's sort of a more objective way to look at a more kind of broad way to look at a real estate investment where you're not factoring in the actual investment for the return on investment for you personally, but more just kind of the overall numbers of the property in comparison to others in the market. And so that's what we're going to be diving into in today's in today's video. And before we do that, I do want to remind you guys that there is a free training link in the description down below. So highly recommend checking that out. In that training. It's a brand new one, where we actually walk through the three critical components that you need in order to invest successfully in short term rental properties. So if you are thinking about it, you want to be able to maximize your returns and be able to analyze properties, find the best properties to invest in, get them, manage them effectively without it taking up a whole bunch of your time becoming a second job, and ultimately get incredible cash flow and amazing return on your investment from those properties. And the best place to start is with that free training that's linked in description down below. So I would highly recommend checking that training out, we've already gotten some really, really great strong feedback from people on that training, saying it's really valuable, it's really helpful. And at the end of it, you're also going to get the opportunity to set up a call with either myself or Riley where we're going to jump on a 45 minute in depth call with you completely free to strategy session, we're going to kind of break down for you what the best next steps for you are, and lay out a path for you to accomplish your goals, whatever they are with short term rental investing, so I'd highly recommend you check that out in the link in the description down below. It's completely free, and it's not gonna be around forever. So make sure you check it out now before it's too late. Now that being said, let's go ahead and talk about cap rate. And let's talk about what cap rate is good for an Airbnb. And a lot of people out there will say okay, you know, an Airbnb deal just isn't worth looking at if the cap rate isn't at least 10% Or at least 15%. And when they give you these numbers, and a lot of people you know, beginning investors and all people that are new to Airbnb investing in short term rental investing, they kind of get straight in the wrong direction. So the answer I'm going to give to you what is a good Airbnb cap rate is actually probably not the answer that you're looking for, probably not the answer you'd expect. But honestly, I believe it is the best answer to get you focused on the right things. And have you be successful investing in short term rentals, because ultimately, that's my goal is let's look at how do we actually get you to be as successful as possible investing in short term rentals and make sure that you succeed, and not in my opinion, by not looking at cap rate. Honestly, in my analysis, I don't even look at cap rate, I never calculate, never pay any mind to it. Because it's not an important number. Ultimately, cap rate is not actually going to be how much you're earning unless you're actually going and buying a property cash, which in my experience is almost never the right approach, never the right strategy, especially with everything going on in the world right now. Where there's likely to be a lot inflation, it makes a lot more sense to be able to buy a property with a mortgage, some kind of financing than it does to buy it just outright paying cash for the property. So what I recommend doing, instead of looking at cap rate is look at a few different metrics. One thing I like to do is I like to look at properties that meet my criteria. That's kind of the first level. So when you're looking for properties, and you're trying to analyze properties at a high level, which is what typically people are doing when they're looking at Cap rates, I like to look at number one, does it meet my criteria, because ultimately, if you just go and pick properties that have a high cap rate, they might not actually end up accomplishing your long term goals. Because those are going to be different depending on what your goals are, and who you are, what your background is, different people are going to have different goals. So cap rate is not really that important. You want to look at does the property meet your specific criteria that you've outlined for what types of properties you're looking for? Now, you haven't actually done the work of outlining those criteria for yourself, that's going to be step one is outlining your goals and outline the criteria, they're going to get you to those goals as quickly and effectively as possible. Now, after that, I like to look at just some real back of the envelope math and say, okay, if I'm spending $100,000 on a property, I want to make sure that at a bare bare minimum, it's going to be able to bring in at least $10,000 in gross income. And that's a really good kind of benchmark back of the envelope number for me is I like to see okay, if it's going to be doing five it's a $500,000 property. I want to make sure it's going to bring in $50,000 a year in gross income, just as a back of the envelope a really basic calculation and that should be the most conservative
In a worst case scenario, I don't believe it can do that if I'm looking at, for example, a property in downtown Toronto, that is a million dollar property. And I think it can only bring in maybe $50,000 a year in income as a lot of them will, because the market, so inflated here, I'm going to look at that and say, No, thank you, that is not going to be enough income to make it worth my while. Now, again, this isn't net income. And a lot of people are gonna get flared up by this by saying, Well, James, that doesn't factor in any of your expenses. But again, this is a very, very back of the envelope basic level analysis that I like to use to just weed out properties, because the other thing that I like to look at is, hey, there's a lot of ways that I can improve the performance on a listing. So it doesn't really make sense for me to dig into the analysis deeply enough to really look at, you know, the net numbers and look at the expenses and everything else, until I'm doing a more thorough in depth analysis. Because at that point, that's when I'm going to look at, okay, where what are the opportunities for improvement, both to increase my overall income and a decrease my overall expenses, right