How to find a good short-term rental investment location

Location, location, location. It’s the most important factor for guests when booking a short-term rental, and it can determine how successful your rental is. Best places to invest lists are a helpful place to start, but what if you’re not interested in those markets? Does that mean the city you want to invest in is a bad idea? Not necessarily.

A lot of metrics and research go into determining the investability of a market. Here are 7 suggestions to help you make a smart, profitable short-term rental decision in a location that’s right for you. 

The elephant in the short-term vacation room is the return on investment (ROI) capabilities of a location. Whether you’re evaluating cash on cash, annual rate of return, cap rate, or another calculation model, what a property can make needs to be higher than the cost to buy and maintain it if you want to be profitable. 

Conservative estimates say that 8-12% ROI is good (though short-term vacation rentals can earn significantly more). Finding a market with a high return is easier if you’re not tied to one particular location. But even if you’re interested in investing in a specific market, you should pay close attention to that area’s return rate. The ROI needs to be high enough to cover your expenses or you need to be prepared to pay the difference out of pocket. 

For some vacation rental owners, being able to cover most of the cost of their vacation home is enough and they don’t mind not making extra money. It’s a personal decision that each short-term rental investor needs to make, but understanding your potential return is the foundation of that decision.

If you’re in any Airbnb host group you’ve likely heard the phrase “supply has skyrocketed.” In fact, quickly growing supply in many markets is the reason why hosts feel like they’re getting fewer bookings. Demand simply isn’t growing as fast as supply.

It’s obvious why investing in a city that’s oversaturated with short-term rentals is a not the best idea (it’s harder to attract guests and you can’t charge as much). Without sufficient demand, these areas don’t receive enough bookings to keep revenue high for hosts. Take Big Bear Lake, CA, which saw thousands of new vacation rental listings in the first two years of the pandemic. The surge in supply in the popular mountain town meant revenue per host plummeted by 2022 – and it’s uncertain if demand will return to pre-pandemic levels. 

The surge in supply in the popular mountain town meant revenue per host plummeted by 2022 – and it’s uncertain if demand will return to pre-pandemic levels. 

Before investing in a location, look at how the number of active listings have changed over time  — especially recently. (You can see these numbers in AirDNA’s MarketMinder™ Overview page for free.) If the number of rentals in a market has stayed largely steady, then that location is probably pretty stable. If the number has shot up in recent months or years, you might have to worry about oversaturation.

3. You want demand that trends (and stays) upward

Any sound investment requires zooming out from the context of right now. Sure, there will be locations that are thriving last year or this month, but that doesn’t mean you should blindly flock there. The markets that are generally trending in the right direction, not just right now, are the real gems. 

Say Los Angeles has caught your eye. Demand was high for the full year of 2019, but after the introduction of a short-term rental law that limits how long guests can stay in a property, it dropped year-over-year. Ever since, demand hasn’t gone back to its peak level. On the flip side, a place like Fairbanks, Alaska, has seen a huge uptick in demand in the last 2+ years. 

Demand is a representation of a location’s investment potential longevity. Pay attention to locations where the number of booked nights has risen gradually over the last few years. (Check out the Booking Demand chart on AirDNA’s Occupancy page.)

Popular destinations are popular … duh. When it comes to short-term rental investing, that often means more competition and higher home prices. But the areas close by could hold untapped potential, especially if they have lower nightly rates that are appealing to budget-conscious travels.

Some of the best-performing markets in recent years have been destinations that are drivable from urban hubs. These “satellite” locations are popular because they feel untrodden but still have plenty of vacation activities.

When looking around a large urban market, you ideally want to be no further than a three-hour drive to capture people looking for a quick getaway. If you’re interested in being near a popular tourist destination, consider the towns right next door so you’re still very close to all the in-demand activities. Being close to a high-demand area is why Ellsworth, ME made 2023’s Best Places to Invest list. It’s near Acadia National Park, a popular summer tourist destination, but offers more affordable home prices for vacation rental investors.

Certain locations require certain amenities — almost everyone booking a ski vacation wants a hot tub. Even in places where amenities aren’t a necessity, the right amenities can help hosts perform substantially better. For example, lots of properties in rustic Gatlinburg, TN don’t have a hot tub, but the ones that do stand out to guests.

Figure out what the “must have” amenities are in your potential investment area and focus on finding a property with those features or plan to add them quickly. Checking out the top earning properties in your area can help you identify these guest-driving amenities. (If the amenity has an associated cost, like pool or hot tub maintenance, don’t forget to factor those costs into your ROI calculations.)

“In many markets, buying a property without a pool is like buying a bike without wheels—it simply won’t work. Tracking amenity data is an absolute must.” - Jamie Lane, VP of Research, AirDNA

6. Find opportunities in under-performers

It’s all well and good having a comprehensive list of competitors, but you also need to know how those competitors are performing. No matter how many listings are in a location, if their dynamic pricing strategies aren’t optimized, or they don’t have the right amenities, there’s an opportunity for you to slide in as a top listing. 

Compare revenue (how much money the properties actually earned over the last year) and revenue potential (how much they could have earned if they were listed full time) to highlight this sweet spot — Rentalizer can help with this. The greater the difference, the more competitors are underperforming, and the more opportunity you have to rise to the top. 

You’ll also want to narrow down your comparison to find niche opportunities. For example, three-bedroom apartments by the city center could be mismanaged and have bad guest reviews. Or maybe a group of outdated cabins are catching all the demand because that’s all that’s available. Find what’s missing and fill the gap.

7. Avoid areas with a lot of professional hosts

For vacation rental investors with one or two properties, locations with a large number of  professional hosts can prove challenging, especially for those who plan on self-hosting their properties.

At AirDNA, we define professional hosts as individuals with more than 21 properties. A high percentage of professional hosts in an area means you’ll be competing against more seasoned, well-resourced property managers. 

In Colorado ski towns like Steamboat Springs and Telluride, more than 50% of hosts are professionals. Standards for guest communication, cleaning, and operations are subsequently very high. Meanwhile, college towns like Madison, WI, State College, PA, and Eugene, OR, have fewer than 5% of professionally-run listings. Investing in these kinds of locations let you make a bigger splash.

Short-term rental investing: A combination of head and heart

When you’re investing in your first, second, or third short-term rental investment, picking the right location is crucial. Odds are you have an opinion on where’d you like to be. That’s a great start, but making a smart investment decision means validating your gut feeling with cold, hard data. 

Keeping these factors in mind can help you choose a location that combines your emotional needs with business-focused pragmatism, resulting in a successful, long-term investment.

How to Find a Good Short-Term Rental Investment Location | AirDNA

Where should you invest in a short-term rental? These seven criteria help you find the perfect location, no matter where you’re looking!

How to Find a Good Short-Term Rental Investment Location | AirDNA

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