How to Evaluate Hotel Cap Rates in Orlando — The Complete Investor Guide

Cap rate is the first metric most hotel investors look at. A 5% or 6% yield sounds attractive — until you run the full numbers and realize you're paying $2K+ monthly out-of-pocket just to keep the deal alive.

The mistake is conflating entry yield (the cap rate) with actual cash flow (what remains after debt service). In Orlando's hospitality market, where cap rates range from 4.5% to 8% depending on location and asset type, knowing which metrics matter is the difference between a winning investment and a cash-draining trap.

The Cap Rate Myth: Why It's Not Enough

Cap rate = NOI ÷ Purchase Price. It tells you the property's current yield — nothing more. A 6% cap rate on a $3M hotel purchase means $180K annual NOI. But if you're financing 75% of the purchase ($2.25M) at today's 6.75% rates over 30 years, your annual debt service is roughly $171K. Your cash-on-cash return is barely 2% ($9K ÷ $300K equity). If cap rates fall 50 bps next year, your property loses $150K in value while you're still paying the same mortgage.

This is called negative leverage — and it's exactly the trap that catches first-time hotel investors in Orlando.

The Leverage Test: Cap Rate vs. Borrowing Cost

The simplest, most important test: Is your purchase cap rate higher than your financing rate?

• Positive leverage: 6.5% cap rate, 5.5% financing rate. The property generates 1% annual "spread" — your mortgage is cheaper than the yield. The property helps pay itself down.
• Negative leverage: 5.5% cap rate, 6.75% financing rate. You lose 1.25% annually. The property can't cover its own mortgage. You write checks.

Rule of thumb: Never buy a hotel where your cap rate is less than 2–3% above your borrowing cost. With financing at 6.5–7%, target entry cap rates of 8.5%+ for value-add plays and at least 6.5% for stabilized properties.

DSCR: The True Cash Flow Metric

DSCR (Debt Service Coverage Ratio) = NOI ÷ Annual Debt Service. It measures how many times over your property's NOI covers its mortgage payment.

• 1.25x DSCR: Standard lender requirement. The property generates $1.25 in annual NOI for every $1 of debt service. Tight but feasible.
• 1.50x DSCR: Comfortable zone. $1.50 in NOI per $1 debt. You have a buffer for occupancy swings.
• <1.0x DSCR: Disaster. Property can't cover its own mortgage. Red flag unless you're committed to value-add upside.

Example: A $2M hotel with $150K NOI financed at 75% LTV ($1.5M) at 6.75% over 30 years has annual debt service of ~$120K. DSCR = $150K ÷ $120K = 1.25x. Lenders will finance it. You'll have minimal cash flow after debt service, but the deal is solvent.

Occupancy Risk: The Hidden Variable

Hotel NOI is directly tied to occupancy. Most offering memoranda show stabilized occupancy (75–80%), but that assumes consistent guest demand. In Orlando, theme park properties run 78–85% year-round. Secondary markets (downtown, airport corridor) can swing 60–75%, especially in slow months.

Always model conservatively: If the OM shows 80% occupancy, run your DSCR at 70%. If you can't afford the property at lower occupancy, you don't have a margin of safety. Hotel operating expenses (housekeeping, utilities, management) stay fixed — occupancy is the only variable you can't control.

Cap Rate by Location: Theme Parks vs. Secondary

Prime locations command lower cap rates because occupancy is predictable — theme park visitors keep rooms full. Secondary markets offer higher entry yields but require operational expertise and occupancy risk management.

The Hospitality Investment Checklist

1. Cap Rate Test: Is cap rate 2–3% above your financing rate?
2. DSCR at Conservative Occupancy: Run at 70–75% occupancy — is DSCR ≥ 1.25x?
3. Cash-on-Cash Return: Year 1 NOI after debt service ÷ equity down payment. Target ≥ 5–8% for stabilized.
4. Market Segment: Prime (I-Drive) or secondary (downtown)? Understand occupancy volatility.
5. Franchise & Management: Strong flag or independent? Franchise adds stability and reduces operational risk.
6. Remaining Lease Term (if applicable): For long-term NNN leases, ensure 15+ years remain.

Ready to Invest in Orlando Hospitality?

Orlando's hospitality market offers multiple entry points — stabilized brands at lower yields, value-add motels at higher risk/reward, and specialty hotels in niche segments. The key is running the right metrics before putting money down.

We've analyzed hundreds of Orlando hotel deals and can help you navigate cap rates, DSCR, occupancy assumptions, and submarket pricing. Whether you're looking at a $2M motel conversion or a $30M institutional property, we'll help you understand the real cash flow picture.