What Makes a Good Vacation Rental Market?

When it comes to short-term rentals, location isn’t just a buzzword—it’s the cornerstone of a successful investment. Guests prioritize convenience, attractions, and neighborhood appeal when booking their stays, which means where you invest plays a pivotal role in your rental’s profitability.

While "best places to invest" lists are helpful, they don’t cover every market or fit every investor’s goals...and each market is ever-changing, so information can become outdated very quickly.

So, how do you choose the right spot for your short-term rental investment? Here are seven actionable steps to guide your decision-making process.

1. Evaluate the Return on Investment (ROI)

Your potential ROI is one of the first metrics to consider when evaluating a location. Whether you calculate cash-on-cash return, annual rate of return, or cap rate, the goal is to ensure your property’s earnings outweigh the costs of acquisition and upkeep.

Stay tuned for a future blog post where we do a deep dive on formulas and calculations you'll want to consider, and what "good" looks like.

Everyone has different goals, and an investor with the capital to pay cash for a property will see a drastically different rate of return than someone who puts 10% down for a vacation home mortgage. In general, a good ROI for short-term rentals falls between 8-12%, but many markets offer opportunities to exceed this range.

If you’re flexible about location, prioritize areas with higher ROI potential. For those set on a specific city or region, it’s crucial to analyze whether the rental income can cover your expenses or if you’re prepared to subsidize costs.

Remember, some investors are content if their rental breaks even, as long as they can use the property for personal vacations. Define your financial goals upfront to guide your search.

2. Assess Supply Stability

Overcrowded markets with surging supply often struggle to maintain steady bookings. An influx of new listings can outpace demand growth, leading to reduced occupancy and lower nightly rates for hosts. Research historical supply trends in your target market using tools like AirDNA’s MarketMinder™.

A stable or gradually increasing number of active listings suggests a balanced market, while rapid supply growth can signal oversaturation. For example, Big Bear Lake, CA, saw a significant increase in vacation rental listings during the pandemic, but this surge led to declining revenue per host as demand failed to keep up.

Focus on markets with consistent supply trends to avoid steep competition and ensure profitability.

3. Analyze Demand Trends

Investing in a location with rising demand ensures long-term profitability. Look beyond current trends and examine how the market has performed over the past few years. Metrics like booked nights and occupancy rates provide valuable insights into a location’s growth trajectory.

For instance, while Los Angeles experienced high demand in 2019, stricter short-term rental regulations caused a decline in bookings, and demand has yet to recover. In contrast, emerging markets like Fairbanks, Alaska, have seen steady increases in demand due to growing tourism and unique attractions.

We also recommend determining which metric is more important to you: Occupancy Goals or Revenue Goals.

Some people focus on reaching 100% occupancy every month, while others may be content hitting revenue goals with fewer nights booked, which means fewer turns and less wear and tear on your property. At Sienna Stays, that is our philosophy. We have a very meticulous pricing system that maximizes revenue for our owners, without the need to be booked 100% of the time.

For example, let's say you have a revenue goal of $6,000 per month for your property. You could have 100% occupancy for a month, but only make $3500 in revenue. We prefer to ensure revenue goals are met or exceeded - if that means hitting 100% occupancy, then that's great, too!

4. Explore Satellite Markets

High-profile destinations often come with hefty price tags and stiff competition, but nearby satellite markets can offer lucrative alternatives. These smaller towns and suburbs benefit from proximity to popular attractions while offering more affordable home prices and less competition.

For example, Ellsworth, ME, has gained traction as an investment hotspot due to its proximity to Acadia National Park. Travelers seeking budget-friendly accommodations often prefer these neighboring areas, making them a prime target for investors.

When scouting satellite markets, prioritize locations within a three-hour drive of major urban centers or tourist destinations to attract weekend travelers.

5. Identify Key Amenities

The right amenities can set your property apart and maximize booking potential. Certain features, such as hot tubs in ski destinations or pools in warmer climates, are often non-negotiable for guests.

Even in markets where amenities aren’t essential, offering thoughtful extras can significantly boost your property’s appeal.

Research the top-performing rentals in your target market to identify must-have amenities. For instance, properties in Gatlinburg, TN, with hot tubs outperform their competitors despite the feature not being universally available.

Ensure you budget for amenity upgrades and maintenance, as they can directly impact your ROI and guest satisfaction.

6. Spot Opportunities in Underperforming Listings

Underperforming rentals in your target market present an opportunity to differentiate your property. Analyze competitor listings to identify gaps in pricing strategies, amenities, or overall management.

For example, outdated cabins in a high-demand area may monopolize bookings simply due to lack of alternatives. By offering a well-maintained, competitively priced property, you can capture unmet demand and rise to the top of the market.

Focus on niche opportunities, such as family-friendly accommodations or properties with unique features, to stand out from the crowd.

If you're ready to take the plunge, Sienna Stays is here to help you make the most of your investment. Our expert guidance and resources are tailored to empower vacation rental owners in navigating the complexities of the short-term rental market. Let us help you turn your investment into a thriving business.

Final Thoughts

Choosing the right location for your short-term rental investment requires a careful balance of market research, financial analysis, and strategic planning. By focusing on metrics like ROI, supply and demand trends, and competitive dynamics, you can identify a location that aligns with your investment goals. Whether you’re exploring satellite markets or upgrading amenities, taking a data-driven approach ensures you make informed decisions for long-term success.