The Best Short Term Rental Markets Aren’t What You Think

The best short term rental markets are not the ones everyone was obsessing over during and shortly after COVID. But I still hear about and talk with people trying to hunt deals in these popular markets.

It’s a huge mistake and, I believe it could be a disastrous real estate investing strategy.

Instead, it’s important to understand the short term rental investing game has changed. While most folks are determined to try and make yesterday’s strategy work in a completely different environment, I’m thinking about it totally differently.

It’s time to think outside the box if you want to do well with short term rentals. Today, the best short term rental markets are NOT vacation markets.

That may sound crazy, but I’ll tell you exactly why that’s the case and why the experts have it all wrong.

Best Short Term Rental Markets According To Experts

Listen, I am not an expert in short term rental markets. But I do operate one of my Detroit homes as a short term rental today. 

So I do have a bit of experience, and like many others, I have been extremely tempted to do more short term rentals.

In 2022, when I started preparing to convert this house from a long term rental to a short term one, I had no clue what I was doing.

So I picked up Avery Carl’s book, “Short Term Rental, Long Term Wealth”. I already owned my target STR property. I was really just looking for operational advice and help. Choosing a market wasn’t something I needed to do.

But Avery’s book dedicates a fair bit of itself to choosing a market.

And while it’s been some time since I’ve read it, I recall there being two main criteria when determining the best short term rental markets.

Criteria #1: Buy In Traditional Vacation Markets

The number one thing Avery’s book stresses is the importance of buying your short term rental in an established vacation market.

Why?

The argument is that these markets have been vacation destinations for many decades. As a result, rules and regulations have long been established and should not change.

You are safe to operate here.

On the surface that makes a lot of sense. But I’ll go into why I don’t fully agree with this later in the post.

But beyond targeting established vacation markets, folks will tell you to drill down even further.

Criteria #2: Favor Regional Destinations

The next big criteria that the short term rental gurus will tell you to do is buy in regional vacation locations.

The logic is that these are more insulated from economic downturns.

If we’re hit with a recession, folks will likely cut back on that extravagant trip to Hawaii. But they will likely still want to get away.

Regional destinations easily accessible by a half day or less of driving will likely still be in demand.

Again, that makes a ton of sense.

But here’s the thing. The short term rental market has drastically changed over the last few years. 

And I’d argue that much of this market selection advice is no longer relevant.

The Best Short Term Rental Markets Are No Longer Vacation Spots

At this point in my life and real estate investing journey, I simply have zero interest in getting into the short term rental markets in vacation destinations.

A lot of people are attracted to this strategy because of the insane returns we’ve seen over the past few years. 

I believe that ship has sailed.

People also underestimate what it takes to actually operate successfully in the best short term rental vacation markets. 

And there’s one huge reason I’d be extremely hesitant to purchase in any traditional vacation market today.

Let’s look at all three of these reasons I’d hesitate to buy a traditional STR in detail.

Reason #1: Short Term Rentals Are Not As Lucrative As People Think

If we look back on the past 5 years of the short term rental market it’s clear that 2021 was the golden year for STR operators.

Anyone who purchased a vacation property in 2019 or 2020 was looking like a genius in 2021. 

We see that in AirDNA’s data, largely in the Revenue per Available Room (RevPAR) metric: 

As a result, people started piling on the short term rental bandwagon, expecting the good times to keep rolling. 

And, as always, that’s generally where we see a return to the mean. RevPAR was essentially flat in 2022 and RevPAR actually declined in 2023 for the first time since AirDNA started collecting this data.

AirDNA called 2023 “a year to forget” in their 2024 outlook report. 

Ouch!

But that’s ultimately fine, right? 

As investors, we expect there will be good years and bad. Revenue may fluctuate, prices may move up or down, but over the long run it works out.

But here’s the issue. Prices for short term rentals simply have not corrected much in most markets. This is especially true when we look at prices since the mania year of 2021.

Here are four popular STR markets and their Zillow price indexes:

In all of these cases, prices are still elevated compared to the end of 2021. 

Meanwhile, interest rates have literally more than doubled since that time.

Add on top of that far more competition. Short term rental inventory, as reported above by AirDNA, has increased nearly 50% while, again, RevPAR has declined.

Investing like this is simply not wise, and it’s not for me.

I also have zero interest in being in the high-end hospitality business.

Reason #2: Competition & Standards Are Extremely High

That’s exactly what you’re doing when you enter these sorts of short term rental vacation markets.

People are on vacation. These are destinations, and they are paying a lot of money to be there. They likely saved up throughout the year to take these trips. Maybe they’re even taking on debt to do it.

In short, they are going to expect a lot; rightfully so.

That means you are going to have to crush it to stay competitive, because there are plenty of folks competing for these same guests.

Some people thrive in creating awesome, standout properties and experiences. They may even love hospitality and customer service.

I do not.

And, unless you’re hiring an expensive property manager, this should be a big consideration as to whether you want to get into the short term vacation rental market.

But the biggest risk here is one that few people see coming until it happens.

Reason #3: You Are Not Immune To Regulation

As I mentioned earlier, in Avery Carl’s book she harps on the fact you should ONLY be looking at traditional vacation markets for your STR investments.

The logic here, again, is that rules and regulations have been cemented in these markets for many decades. They are tourist driven areas and vacation rentals are what drives much of their economy.

In other words, these are considered “safe” areas to invest from a regulatory perspective.

And that sounds logical, right?

Sadly, many are finding out this is not reality. 

Palm Springs Gets Ravaged

Investors in Palm Springs are quickly learning that regulations can quickly change. 

