How To Succeed With Real Estate Investing in Gateway Markets

For every real estate investor, there’s a gateway market: a location that holds the promise of a reliable investment. Think of places like New York City and Miami, densely populated large cities where millions of people live and just as many come to visit. 

Since Airbnb hit the mainstream in 2008, gateway markets have become a go-to for short-term rental (STR) investors—their economic health, vibrant tourism industries, and large populations are a winning formula for real estate investing. But they’re also highly competitive.

To successfully invest in gateway markets, you first have to understand what a gateway market is and how to leverage the market data in your favor. 

What is a gateway market in real estate? 

Gateway market definition: A city or metropolitan area that’s considered a stable real estate investment because of its population, economic health, diversity, and desirability. 

A gateway market in real estate has historically generated a reliable return on investment (ROI). These are bustling cities with robust economies where people love to live and visit. They’re also business travel hotspots because of booming industries like big tech or finance. 

Many real estate investors will make the most of this thriving demand by purchasing properties, enjoying stable cash flow, and then selling when the market is high to maximize profits. 

How to identify gateway markets

Investors consider many major cities in the United States to be gateway markets. If you know which factors make markets a gateway, you can identify investments based on data, not investment trends. 

Here at AirDNA, we identify gateway markets based on: 

1. Population size: Gateway markets are densely populated large cities, many of which have at least 8 million residents. 
2. Industry: Many companies are headquartered in gateway cities because of booming industries like tech, hospitality, and healthcare.
3. Tourism: People love to visit gateway cities due to the plethora of delicious food and must-do activities.  
4. Attractions: The markets have high economic diversity and high construction, meaning there’s a year-round draw for residents, business travelers, and tourists alike.
5. International hubs: Major ports, busy international airports, and shipping channels are a calling card for a gateway market. 
6. Reputation: Gateway markets tend to be household names. New York and London are revered around the world and, likewise, in the investment scene.

Top gateway markets in the U.S.

Many of the top markets in the U.S. are the major cities you’d expect. This isn’t an exhaustive list, but they represent some of the long-time leading markets: 

1. Chicago: One of the midwest’s leading cities, Chicago’s multiple universities, beautiful Lake Michigan, and the major healthcare, retail, and finance companies keep this city popular. 
2. Miami: Down in Florida, Miami leads the way thanks to its economic diversity and year-round tourism thanks to its pristine beaches and blue skies. 
3. Los Angeles: California boasts the fifth-largest economy in the world, and Los Angeles’s entertainment scene can take credit for much of that economic health. Los Angeles International Airport is also one of the busiest in the world. 
4. San Francisco: Although known as one of the most pricey places to live, it remains a popular place to invest. The city’s vibrant tech scene, high construction, and attractions like the Golden Gate Bridge, the Three Sisters, and Alcatraz keep it in demand. 
5. New York: NYC has long been the world’s top gateway city, but times may be changing. Growing competition and tightening local government regulations have restricted how STRs operate. Investors may instead look to neighboring markets, like New Jersey, to draw from the Big Apple’s consistent demand while avoiding the hassle of regulations.  

Pros and cons of investing in gateway markets

Like all investments, gateway cities come with risks and rewards worth considering before you purchase a property in one of these metropolises. 

Pros 

1. High demand: STRs struggle when supply exceeds demand. While this can still happen in gateway cities, the consistently high demand insulates from this effect, and real estate investors can typically count on cash flow. 
2. Reliable returns: Because gateway cities enjoy high demand, many investors feel they’re less volatile than other markets and offer more reliable ROI. 
3. No off-season: Many markets reckon with at least some seasonality, but in gateway markets, people have year-round reasons to visit. 
4. Diverse traveler types: Gateways have economic diversity that includes business and leisure, doubling an STR’s pool of potential guests. 

Cons

1. Competition: Because gateway markets are attractive, they’re also highly competitive. This creates a higher barrier to entry. 
2. High costs: Many of these markets have also recorded all-time high property values. This stretches investors’ budgets and eats into their ROI. 
3. Decreasing returns: Though these cities do offer reliable returns, those returns are dwindling. Oversaturation and high prices have made it difficult to maintain the profit margins these markets once offered.  
4. Tightening regulations: Many believe that the plethora of STRs in gateway markets is harming housing availability. As a result, local government regulations greatly restrict STR operations.

