Before you invest in a property, list it on RentalTrader, and start accepting bookings, there’s something of the utmost importance that you need to do: choose the right vacation rental market. The market you select plays an integral role in your overall success as a short-term rental host or investor.
Read on to learn why doing your research is so essential, how market strictness and maturity affect your choice, and the pros and cons of the three short-term rental markets. We’ll also go over how to find and analyze tourism data for specific markets and share strategies for assessing potential income. Let’s get started!
- Why You Need to Do Your Research Before Investing
- The Role of Market Strictness
- Market Maturity and Its Impacts
- Three STR Market Types: Which Is Best For You?
- Recent Market Performance
- How to Find and Analyze Tourism Data for a Specific Market
- 4 Strategies to Assess Potential Income from a Market
- Top Takeaways
Why You Need to Do Your Research Before Investing
Over the past 15 years, the vacation rental industry has experienced massive growth. Because vacation rentals are so mainstream now, we often forget that purchasing these short-term rental properties is a relatively new strategy for most real estate investors. That’s part of the reason why it’s so important to research the markets you’re interested in before zeroing in on a particular property.
Set Yourself Up for Success
Let’s not forget that investing in a short-term or vacation rental property, especially your very first one, is a big deal! Making the investment can be nerve-wracking, so doing the research to ensure that you choose the right market for your vacation rental property is crucial.
Complete a Detailed Data Analysis
Looking at factors like the market size, the cost of properties in the area, their price per night, and their average occupancy rate will help you determine whether or not your potential investment makes sense. You’ll want to dive even deeper to learn about the area’s demand, average mortgage rates, utility expenses, gross annual income, and homeowners association fees.
Avoid Blindly Jumping In
New investors are sometimes tempted to simply purchase a nice property in an area they like and turn it into a vacation rental without doing any research. They mistakenly believe that they already know the best places to start a short-term rental business. Maybe their family used to vacation in Santa Monica when they were a child, and they’ve always dreamed of owning a rental property there. Or perhaps they’re a huge Red Sox fan, and they believe having a property near Fenway Park is enough to propel them to instant wealth. Unfortunately, jumping into an investment in this way doesn’t often result in success.
Get Familiar with Regulations
One of the major problems with failing to research the market you’re interested in is that you don’t know whether there are strict short-term rental regulations there. What if you purchase a property, only to find that you can’t legally run your new vacation rental business there? Or what if regulations are pretty relaxed, but the market is oversaturated, and you can’t turn a profit?
Take Your Investment Seriously
Doing your research helps to ensure you can find success as a vacation rental owner, while utilizing a random strategy will yield random results. If you want to be a serious investor, you’ll need to look at historical information and plenty of data.
The Role of Market Strictness
When discussing the importance of researching potential markets, we briefly mentioned how problematic short-term rental regulations can be. Short-term rental or STR regulations are legal requirements. They vary by city, county, and state.
In some cities, vacation rentals are illegal; in others, they’re limited to specific zones. Still others have placed limits on the number of short-term rental properties that can run in a certain area.
Depending on the location of your vacation rental property, local regulations will likely require you to have a business license and a short-term rental license. The local STR regulations will also determine the taxes you’ll have to pay.
Remember that no two markets have the exact same regulations for vacation rentals. If you’re running a successful rental in one state and plan to expand your portfolio by starting a vacation rental in another state, don’t assume the same laws and rules carry over.
STR regulations are so integral to your business that they’re the first thing you need to look up once you’ve found a market you like. You’d be shocked by how many investors don’t take the time to do this! Just a few minutes of Google searching and reading up on local regulations can save you from the nightmare of purchasing a property, only to find that you can’t legally turn it into a vacation rental.
There are three types of markets when it comes to market strictness: relaxed markets, moderate markets, and stringent markets. See the table below for a brief overview, and read on for more in-depth explanations of each market type.
Relaxed markets aren’t without rules and regulations altogether, but they tend to be very minimal. In a relaxed market, it’s very rare for short-term rental licenses to be revoked.
While you’ll need a permit to run a vacation rental in a relaxed market, obtaining one is often as easy as making a quick call to the county office.
The main reason why these markets have such relaxed regulations is that they usually have just as many (or even more) vacation rentals as they do permanent residences. Because of this, they’re highly dependent on the local occupancy tax income they receive from their many vacation rentals. Therefore, it’s wise for these markets to keep regulations minimal and maintain an easy environment for investors.
