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What Is a Cap Rate for a Hotel?

The cap rate, short for capitalization rate, is the yearly profit of a property as a percent of its price. Turn it around and you have the way to value a hotel: divide the profit by the cap rate.

A quick example

If a hotel earns $900,000 a year after a buyer's adjustments, and buyers are using a cap rate of 9%, the value is about $10 million. At 8% the same hotel is worth about $11.25 million. At 10% it is worth $9 million. A one-point change in the cap rate moves the value by a lot, which is why we show a range.

What moves the cap rate

• The kind of hotel. Buyers tend to accept a lower yield for hotels they see as steadier, and ask for a higher yield for hotels they see as riskier.
• Size. Smaller hotels often trade at higher yields than larger ones.
• Condition. A tired property makes a buyer ask for a higher yield, on top of the cost of the work.
• The market and the brand. Where the hotel is, how strong its brand is and how many years are left on the franchise agreement all matter.
• Interest rates. When it costs more to borrow, buyers generally ask for higher yields.

Where the numbers on this site come from

Sleeping Value uses planning ranges for each kind of hotel, nudged up slightly for small and older hotels. They are assumptions, not a survey of recent sales. A hotel broker or appraiser can tell you what buyers are using in your market right now.