Strategies for investing in a gateway market successfully

Investing in STRs is a little different than investing in traditional real estate. The goal isn’t just to find properties with appreciating values but also those that are desirable to travelers. This balance can be particularly difficult to strike in competitive gateway markets, but it’s still possible. 

Here’s how: 

1. Develop Your Investment Criteria

Start by identifying what success means to you. Regulations, location within a densely populated large city, competition and more can all impact how investment-worthy a market is. Whether something is a red light or a green one depends on your goals.

We recommend investors consider: 

• Regulations: Many gateway markets face increasingly strict local government regulations. New York’s STR rules, for example, restrict stays under 30 days. Research regulations before you buy to ensure you can profitably operate your property.
• Capitalization rate: This is a figure that weighs risk versus reward for every investment. Understanding figures like these and the rate you need to hit your ROI goals can help narrow down your pool of potential STRs.
• Growth: Is the market on the up or the down? A growing market is a sign that it could be a great investment. Otherwise, you may make an investment that can’t support your income goals. 

2. Analyze the rental data in your target locations

Suppose you’ve found a market that offers relatively lax regulations and high growth. Now it’s time to drill down within those markets. Consider different neighborhoods, zip codes, and even suburbs to find the best area for your investment. 

Figures like average revenue, occupancy, pacing, and more can help you zero in on locations within markets that offer the most bang for your buck. While competition in gateways is high, there are still diamonds in the rough. Take New York City, for example. Many New Jersey STRs are seeing increased demand following the city’s restrictions. In this case, perhaps investing in Jersey is your inroad to the competitive NYC market. 

3. Compare zip codes

Look at different zip codes in your chosen metro area. Once you've picked a few, it's time to crunch the numbers and see how they stack up against each other.

You want to use data to predict how well these areas will do in the future. Look at things like how much money properties are making, how often they're booked, and how their rates are growing. A good area for investment is one where these trends are on the rise, showing that you're likely to get strong returns on your investment.

4. Identify properties

Now you’re ready to select a property. Within your areas of choice, analyze how different property types perform. A studio can have a very different ROI than a three-bedroom, even if those properties are on the same street. 

Consider not just the property size and price tier but also property type—apartments, condos, houses, and more—amenities, and even how unique the property is. Our data shows that unique properties are often more in demand than their conventional STRs and can be an effective way to differentiate your listing in a competitive gateway market. 

5. Research properties for sale

Let’s say you’ve analyzed the data, and the most promising investment for you is two-bedroom apartments in downtown areas with balconies. It’s now time to hit the pavement.

Use the map feature on tools like AirDNA to create a radius for the area you’ve chosen, then take a look at the available properties in the area. Our new For Sale Properties feature displays MLS listings alongside key data like STR revenue calculator, average daily rate, and occupancy projections so you can make a data-driven investment decision. 

With all that done, once you’ve secured financing, you’re ready to make an offer. 

6. Optimize your listings

While picking the right properties is vital, so is optimizing your listings after you invest. This means: 

• Adopting dynamic pricing: The daily rate you offer should adapt to the season and supply and demand in your market. If it doesn’t, you could be leaving money on the table. 
• Upgrading amenities: Take a look at comps and the amenities that boost your revenue. If, for example, you have a stand-up shower but highly booked properties in your market have bathtubs, you might consider a quick renovation. 

Polishing your listing: Include professional photos, thoughtful descriptions, and encourage past guests to leave reviews. This can all help your listing stand out.

Bonus Tip: Consider emerging markets 

Because gateway markets are attractive, they’re also highly competitive. As supply outpaces demand and housing values remain high, gateways may not generate the returns they once did. According to our data, new markets may be on the rise, and we recommend using vacation rental data to explore those possibilities. 

Say goodbye to guesswork

Gateway markets are investment magnets because investors assume they’re successful. But what if you didn’t have to settle for assumptions? 

Powered by data from over 10 million properties, AirDNA’s short-term rental intelligence can help you find profitable properties for sale, forecast how much those properties could make, and then operate them profitably—whether they’re in a gateway market or elsewhere. Learn more about short-term rental data and how to use it.