The new strategy of real estate investing is short-term rentals. While vacation rentals have been around for decades, it’s only recently that more traditional investors have begun to invest in them. You are likely reading this because you want to learn more about this strategy but aren’t sure where you should start.
First, you will need to choose the best market in which to invest. To determine if an investment is worthwhile, you will first need to research and analyze certain factors. The average occupancy rate, cost per night, and the cost of properties in your area should all be taken into consideration.
In this article, we’ll discuss the types of short-term rental markets, and what to look for when deciding where will work best for you.
Types of short-term rental markets
The most common types of short-term rental markets can be broken down into three categories: metro markets, national vacation markets, and regional vacation markets. All markets have varying degrees of volatility based on various attributes as well as their own pros and cons.
Your goals and tolerance for risk will determine which market you choose. No matter what market you choose to invest in, it is important that you do your research thoroughly before you jump in.
Metro markets
Metro markets are large metropolitan areas that are highly visited but not dependent on tourism. These areas have strong permanent resident populations and have many jobs and industries that support local economies. Cities like New York, Austin, and San Francisco are a few examples.
Short-term rentals in metro markets have only recently started to gain popularity among renters that would normally stay in hotels. This includes those on business trips and traveling medical professionals.
Vrbo, with its vast selection of luxury homes, and Airbnb were both created to provide a great opportunity for those who are early adopters of short-term rentals within major metro areas. Their product was innovative and offered more space and comfort than standard hotel rooms. These accommodations were also rare in their respective markets at the time.
Although metro markets offer high cash flow and great rewards, they also have the highest risk. This is due to several factors. Many metro markets have struggled over the past decade due to the historical rental of hotels instead of privately-owned homes. In addition, dense permanent resident populations have played a role.
Metro markets also have a more volatile short-term rental regulatory structure than other markets. Many metro market short-term rental investors were closed down within a few years of their operation.
Market saturation is another important consideration when you invest in short-term rentals in metro markets. This is a real possibility in the rare metro market where short-term rentals have been largely unregulated.
Market saturation is when there are few existing rentals in a given market, and new properties are consistently being converted to short-term rentals. It is worth noting that you always have the option to convert a property into a medium-term or long-term rental, if necessary.
National vacation markets
Tourism is a major factor in national vacation markets. Consider large, tourist-dependent destinations like Orlando, New Orleans, and Las Vegas.
These markets tend to have more stable rental regulations due to short-term rentals being a part of the economic fabric over decades. However, short-term rentals may not be allowed in all areas.
Due to the influence of larger resorts and hotels, along with residents, certain neighborhoods may have far stricter regulations. Jackson Hole, Wyoming for example has fewer than ten areas where short-term rentals are allowed.
National vacation rental markets can be very lucrative in economic booms, but they will see a decline during recessions. Travelers are less likely to spend on expensive vacations and will instead choose more affordable, nearby destinations.
Regional vacation markets
Regional vacation markets are those where tourists arrive in large numbers by car. You can find these examples in Panama City along the Emerald Coast of the Florida Panhandle, Gatlinburg in the Smoky Mountain region of Tennessee, and Lake Placid in the Adirondacks of Upstate New York.
Tourism makes up virtually 100% of the economy in regional leisure destinations. These are the areas of the country that have little or no other industry. One major difference to the national markets is that local markets tend to be more accessible and less expensive.
These markets usually have lower real estate prices than their national counterparts. Several of these types of markets have more vacation renters than permanent residences. Many of them have been renting private homes, condos, such as those at condotels, and cabins since long before the advent of websites like Airbnb.
These markets typically have very flexible short-term rental regulations. Because local governments made the decision decades ago how to monetize short-term rental revenue, there are usually no city council clashes. Local governments collect an occupancy tax that is so profitable it would be fiscally disastrous to introduce regulations against short-term rentals.
It would appear that short-term rentals are most successful in metro markets, due to their large number of tourists. However, due to regulation problems in many metro areas, the best investment is actually the regional, drivable rental market. Regional markets are most resilient to recession due to their accessibility and affordability.

Recession resiliency
Obviously, tourism and the travel industry are the keys to any short-term rental success. It is therefore crucial to ensure that there is enough tourism to allow short-term rentals to make a profit, even in economic downturns. Market resilience is dependent on several factors.
We will first look at the causes of the two previous economic downturns, the 2008 housing crisis and the COVID-19 pandemic. The regional vacation market did better than the national and metro markets during both economic downturns. Its two pillars of resilience to recession are affordability and accessibility.
During the Great Recession 2008, disposable income for the average American family fell dramatically. Potential short-term rental investors often make the mistake of thinking that everyone stops taking vacations when they have less money. This is not true.
While they may not be able to take more expensive vacations to some of the larger national markets, they can still travel to other destinations. Due to their affordability, families can take weekend getaways to local and regional areas even during a recession.
During the height of the global COVID-19 pandemic, accessibility was the key driver of success, and affordability was also a major factor.
The entire population was desperate to escape their homes after months of lockdowns. Most Americans weren’t comfortable traveling to large metropolitan areas with more dense populations.
They were also uncomfortable being in confined spaces with strangers, even for a brief time. Travelers drove to their vacation destinations in their own cars to rent single-family homes. This allowed them to enjoy the outdoors and be away from others because of the fear of contracting this virus.
Conclusion
As you can see, there is a lot to think about when choosing a market for your short-term rental investment. Preparing yourself by knowing the local regulations, along with historical data related to vacation rentals during times of economic uncertainty, are key to making the right decision. With the proper knowledge and planning, you can be a successful short-term rental investor.

















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