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Updated about 7 years ago on . Most recent reply

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27
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2
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Philip Arthurs
  • Real Estate Agent
  • Birmingham, AL
2
Votes |
27
Posts

Cap Rates on Vacation Rental Properties?

Philip Arthurs
  • Real Estate Agent
  • Birmingham, AL
Posted

This might be a dumb question (I'm a new to this).  Do vacation rentals use cap rates for valuation?  I'm looking at a property in Destin, FL and I'm trying to determine an average cap rate for a condo located on the beach.  The agent I'm using there gave me a confusing answer making me think that it was a dumb question.  If not a dumb question, does anyone have a good answer for me?  Thanks in advance for your assistance.

Most Popular Reply

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259
Posts
293
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Kristina Heimstaedt
  • Real Estate Agent
  • Newport Beach, CA
293
Votes |
259
Posts
Kristina Heimstaedt
  • Real Estate Agent
  • Newport Beach, CA
Replied

Hi @Philip Arthurs. It's a challenging question to answer for agents because it fluctuates significantly from month to month and even year to year. You also ought to confirm/consider to what extent do/does each condo association allow for vacation rental. Knowing what your city wants that way is very important and can significantly impact your bottom line. I often refer people to Bill McBride's blog Calculated Risk Blog because he's got a lot of excellent data and macro numbers. I mention his blog because he shows that the occupancy rate for hotels over the last 3 years have either set records, and/or have been some of the best in history. 

Vacation rentals are probably one of the areas where it would be nice to have a healthy cap rate because you need the buffer for fluctuations in the market on top of the fact that they are typically in secondary housing markets and those are what we see have some of the largest swings in appreciation and depreciation. If the infrastructure is based on tourism and the tourism decreases/disappears, that dramatically impacts the housing market. I like to think of secondary housing markets as the cherry on top in "keeping up with the jones's". Lots of money to be made, but arguably higher risk as well.

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