South Padre Island and Galveston make top ten beach property ROIs!
Vacation rental management platform released a report ranking the top ten US destinations for purchasing a beach home in 2023 based on the highest annual cap rate, or annual rate of return on investment.
The list includes:
- Lake Anna, Virginia – 12.1% cap rate, median home sales of $385,000
- Hatteras Island, North Carolina – 9.51% cap rate, median home sales of $412,500
- Navarre, Florida – just over 8% cap rate, median home sales of $370,000
- Palm Coast, Florida – 8.08% cap rate, median home sales of $300,000
- Ocean Shores, Washington – 7.47% cap rate, median home sales of $315,000
- Myrtle Beach, South Carolina – 7.34% cap rate, median home sales of $230,000
- South Padre Island, Texas – 7.27% cap rate, median home sales of $300,000
- Galveston, Texas – 7.21% cap rate, median home sales of $287,000
- Gulf Shores, Alabama – 7.19% cap rate, median home sales of $350,000
- Virginia Beach, Virginia – 7.18% cap rate, median home sales of $300,000
Despite soaring real estate prices, demand for vacation homes remains strong, and the report highlights profitable opportunities for those looking to invest in a beach home in 2023.
How to calculate ROI cap rate?
The capitalization rate (cap rate) is a metric commonly used in real estate to evaluate the potential return on investment (ROI) of a property. It is calculated by dividing the property’s net operating income (NOI) by its current market value or purchase price. Here’s the formula:
Cap Rate = (Net Operating Income / Property Value) x 100
To calculate the cap rate, follow these steps:
Determine the property’s net operating income (NOI): NOI is the annual rental income generated by the property minus the annual operating expenses. Operating expenses include property taxes, insurance, maintenance, property management fees, and other costs associated with running the property. Mortgage payments are not considered part of operating expenses.
Annual Rental Income: $30,000
Annual Operating Expenses: $10,000
Net Operating Income (NOI): $30,000 – $10,000 = $20,000
Determine the property’s market value or purchase price: This is the price at which the property is bought or its current market value.
Property Value: $250,000
Calculate the cap rate: Divide the NOI by the property value and multiply the result by 100 to express it as a percentage.
Cap Rate = ($20,000 / $250,000) x 100 = 0.08 x 100 = 8%
In this example, the cap rate for the property is 8%.
A higher cap rate indicates a higher potential ROI, but it may also come with higher risk. When comparing investment properties, the cap rate can be a useful metric to gauge their relative profitability.
Keep in mind, though, that the cap rate is just one factor to consider in real estate investing, and it’s essential to perform a thorough analysis of the property and the local market before making an investment decision.