A few examples of relaxed short-term rental markets include Milwaukee, Wisconsin; Columbus, Ohio; Indianapolis, Indiana; and the Great Smoky Mountains of East Tennessee.
Next, we have moderate markets. These markets maintain stable and manageable regulations for both vacation rental owners and primary residents. Moderate markets are typically quite friendly toward vacation rentals as long as they’re located in areas permitted by local zoning laws and operated with the appropriate permits.
Generally, if you purchase a short-term rental property in a moderate market, you’ll have an excellent long-term investment on your hands. Just be cognizant of the local regulations, and be sure to pay your STR occupancy taxes!
Some of today’s moderate markets are Destin, Florida; Houston, Texas; and Atlanta, Georgia.
Stringent markets are the most difficult market in which to run a vacation rental property because their processes, rules, and regulations surrounding short-term rentals constantly change. There’s an intense, nonstop battle between the city council and short-term rental owners in these volatile markets.
Not only do investors have to keep a close eye on city council meetings to watch out for anti-short-term-rental bills being passed, but it’s a challenge just to obtain a permit in the first place.
Even if you manage to get a permit and find a property that’s currently zoned for vacation rentals, that could change at any time. It’s not uncommon for short-term rental licenses to be revoked in this type of market.
One thing to note is that stringent markets can be quite lucrative. Still, the fact that you’ll need to constantly monitor the area’s constantly changing regulations means you’ll essentially have a new full-time job on your hands. Since the whole idea of vacation rental investment is to earn passive income, is that high earning potential worth the time-consuming task of keeping up with regulations? For you, it might be, but it’s definitely something to consider.
Some of the cities that are currently considered stringent markets include Nashville, Tennessee; New York City, New York; Santa Monica, California; Jersey City, New Jersey; and Charleston, South Carolina.
Market Maturity and Its Impacts
The maturity of the market you’re interested in is also key. The more mature a market is, the less likely you will run into stringent short-term rental regulations. Conversely, the less mature a market is, the more likely it will have unfavorable regulations.
Mature markets have moved through the emerging and growth phases and tend to be older, larger, and more stable. They’re more established and profitable than less mature markets.
How do you determine the maturity of a vacation rental market? You’ll need to look at historical data to determine how long short-term rentals have been around in the area and how long they’ve been the norm, taking precedence over hotels.
The earlier vacation rentals began to flourish and succeed in the market, the more mature it is. On the flip side, if short-term rentals only recently overtook hotels in the area, it’s much more likely that unfavorable vacation rental regulations will be put into place.
Mature markets have had plenty of time to find a balance between their vacation rental owners and their permanent residents, as well as between the hotel industry and the short-term rental industry. Less mature markets haven’t yet reached equilibrium.
If you’re looking for the highest income potential and best chance of favorable vacation rental regulations, a mature market is your best bet.
Three STR Market Types: Which Is Best For You?
While each of the three markets discussed below has varying degrees of stability and its own pros and cons, there’s no objectively right or wrong market for short-term rental investment. Your decision should be made with your goals and comfortability with risk in mind. No matter which market you choose, just remember to do your research first!
|Metro, Regional, and National Markets: A Quick Overview
|Regional Vacation Market
|National Vacation Market
|NYC, Los Angeles, Nashville
|Panama City Beach, Gatlinburg
|Orlando, Honolulu, Aspen
|Types of Tourists
|Professionals, locals on staycations, families
|Families, couples, large groups
|Families, couples, large groups
|High rewards in terms of cash flow, diverse pool of guests
|Stable, accessible, affordable
|Lucrative during economic booms, stable regulations
|Extremely risky, volatile regulation structure
|Slightly less cash flow potential than metro markets
|The first to see downward trends during depressions
Metro markets are major metropolitan areas, such as New York City, New York; Los Angeles, California; Austin, Texas; Nashville, Tennessee; San Diego, California; and Seattle, Washington.
This type of market attracts many visitors, but it isn’t financially dependent on tourism. Instead, there’s quite a bit of industry outside of tourism that supports the local economy. Therefore, there are many jobs, so many permanent residents have to live in the area to fill them. Metro markets generally have large, dense permanent-resident populations.
Another thing to note about metro markets is that they typically have lots of hotels. Short-term rentals are newer in these areas and have only begun to thrive over the past 15 years or so. Staying in a vacation rental is a somewhat new choice for tourists who would’ve previously stayed in a hotel during their trip.
