function calculateHotelCapRate() {
var grossRevenue = document.getElementById('annualGrossRevenue').value;
var expenses = document.getElementById('annualOperatingExpenses').value;
var marketValue = document.getElementById('propertyMarketValue').value;
var resultDiv = document.getElementById('hotelCapResult');
var rev = parseFloat(grossRevenue);
var exp = parseFloat(expenses);
var val = parseFloat(marketValue);
if (isNaN(rev) || isNaN(exp) || isNaN(val) || val <= 0) {
resultDiv.style.display = "block";
resultDiv.innerHTML = "Please enter valid positive numbers for all fields.";
return;
}
var noi = rev – exp;
var capRate = (noi / val) * 100;
resultDiv.style.display = "block";
resultDiv.innerHTML = "Annual Net Operating Income (NOI): $" + noi.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}) + "" +
"Hotel Capitalization Rate: " + capRate.toFixed(2) + "%" +
"Interpretation: For every $100 invested, this property generates $" + (capRate).toFixed(2) + " in annual net profit.";
}
How to Calculate Cap Rate for a Hotel
In hotel real estate, the Capitalization Rate (Cap Rate) is one of the most critical metrics used to evaluate the potential return on investment. Unlike standard commercial leases with fixed rents, hotels are "operating businesses" where income can fluctuate daily based on occupancy and room rates.
The Hotel Cap Rate Formula
The calculation for a hotel's cap rate is straightforward, provided you have accurate financial data for the property:
Cap Rate = (Net Operating Income / Current Market Value) × 100
Key Components Explained
Net Operating Income (NOI): This is the total annual revenue generated by the hotel (rooms, food and beverage, spa, events) minus all operating expenses (labor, utilities, maintenance, property taxes, insurance, and management fees). It does not include mortgage payments or capital expenditures.
Current Market Value: This is either the price you are planning to pay for the hotel or the current estimated value based on recent sales of comparable properties.
Step-by-Step Calculation Example
Imagine you are looking at a boutique hotel with the following annual financials:
Total Revenue: $2,000,000
Operating Expenses: $1,300,000
Asking Price: $10,000,000
Step 1: Calculate the NOI
$2,000,000 (Revenue) – $1,300,000 (Expenses) = $700,000 (NOI).
Step 2: Apply the Cap Rate Formula
($700,000 / $10,000,000) = 0.07.
Step 3: Convert to Percentage
0.07 × 100 = 7.00% Cap Rate.
Why Hotel Cap Rates Are Unique
Investors typically expect higher cap rates for hotels compared to multifamily or office buildings. This is because hotels carry higher operational risks. A bad month in tourism or a local economic downturn can immediately impact the NOI. Therefore, a "good" hotel cap rate often ranges between 8% and 11%, depending on the location and the brand (flag) of the hotel.
Factors That Influence Hotel Cap Rates
Location: Hotels in primary markets (New York, Tokyo, London) have lower cap rates because they are considered safer investments.
Asset Class: Full-service luxury resorts often have different risk profiles than limited-service budget motels.
Condition: Properties requiring significant "Property Improvement Plans" (PIP) usually trade at higher cap rates to offset the cost of upcoming renovations.