A vacation home or short-term rental (STR) can be a fantastic investment opportunity— if you know where to look. Location truly is everything in the short-term rental market.
As an investor, you’ll be looking for homes in areas that will deliver a good cap rate and rental revenue while still being affordable (unless you have the cash to buy in Malibu, in which case you probably don’t need this article).
Late in 2023, we covered the top five most profitable vacation rental locations in an episode of our On The Market podcast. In this article, we’ll cover the key metrics that make these short-term rental locations unmissable.
The data comes in courtesy of the Top 25 Best Places to Buy a Vacation Home list compiled by Vacasa.
What Is a Good Cap Rate on a Short-Term Rental?
But first, what is a cap rate, and what is a good one if you’re buying a short-term rental?
Quite simply, the cap rate is the number you get (in percentage) when you divide a property’s net operating income (including insurance and maintenance costs) by its current market value. The number you get is the property’s annual yield or return you will generate as an investor.
Obviously, the higher the cap rate, the better the return on your investment. As a general rule, a cap rate of under 5% is considered low in real estate. Anything between 5% and 10% is the ideal cap rate. Cap rates of over 10% are relatively rare, but they do exist, as some of our top vacation rentals will prove.
They might not be where you expect, though. As we all know, the pandemic housing market boom caused home prices to go through the roof in many locations. When home prices appreciate dramatically, the cap rate is automatically lowered, which can make an investment too expensive to be worth it.
Top 5 Best Places to Buy a Short-Term Rental
Instead of chasing the most popular vacation destinations, consider making a savvier choice that will deliver better