Short-Term Rental Regulations
In metro markets, it’s not uncommon for vacation rentals to get shut down because of constantly changing regulations. There are three main factors contributing to anti-short-term-rental regulations: unhappy permanent residents, hotel lobbyists, and the lack of affordable housing resulting from short-term rental investors.
The unhappy permanent residents are usually people who live near multiple vacation rentals. As vacation rental investing grew in popularity, many residential areas that used to be very calm and quiet transformed into streets of rental properties where guests can be loud and disruptive. Permanent residents who live in these areas will often go to city council meetings to talk about what they view as adverse effects on their neighborhoods. Then, local media picks up the stories, offering further negative coverage of the topic. In general, there’s an adversarial relationship between non-investor permanent residents and short-term rental owners in metro markets.
Hotel lobbyists are another source of anti-STR regulations. In fact, they’re typically the largest source. Because vacation rentals have flooded the hospitality market in droves and gained a massive portion of the market share, hotels have fought back in attempts to eliminate them entirely. Lobbyists work tirelessly to get new bills introduced on the local level. They often find success and are able to halt vacation rental industry growth by limiting short-term rentals to specific zones, revoking permits, and sometimes even banning vacation rentals altogether.
Finally, the “Airbnb effect” is also responsible for anti-vacation-rental regulations. The Airbnb effect refers to property values skyrocketing due to many long-term rental and primary-home properties being converted into short-term rentals. These STRs are sold at a premium, leading to rapid appreciation, which is great for investors but not so great for permanent residents.
One study found that a one-percent increase in Airbnb listings results in a 0.018% increase in rent and a 0.026% increase in house prices. In some metro markets, vacation rentals have caused severe affordable-housing issues. As a result, locals and advocacy groups complain to the city council, and more stringent regulations are passed.
Types of Tourists
Metro markets attract guests of many different types. A few include professionals on business trips, locals going on “staycations,” families stopping by to see the sights in the area, and traveling medical professionals.
The biggest advantage of running a successful vacation rental in a metro market is exceptionally high rewards as far as cash flow goes.
Another benefit of having a short-term rental in a metro market is that there’s a diverse pool of guests that you can appeal to and get bookings from. Having a broad range of guests to appeal to through your listing results in more bookings and better cash flow.
As discussed above, one of the most significant drawbacks of having a vacation rental in a metro market is the volatile regulation structure.
Even if you’re able to secure a property in a metro market with more relaxed regulations, you’re simply trading one drawback for another: oversaturation. When short-term rentals aren’t regulated as strictly, hundreds and even thousands of them tend to pop up within a short period of time. This forces vacation rental owners and investors to drop their nightly rates in attempts to win bookings over their competition, but very low rates make it nearly impossible to turn a profit.
Suppose you start a vacation rental in a mostly unregulated metro market and find that oversaturation is an issue. In that case, one option is to convert it into a medium- or long-term rental instead.
In addition, metro markets are the riskiest type of short-term rental market, thanks to their dense permanent-resident population and long-term preferences for hotels over vacation rental properties.
Metro markets generally have moderate recession resistance. While they don’t do as well as regional markets, they’re better off than national markets during economic downturns. Because of the vast diversity of guests, it’s unlikely for travel to metro areas to ever stop, even during recessions.
Regional Vacation Markets
Regional vacation markets can be thought of as “drive-to” markets where most tourists arrive by car. These include cities like Panama City Beach, Florida; Big Bear Lake, California; Branson, Missouri; and Gatlinburg, Tennessee.
There is little to no industry outside of tourism in regional markets, so there are fewer permanent residents. This type of market is completely financially dependent on tourism and has been for decades.
Short-Term Rental Regulations
Vacation rental regulations in regional vacation markets tend to be very accommodating. Since short-term rentals have been a considerable part of the economy for decades, local governments in these markets figured out how best to monetize vacation rental income long ago. Therefore, if you start a vacation rental in a regional vacation market, you won’t run into issues with the hotel industry, problems with angry permanent-resident neighbors, or clashes with the city council.
Types of Tourists
Regional vacation markets attract a lot of families and couples, although you’ll likely see large groups, workationers, and other types of guests as well.