In 2022 Palm Springs passed a new ordinance that would limit short term rental permits to no more than 20% of properties throughout the entire city.

How’s that working out?

Check out this small sample size of properties and their listing histories:

It’s absolute carnage in the Palm Springs real estate market.

Regulation risk seems pretty damn real to me!

So let’s think all this through…

Imagine getting into the traditional short term rental market game today. You are entering a highly competitive space where guests expect near perfection.

Compared to just a couple years ago you have prices that are substantially higher, debt servicing levels that are more than double, lower revenue numbers, and nearly 50% more inventory.

Add on top of it the real risk of regulation changes that could chop your property value in half overnight.

Does that seem like a good risk/reward to you?

Absolutely not.

So what’s an aspiring short term rental investor to do?

The Best Short Term Rental Markets Have Little Regulation

Quit simply, I believe the best way to be successful with short term rentals is to do the exact opposite of what the gurus have been telling us.

Do NOT buy in vacation markets. Look to metropolitan areas that have little to no regulation today.

As I see it, there are at least three benefits to doing it this way.

Benefit #1: Cheaper Entry Points

One of the best ways to control risk is to put less money AT risk.

By getting away from the traditional vacation markets you’re opening up a lot of options. And these options tend to be a lot less expensive than the overheated prices in vacation areas.

I was all in on my Detroit short term rental for about $180,000. It appraised for $240,000 and we pulled all of our capital out.

While you may not have the resources to do that, there are plenty of markets that over price points at a half or third of what you’d pay in vacation destinations.

Benefit #2: Regulation May Not Matter

I like to look at worst case scenarios when analyzing anything. But it’s also great to think about the best case scenarios and everything in between.

If you buy in a market that does not currently have short term rental regulations there are really three things that will likely happen.

Regulatory Outcome #1: No Changes

This is obviously the best outcome. 

If your chosen market simply never regulates short term rentals, you continue operating just the same. While this may be unlikely, I can see some states/areas where this might be aligned with the political majority.

More often than not though, I’d at least expect some regulation down the pike.

Regulatory Outcome #2: Regulations With Grandfathering

If/when regulation does come to your STR market, the absolute best case scenario is for current short term rental operators to get grandfathered in.

Sounds like the dream, right? You potentially get years of operating without regulation and then simply fall in line with new rules.

I believe this is the most likely scenario when regulation does indeed happen. 

I grew up in a small area of Northern Michigan in Harbor Springs, right near Petoskey. It is known to be a popular summer vacation area. 

This article from 2017 talks about how Petoskey started regulating short term rentals but grandfathered existing operators. 

I firmly believe that, if no current regulation exists today, it’s more likely than not that future regulation will grandfather in existing short term rentals.

But there’s always a chance for an all-out ban.

Regulatory Outcome #3: Potential Full Blown STR Bans

A complete STR ban would be the worst possible outcome in our plan to operate a short term rental in a currently unregulated market.

And while I believe the risk is low of this happening today, it’s worth considering. 

Even in Dallas, where a near outright STR ban was adopted, it is being struck down.

And this quote from the article is important:

“Operators of Airbnb and Vrbo rentals say Dallas effectively banned short-term rentals after years of debate.”

The emphasis here is mine. 

This ban took YEARS to unfold. And that’s a huge advantage.

Even if a ban were to take effect, it would be years in the making. Here’s why that is such a benefit…

Benefit #3: Ability To Fallback To LTR

If you’re planning to operate a short term rental in a metropolitan area you always have the ability to fallback on the long term rental market.

In vacation destinations, that’s just not possible.

This is a great alternative that, over time, should only become more attractive. Rents tend to increase as the years go by, making long term rental numbers increasingly strong.

Why am I stating the obvious?

I would be comfortable buying a property in a metropolitan area that has little to no short term rental regulations today that doesn’t currently cash flow as a long term rental.

The thought process is that if or when regulations do come, it will take years to materialize. In that time it’s quite likely that long term rental rates have increased to a point where they “work”. 

And this all assumes we don’t get grandfathered in with new regulation. We’re assuming that we’re dealing with an all out short term rental ban.

Hopefully, by now it’s making sense why I like this strategy and how I think about the best short term rental markets today.

Your starting point should be lax regulation.

So what markets offer little to no STR regulation?

For starters, Detroit. I also believe Detroit is one of the best markets you can be investing in today, so you’d get the benefits of that as well!  

But there are other markets too. For example, I was heavily looking at Bakersfield, California on my short list of the best short term rental markets.

Some quick Googling will likely lead you to other options.

Investing In Short Term Rentals Has Changed… Kind Of

When I was exploring purchasing a short term rental in the Big Bear market I talked to a real estate agent there that said something that really slapped me across the face.

This is an excerpt from one of our email exchanges:

I have to commend the agent for being open and honest about this. I was interested in doing something in that market but she made it very clear my expectations were not realistic.

And this is what happened with COVID. These vacation markets became lucrative places to operate when they were never meant to be that.

What we’re seeing now is a return to normal.

I am all for buying a vacation home. But I see very little point in buying a short term rental vacation property.

There’s a difference.

Just like the agent said, buy in a market where you want to vacation. If you expect to use the home multiple times per year and rent it out the rest of the time in an effort to break even… that’s great!

But if you have wide eyes and dreams of making it big as a STR operator, vacation markets likely aren’t the place to go.

Instead, explore less regulated markets. 

Is it as sexy? Absolutely not.

But it’s likely going to be a lot more profitable and far less risky.