Best Short-Term Rental Markets in The U.S

For those considering entering the short-term rental (STR) market, 2023 presents a favorable investment climate. To guide your investment decisions, this article will explore the key factors that make a good STR market and present a curated list of the top 10 short-term rental markets in the U.S. 

These markets have been selected based on various criteria, including cap rates, median home prices, and occupancy rates. So, if you're looking to harness the potential of STRs and maximize your returns, read this guide to learn more about the best markets to consider in 2023.

What Makes a Short-Term Rental Market Profitable?

Investing in STRs requires careful consideration of multiple factors to ensure profitability. Property, in general, is an exciting prospect for investment, however, the STR market is somewhat different from other property markets. There are, therefore, several other factors you have to consider when deciding where to invest money for STRs. Here are some key elements to evaluate when determining the attractiveness of a specific market:

Demand Factors

Seasonality: The appeal of a market can vary greatly depending on its seasonal attractions. Some locations may thrive during the summer, while others might attract winter sports enthusiasts. Understanding the seasonality of a market is crucial for revenue forecasting. When you’re familiar with when a given area is most busy, it will allow you to make predictions on your ROI and allow you to adjust your investment and listing pricing according to when it is busiest. 

Local Events: Markets hosting popular events or festivals often experience increased demand for short-term rentals during those periods. Being aware of local events can help you optimize your rental income and will enable you to adapt your marketing strategies based on these events. Using packages and specials as a means of attracting more customers during a special event is one way investors ensure they are always on top of the STR game. 

Tourism: Tourist destinations tend to have a consistent demand for STRs throughout the year. Markets with renowned tourist attractions are generally reliable options for investors. If you want to invest in an STR space that has consistent demand, then you should consider getting a property or investing in a property portfolio that has a tourist attraction as a key selling point. 

Legal Climate

Regulations and Restrictions: Regulations governing short-term rentals can significantly impact your ability to operate and generate income. Before making a final decision on an investment, it’s a good idea to familiarize yourself with local laws and regulations governing STRs in your target market. For example, some legal climates will only grant a certain number of STR licenses to property owners. However, this very much depends on the rules laid out by the local authorities. 

Getting Permission: Before investing in an STR or purchasing a property for STR yourself, you need to ensure that there are no restrictions surrounding what the property may be sued for. You can find this out by conducting simple research about the rules for STRs in the area or the state. 

Financial Metrics

Return on Investment (ROI): ROI is a critical metric that reflects the profitability of your investment. It considers both rental income and expenses, allowing you to assess the potential return on your investment. The profitability of a property should be scoped out before any final decisions are made. 

Nightly Rates: The average nightly rate you can charge directly affects your revenue. Competitive rates are essential for attracting guests and maximizing income. However, you also need to make sure that you cover your expenses and make a profit. That is why the type of property you decide to invest in makes a great difference.

Occupancy Rates: High occupancy rates indicate strong demand and consistent bookings, which are essential for maintaining a steady income stream. This comes down to knowing when the busy seasons in the area are. 

Median Home Prices: The cost of purchasing property in a market impacts your upfront investment. Markets with affordable median home prices may provide better ROI potential. This is especially relevant if you plan to purchase the property yourself. The more you spend on a property to let out as an STR, the more you will have to charge on your nightly rates to those looking to stay there.

Now that we've outlined the key factors to consider, let's delve into the top 7 short-term rental markets in the U.S. for 2023. These markets have been selected based on their cap rates, median home prices, and occupancy rates, offering a well-rounded view of their investment potential.

Top 7 Short-Term Rental Markets in the U.S.

Gatlinburg, Tennessee

Cap Rate: 8.1%

Median Home Price: $409,084

Occupancy Rate: 61%

Description: Gatlinburg, Tennessee, offers an excellent opportunity for short-term rental investors due to its high cap rate and strong occupancy rate. Nestled in the picturesque Smoky Mountains, Gatlinburg attracts visitors year-round with its natural beauty, hiking trails, and vibrant arts and crafts community. The median home price is relatively affordable, making it accessible for investors. With a diverse range of activities and events, Gatlinburg maintains a consistent demand for vacation rentals, ensuring steady rental income and potential for substantial returns.