Out of the three vacation rental markets, the regional market is the most stable investment. Regional markets are more accessible and affordable than the metro and national markets. Since they’re usually small towns, the real estate prices are lower, and city council battles are nonexistent because there are more vacation rental owners than permanent residents.
The small short-term rental occupancy tax the governments in these markets collect is so lucrative for them that it would be against their best interests to impart stricter regulations.
Because regional markets offer travelers a more affordable travel destination, people still take vacations to these areas during economic downturns. Often, they’ll cancel their metro or national market vacation plans and opt for a trip to a regional market instead.
One example of regional vacation markets doing well during an economic downturn was during the recent coronavirus pandemic. Once things started to open up again, families wanted to go on vacation, but many weren’t comfortable being confined with strangers during flights or staying in heavily populated areas. They wanted to take trips to places they could drive to in their own vehicle and stay in single-family properties where there was plenty of space. As a result, many families chose to travel to regional vacation markets where they could enjoy the outdoors and have fun without being too close to others.
A potential drawback of investing in a vacation rental in a regional market is that there isn’t quite as large an opportunity for cash flow as in metro markets. However, we’d argue that the stability and reliability of regional markets, as well as their typically relaxed regulations, offset this slight disadvantage.
As mentioned above, regional markets are the most recession-resistant vacation rental markets, thanks to their combination of affordability and accessibility. During the housing and financial crisis of 2008 and the COVID-19 pandemic of 2020-2021, the regional vacation market outperformed both metro and national vacation markets.
Below, you’ll see a graphic from Vrbo that shows the top ten destinations travelers searched for in April of 2020. Most of them were regional markets, traditionally strong vacation rental markets located within driving distance to major cities.
Source: Vrbo, “Top Destinations Searched by Travelers” in April 2020
- Destin, Florida
- Panama City Beach, Florida
- Gulf Shores, Alabama
- Hilton Head Island, South Carolina
- Orange Beach, Alabama
- Gatlinburg, Tennessee
- Myrtle Beach, South Carolina
- Maui, Hawaii
- Outer Banks, North Carolina
- Pigeon Forge, Tennessee
National Vacation Markets
The third short-term rental market is the national vacation market, also known as a “fly-to” market since most tourists fly there. Examples include Orlando, Florida; Honolulu, Hawaii; and Aspen, Colorado. These markets are financially dependent on tourism.
National vacation markets are sometimes called “true vacation markets.” They’re not usually urban areas. Instead, they’re places where people take expensive vacations that require flights. These are the types of vacations that families spend years saving up for. Generally, it’s considered a big deal for the average person or family to go to a national vacation market.
These markets are typically friendly to short-term rentals, but there are some regulations in place.
Short-Term Rental Regulations
Since vacation rentals have been part of the economy for decades in these markets, regulations tend to be quite stable.
Still, you’ll find that some national vacation markets have stringent regulations due to the efforts of large resort chains and affluent permanent residents. Jackson Hole, Wyoming and parts of Hawaii like Honolulu are some examples.
Types of Tourists
National vacation markets are hotspots for family vacations, honeymoons, couples’ trips, and large group vacations.
During economic booms, national vacation markets can be highly profitable for vacation rental owners and investors. Their stable regulations also come with less stress than running a short-term rental in a metro market.
When recessions hit, national vacation markets are the first to see dramatic downward trends. Often, people will still travel during economic downturns. But instead of going on huge, expensive, fly-to vacations, they’ll opt for more affordable, accessible trips to regional drive-to vacation markets.
As mentioned above, vacation rental owners and investors that have properties in national vacation markets will definitely experience a decrease in their earnings during recessions. Because vacationing in national markets isn’t as affordable as it is in regional markets, most travelers aren’t able to afford trips to national markets when the economy isn’t doing well.
Recent Market Performance
This chart from AirDNA gives a good overview of how different types of vacation rental markets have been doing in the past few years.
As you can see, metro markets (Large City; Urban) currently have the lowest average annual revenue potential. National markets (Destination/Resort; Coastal and Destination/Resort; Mountains/Lake) are doing pretty well, and regional markets, particularly Small City/Rural, have the highest average annual revenue potential.
How to Find and Analyze Tourism Data for a Specific Market
By now, you probably have a good idea of what type of market you’d like to start a vacation rental in. Once you’ve chosen a specific market, you’ll want to find plenty of tourism data to analyze whether an investment in that market will pay off.
