Real estate remains attractive as an investment vehicle, both for supplementary income and full-time careers. Online platforms have lowered the barrier to entry, making short-term rental investment accessible to more people than ever. But accessibility doesn’t guarantee profitability.
The difference between a thriving rental and a money pit often comes down to market selection. Before committing capital, you need to understand whether a location can actually support your investment goals.
TL;DR
- Evaluate tourism appeal: year-round demand beats seasonal-only markets for consistent income.
- Research the local economy for stability and growth trajectory.
- Understand cost of living and how it affects your expense structure and pricing power.
- Use short-term rental analytics to assess competition, occupancy rates, and realistic revenue potential.
- Know your target guest and whether the market attracts them.
- Research regulations before you buy, not after.
1. Determine the location’s appeal to travelers
The location you target should have consistent demand from travelers. Investigate whether the area offers:
- Easy access to public transportation and major attractions
- A solid selection of restaurants, cafes, and local shops
- Walkable neighborhoods or convenient access to experiences
- Tourism traffic throughout the year, not just peak seasons
Seasonal versus year-round markets:
If you plan to use the property personally and rent it occasionally, a seasonal market might work. You’d vacate during high season, rent at premium rates, then enjoy the property yourself during quieter months.
If you’re investing purely for rental income, year-round demand matters more. Seasonal markets create cash flow gaps that fixed costs (mortgage, insurance, utilities) don’t respect. A property that’s busy for three months and empty for nine rarely pencils out as a pure investment.
Research what draws visitors: beaches, mountains, urban attractions, business travel, events, or cultural destinations. Understand whether that draw is sustainable or dependent on trends that might shift.
2. Investigate the local economy
Tourism appeal gets guests through the door, but economic stability determines whether that demand persists. A booming economy attracts business travelers, relocating professionals, and visitors with disposable income. A struggling economy does the opposite.
Indicators worth researching:
- Job growth and unemployment trends
- Major employers and industry diversity
- Population growth or decline
- Infrastructure investment and development plans
- Business travel volume (conferences, corporate headquarters, regional offices)
An economy built on diverse, growing industries offers more stability than one dependent on a single employer or sector. Check whether the area’s economic drivers align with long-term trends or face disruption risks.
Cities experiencing population growth typically see rising demand for both long-term and short-term housing. Markets losing population face the opposite pressure. The U.S. Bureau of Labor Statistics provides employment data and industry projections that help assess economic trajectory.
3. Understand cost of living and expense structure
Your investment needs to generate returns, not just break even. Understanding local costs helps you project realistic profitability.
Key cost factors:
- Property prices and typical down payment requirements
- Property taxes (which vary dramatically by location)
- Insurance costs (especially in areas prone to natural disasters)
- Utility averages (heating, cooling, water, internet)
- Maintenance and repair costs
- Property management fees if you won’t self-manage
Higher cost-of-living markets typically support higher nightly rates, but the math doesn’t always favor investors. A property in an expensive market might generate $300 per night but face $4,000 monthly in fixed costs. A property in a moderate market generating $150 per night with $1,500 in monthly costs might deliver better returns.
Run realistic projections using actual local data, not national averages. What occupancy rate do you need to cover expenses? Is that rate achievable based on market conditions? Understanding how to calculate NOI for vacation rentals helps you build accurate financial models.
4. Analyze short-term rental data for the area
Before investing, understand what the market actually looks like for operators already there.
Data points to investigate:
- Average daily rates by property type and neighborhood
- Occupancy rates across seasons
- Revenue per available night (combines rate and occupancy)
- Number of active listings (competition level)
- Review quality and volume for existing properties
- How quickly new listings gain traction
Platforms like AirDNA, Mashvisor, and AllTheRooms provide market analytics that reveal these metrics. Study the data before making assumptions about what your property could earn.
Look at comparable properties specifically. A luxury four-bedroom performs differently than a studio apartment. Make sure you’re analyzing the segment you’d actually compete in.
Saturation signals:
- High listing counts with mediocre occupancy suggest oversupply
- Declining average rates over time indicate pricing pressure
- Many listings with few reviews may signal struggling operators
Opportunity signals:
- Strong occupancy with limited inventory suggests unmet demand
- Rising rates over time indicate healthy pricing power
- High review scores across listings suggest guests enjoy the area
5. Know your target guest and regulatory environment
Understanding who visits the area shapes everything from property selection to amenities to marketing.