Joshua Tree, CA

Cap Rate: 11.07%

Median Home Price: $525,050

Revenue Growth: 113%

Description: Joshua Tree, California, is a rising star in the short-term rental market due to its rapid revenue growth and relatively quick return on investment. Known for its stunning desert landscapes and proximity to Joshua Tree National Park, this area attracts nature enthusiasts and artists alike. The median home price is reasonable, considering the potential income from vacation rentals. With its unique appeal and robust revenue growth, Joshua Tree promises a lucrative investment opportunity for those seeking to capitalize on the growing demand for desert getaways.

Sea Isle City, NJ

Cap Rate: 6.9%
Median Home Price: $1,200,000

Revenue Growth: 82%

Description: Sea Isle City, New Jersey, stands out as a premier short-term rental market with impressive revenue growth and a picturesque seaside location. While the median home price is higher, the daily rental rate and revenue growth make it a compelling investment. Sea Isle City attracts beachgoers and vacationers looking for a coastal escape. With a relatively short time to break even and strong revenue growth, investing here offers the allure of beachfront living and excellent income potential.

Lincoln City, OR

Cap Rate: 6.28%

MedianHome Price: $764,950

Revenue Growth: 72%

Description: Lincoln City, Oregon, is a coastal gem known for its stunning oceanfront properties and vibrant beach culture. While the median home price is higher, the appealing daily rental rate and impressive revenue growth make it a promising investment. Lincoln City offers a wide range of outdoor activities, attracting tourists year-round. Its relatively quick time to break even and robust revenue growth make it a strategic choice for investors seeking a slice of the Oregon coast's beauty and profitability.

Sedona, AZ

Cap Rate: 6.73%

Median Home Price: $895,050

Revenue Growth: 65%

Description: Sedona, Arizona, is a red rock paradise that entices travelers with its breathtaking scenery and spiritual allure. The median home price is higher, reflecting the market's prestige and exclusivity. Sedona's unique natural beauty and year-round appeal result in a strong daily rental rate and consistent revenue growth. Investors can expect a relatively short time to break even while enjoying the benefits of owning a property in one of Arizona's most sought-after destinations.

Fredericksburg, TX

Cap Rate: 5.55%

Median Price: $898,550

Revenue Growth: 52%

Description: Fredericksburg, Texas, is a charming destination known for its German heritage, wineries, and historic appeal. The market's higher median price is balanced by a competitive daily rental rate and strong revenue growth. Fredericksburg attracts history buffs, wine enthusiasts, and travelers seeking a taste of Texas culture. With a relatively short time to break even and impressive revenue growth, this market offers investors a chance to own a piece of Texas Hill Country while enjoying a thriving short-term rental business.

Hot Springs, AR

Cap Rate: 7.09%

Median Home Price: $299,500

Revenue Growth: 52%

Description: Hot Springs, Arkansas, presents a unique investment opportunity with its affordable median home price, rapid time to break even, and strong revenue growth. The city is renowned for its natural thermal springs and historic bathhouses. Hot Springs attracts wellness seekers, history enthusiasts, and outdoor adventurers. With a quick return on investment and impressive revenue growth, this market is a strategic choice for investors looking to tap into the allure of natural healing and historic charm.

Summary

In recent years, the short-term rental industry has gained significant traction, with annual revenue in the U.S. projected to reach $20 billion by 2025. As travelers increasingly opt for vacation homes over traditional hotels, investors are exploring the potential of short-term rentals. To succeed in this dynamic market, it's crucial to select the right location.

This article has provided an in-depth exploration of the top 10 short-term rental markets in the U.S. for 2023. These markets offer attractive cap rates, affordable median home prices, and high occupancy rates, making them prime choices for STR investment. However, it's essential to consider local regulations and taxes before making your investment decision.

As the STR market evolves, staying informed about emerging trends and conducting thorough due diligence in your chosen market will be key to maximizing your returns and building a successful vacation rental business.