Short Term Rental Cap Rates cash flow and potential sale value

[Manley Seale]

So, i'm trying to analyze cap rates for a STR investment and I'm coming up with two different lenses to view a cap rate.

1. Annual Cash Flow potential from what I'm seeing would want to see a higher cap rate. Is that correct? 

2. Sale potential would want a lower cap rate if you were trying to determine the potential Sale Value. Is that correct? 

Example-

1. Annual Cash Flow potential- NOI = 100,000. Property bought for 1,000,000. Cap rate = 100,000/1,000,000= 10%

• Now let's say cash flow was 150k. 150,000/1,000,000 = 15%

2. Sale potential- NOI = 100,000. Don't know the property value. Let's say the average cap rate is 10. 100,000/.10 = $1,000,000 sale value

• now let's say the average cap rate is 15 for the sake of argument and similar to above = 100,000/.15= $666,666
• Now lets say the average cap rate is 8. 100,000/.08 = $1,250,000. 

So as you can see the lower the cap rate the higher the potential sale value assuming the same NOI is used. But the higher the cap rate divided by the original invested amount actually produces higher cash flow.

I am just putting this out there to see if what I'm saying is making sense. Also, if is does make sense, would anyone with STR property in the AL Coast or FL panhandle care to share what cap rates they are seeing for cash flow and then for potential sale value?

Thanks!

[Jeffery Wilen]

As stated by Hal, unless your doing STR with a 5plex or larger it is the CMA that determines sales price no it cap rate.

Only a commercial property, ie the 5plex or larger, uses cap rate for valuation. Then the NOI does determine the sales price. Like a CMA, cap rates are market driven, not arbitrary. They're influenced by the property type, location and other items that would reflect the typical "risk" of investing in the property. Generally speaking, the higher the perceived risk for the investment, the higher the cap rate.