Guest segments to consider:
- Leisure travelers: Families, couples, friend groups seeking vacation experiences
- Business travelers: Professionals attending meetings, conferences, or client visits
- Bleisure travelers: Business visitors extending trips for leisure
- Remote workers: Digital nomads and location-flexible professionals seeking month-long stays
- Relocators: People moving to the area who need temporary housing while finding permanent homes
- Event attendees: Guests visiting for weddings, graduations, sports events, or festivals
Different segments have different needs, booking patterns, and price sensitivity. A market dominated by business travelers behaves differently than one driven by beach vacationers.
Regulatory research is non-negotiable:
Short-term rental regulations vary dramatically by city, county, and even neighborhood. Before investing, understand:
- Whether short-term rentals are permitted in your target area
- Licensing, permit, and registration requirements
- Occupancy limits and operational restrictions
- Tax collection and remittance obligations
- HOA or building restrictions that might apply
- Pending legislation that could change the rules
Regulations have tightened significantly in many markets over the past several years. Cities that once welcomed short-term rentals have imposed caps, banned non-owner-occupied rentals, or created licensing systems that limit new entrants. Research current rules and track proposed changes before committing capital.
| Evaluation factor | What to research | Green flags | Red flags |
| Tourism appeal | Attractions, transport access, year-round demand | Multiple demand drivers, diverse visitor types, consistent traffic | Single-season destination, limited attractions, declining visitor numbers |
| Local economy | Job growth, industry diversity, population trends | Growing employment, diverse employers, population influx | Single-industry dependence, population decline, major employer closures |
| Cost structure | Property prices, taxes, insurance, utilities | Expenses allow profitable nightly rates, favorable tax treatment | High fixed costs requiring unrealistic occupancy to break even |
| Market data | Occupancy rates, ADR, active listings, review trends | Strong occupancy with limited inventory, rising rates over time | High listing counts with mediocre occupancy, declining average rates |
| Regulatory environment | STR permits, licensing, zoning, pending legislation | Clear legal framework, established permit process, stable rules | Bans on non-owner-occupied rentals, caps on permits, restrictive pending legislation |
Making the right investment decision
Even with thorough research, short-term rental investment carries risk. Markets shift, regulations change, and economic conditions evolve. The goal isn’t to eliminate uncertainty but to make informed decisions based on real data rather than assumptions.
Before purchasing, stress-test your projections:
- What happens if occupancy drops 20% from your baseline assumption?
- Can you cover expenses during an extended slow season?
- If regulations tighten, could the property work as a long-term rental instead?
- How long until you’d need to sell if the investment underperforms?
Properties that pencil out only under optimistic assumptions are higher risk than those with margin for error. Dynamic pricing tools can help maximize revenue once you’re operating, but they can’t rescue a fundamentally flawed market choice.
FAQs
How much data should I gather before investing in a market?
Enough to build realistic financial projections. At minimum: average daily rates for comparable properties, seasonal occupancy patterns, local regulations, and your full expense structure. Spending a few hundred dollars on market analytics before committing tens of thousands to a purchase is worthwhile insurance.
Should I invest in a market I’ve never visited?
Visiting helps you assess intangibles that data can’t capture: neighborhood feel, walkability, noise levels, and whether you’d actually want to stay there. If visiting isn’t possible, at minimum talk to local property managers and study the area thoroughly through maps, reviews, and local news.
How important are regulations compared to other factors?
Critically important. A market with perfect economics becomes worthless if regulations prohibit or severely restrict short-term rentals. Always research regulations early in your evaluation process, not as an afterthought.
What occupancy rate should I target in my projections?
Conservative projections use 50-60% occupancy for first-year estimates in established markets. Mature, well-reviewed properties in strong markets might achieve 70-80%. Be skeptical of projections assuming higher than 75% occupancy unless you have specific evidence supporting that assumption.
How do I evaluate competition in a market?
Count active listings in your target area and property type. Read reviews to understand what guests appreciate and complain about. Analyze pricing patterns across seasons. High competition isn’t automatically bad if demand supports it, but entering an oversaturated market requires a clear differentiation strategy.