now, just trying to do a very basic high level analysis of the property. And that's personally how I like to do it. It's been very successful for me so far. Now, from there, if the numbers make sense, it's a property that meets my criteria. And those really basic numbers make sense. That's when I'll get in touch with the owner of the property or the listing agent for the property. And I'll talk to them about different things, ask them different questions to again, just make sure it's going to meet my criteria for I'm looking for, then I'll put an offer in and I'll put in a conditional offer. Now, again, a lot of people don't like to do this, a lot of people tell tell me all the time, you can't get properties in my area with conditional offers, you've got to go in firm, the market is so hot right now. And I beg to differ. Now, I'm not saying I would never go firm and on an offer, I've done that in the past, it's worked out well. But to do that, you just need to do the more in depth analysis that I'd recommend doing later, before you put in that offer, if you are going in firm. And what I found as well is that a lot of the properties that you do need to go and really firm on don't actually make sense as a deal. Otherwise, you'd be able to work the price down a little bit more. So that's just been my experience. Now what I'll do then is with that conditional offer, it gives me a lot of flexibility to then actually get more detail on the property, go check it out myself, do an inspection, see what kind of opportunities there are for the property. Maybe there's some cool opportunities I see once I go by there to add additional space to do different renovation work that I think is going to increase the value of the property to prospective guests. Then after all that, after I've done that kind of walk through the property, that's when I really go and run my in depth numbers on the property that's not really sink in, I go to sites like err DNA, and I've got a few tools I use. And again, if you want to access those tools, you want to see what those tools are the link in the description below to that free training is where I'm going to walk through them in more detail. But then I've got a few tools in my tool bag to run a more in depth analysis. And I like to look at okay, what is the worst case scenario, a more moderate realistic scenario? And then what's the best case scenario for what my top line income my top line revenue is going to be? And then from there, I like to factor okay, what are the different expenses going to be for me, if I go and buy this property? What's my financing gonna look like? What kind of interest rate am I going to get? You know, what are the taxes, I'm going to pay all these different things, what are my expenses of operation going to be, you know, internet, things like cleaning all those different expenses. And I like to run the real numbers. So run the real scenario, play it out and look at both a worst case scenario, a more realistic scenario, and a best case scenario as well. Now with that, I'm getting way more detail than you could ever get by just looking at cap rate or looking at something else, I'm getting a real in depth analysis. And my goals personally, are always to make sure that the cash flow positive is still going to be achieved, even in the worst case scenario, meaning that even in a worst case scenario, the worst thing I could possibly imagine happening with this property, I'm still going to bring in enough to cover all of my expenses every single month. And it's not going to be me having take money out of my bank account and pay that mortgage, I want to make sure that everything all the expenses are covered by the income from the property. As a worst case scenario, no more realistically, I'm personally looking for a 15 to 20% cash on cash return, that means that if I'm putting money into the deal, I want to be getting 15 to 20% return on that money every single year, just off the cash flow for the property, not looking at equity, not looking at appreciation now is a really good number. For me, that's where I'm happy. And that is the number that I think people should be more focused on with short term rentals. cap rate is fictional cash is reality. Cash is the money that you can actually use right here right now to go and pay for another property to go and pay for your livelihood, whatever it might be, you could actually use that money right here right now. So that's why I recommend really focusing on that number, that cash on cash return is the real number of how much you're actually making on the investment that you make. So that's the number that to me is the most important. Now calculating not requires a lot more detail. It's a lot more dependent on the individual investor. So it's going to depend on your specific scenario but at the end of the day, you are an individual who's going and making this investment you
You want to make sure that you personally get a good return, not the person who would hypothetically maybe buy the property all in cash that they would get a good return. Those are two very different things. So that's really my process for analyzing properties. And again, if you want more depth and more detail on exactly how I do, I do this and the different tools that I use, as well as all the steps of the process. Everything you need to be a successful short term rental investor that I highly recommend you check out the link in the description down below. There's a free training there, that's going to walk you through everything you need to do to earn a full time income, replace your income and get incredible returns from investing in short term rental properties and buying up vacation homes and really cool properties all around the world that you can travel to and get an incredible return on your investment. So I'd highly recommend checking out that train down below. And again, if you are not yet subscribed to the channel, make sure you hit that subscribe button. I know a lot of you guys are here watching the channel watching this video and you're not subscribed to the channel yet so make sure you hit that subscribe button. I post two new videos every single week that you'll want to stay up to date with and last but certainly not least, is take a quick second and smash that like button make sure you hit the like button. It helps me out tremendously with growing this channel. So please take a quick moment to just hit that like button and help me out. All that said I'll see you in the next video.