The reason you need to look at tourism numbers is simple: Short-term rental income is directly dependent on the number of tourists that travel to the area.
Department of Tourism
If you’re having trouble finding the information you need online, give the market’s tourism department a call. You can ask for them to email you brochures and tourism information.
The key is to find as much data as you can, going as far back as possible. This way, you can get a better idea of year-over-year tourism trends in the market. Year-over-year figures are valuable because they allow you to make easy comparisons over time. You can see whether your potential market is growing or slowing down year by year. Plus, looking at year-over-year data gives you a better perspective than analyzing month-by-month data; it eliminates small fluctuations and shows the overarching trends.
Conference Centers and Tourist Attractions
A couple of other good places to locate information are major conference centers and tourist attractions in the market. They usually collect visitor data and can share it with you so that you can get a good sense of how many people are traveling there.
National Park Service
If your potential market is near a national park, the National Park Service has a wealth of data to explore that goes back to each park’s opening. You can look at how your market performs during economic downturns and whether it’s growing or slowing down over time.
Hotels and More
Other places to look are hotels, major-league sports team stadiums, theme parks, and universities in the area.
4 Strategies to Assess Potential Income from a Market
Remember that no data set will be absolutely perfect. Still, the more data you have, the more accurate and effective your potential income assessment will be.
Strategy #1: Don’t Look at Specific Properties
As you’re analyzing income potential from a particular market, you should only look at data that shows market trends as a whole. Don’t choose one specific property to look at and extrapolate from there. Looking at a single property is counterproductive, and it can throw off the accuracy of your market data. What if you happen to choose a property that’s an outlier? There will be plenty of time to look at particular properties later on, but right now, we’re just focused on the market itself.
Strategy #2: Utilize Mashvisor, Key Data, and AirDNA
These three platforms offer highly valuable data to vacation rental investors. Here’s a brief profile of each one.
Mashvisor provides real estate investment data analysis to investors. The company’s mission is to empower investors to find both traditional and vacation rental investment properties and help them optimize the performance of their rentals.
Mashvisor features interactive neighborhood and property insights with detailed analyses of:
- Long-term and short-term rental pricing
- Occupancy rates
- Seasonality trends
- Revenue potential
- Cost assumptions
- Cash flow calculation
- Financial and purchase investment analysis
Key Data focuses on aggregating both historical and forward-looking data (although you’ll want to focus on the historical data rather than future projections). It provides the hospitality industry with comparative data dashboards and performance analytics perfect for investment funds, tourism organizations, and professional vacation rental managers.
AirDNA is the largest and most well-known of these three platforms, and it’s excellent for analyzing short-term rental market data. It has a full suite of products to help hosts, investors, and businesses find their next investment, optimize their listings, and research market-wide trends.
AirDNA’s MarketMinder features millions of data points on one integrated platform, while its Enterprise Solutions product consists of customized insights to help you grow your business. There’s also the Rentalizer, which calculates how much you can make on Airbnb from a specific property. Finally, API is meant to help you accelerate your business by uncovering insights and helping you target the right customers. We recommend checking out data from the MarketMinder at this point in the vacation rental property investment process.
Strategy #3: Get Data from Major National Property Managers
Major national property managers, like Evolve and Vacasa, are another source of market data. These companies are large start-ups that have their own proprietary data. Give them a call and ask about the markets you’re interested in; they’ll provide market-wide data points for you to assess.
Strategy #4: Find Other Sources with Data from Major Online Booking Platforms
Any data you can uncover from sources that use the major online booking platforms (Airbnb and Vrbo) will be a great addition to your analysis. However, you’ll want to avoid management companies that don’t utilize these major platforms. Third-party data from companies measuring vacation rental performance across multiple platforms will offer you a fantastic baseline to begin your analysis.
Now you know how to choose the right vacation rental market to invest in! But before you go out and buy the vacation rental property of your dreams, here’s a quick recap.
Once you’ve selected your market, invested in a property, and prepared it for guests, don’t forget to list it on RentalTrader! It’s quick, easy, and completely free to list your vacation rental, and our 4.5% host fee is among the lowest in the industry. Improve your bottom line by avoiding other platforms’ fees of 14% or more, and join the revolution here at RentalTrader! We’re determined to take back the market from the big guys and make travel affordable for everyone. Click here to get started.
If you want more idea about choosing the right vacation rental market, please watch the following video: