– Location is crucial in the short-term rental market for a good cap rate and rental revenue
– A good cap rate is between 5% and 10%
– The top 5 best places to buy a short-term rental according to Vacasa’s list are Lake Anna, Virginia; Okaloosa Island, Florida; Sandbridge, Virginia; Rehoboth Beach, Delaware; and Navarre, Florida
– Lake Anna, Virginia offers a high cap rate of 10.32% with reasonable home prices
– Okaloosa Island, Florida has a cap rate of 9.08% with a more relaxed feel and affordable home prices
– Sandbridge, Virginia offers a cap rate of 6.47% with an exclusive vacation atmosphere
– Rehoboth Beach, Delaware has a cap rate of 6.46% with a vintage seaside town feel
– Navarre, Florida has a cap rate of 6.42% with a picture-perfect beach and affordable home prices
– It is important to research and avoid oversaturated vacation destinations with unaffordable home prices
– Look for smaller places with a high-end feel, unique vintage charm, or lakeside charm
– More than half of the highlighted markets have vacation homes around or under the median home price of the US.
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 ROIs. Here are some of these savvy choices.
1. Lake Anna, Virginia
- Cap rate: 10.32%
- Median home sale price: $405,500
- Annual gross rental revenue: $64,121
The crème de la crème of vacation rental destinations in 2023 is the charming lakeside destination in Virginia. Lake Anna is the state’s third-largest lake, with 200 miles of sandy beaches.
Why is this such a popular destination? Its location right between Fredericksburg and Richmond is one reason, but we bet that the pristine beaches, clean water, and overall high-end feel of this vacation destination is what makes it so desirable, especially in the summer.
And for a lakeside destination, home prices are very reasonable. Compare it with the median home price at Lake Tahoe, for instance—an eye-watering $907,000.
2. Okaloosa Island, Florida
- Cap rate: 9.08%
- Median home sale price: $360,000
- Annual gross rental revenue: $53,832
It’s unsurprising to find a Florida location among the most popular vacation locations, but if you’re looking at Florida as an investor, look away from the obvious destinations (e.g., Miami, West Palm Beach, and Tampa) and toward the hidden gem that is Okaloosa Island.
Located on Santa Rosa Island and boasting three miles of ultra-white sandy beaches, it’s not an off-the-beaten-track destination by any means, but it does offer a somewhat more relaxed feel thanks to its location in northwestern Florida. A big draw for tourists is how small and cozy this place is, with everything within an easy walking distance. And a median home price of just $360,000 is affordable for such a great location.
3. Sandbridge, Virginia
- Cap rate: 6.47%
- Median home sale price: $928,900
- Annual gross rental revenue: $88,702
Sandbridge, Virginia, is very close to Virginia Beach, but it couldn’t be more different. There are no hotels here, which means visitors enjoy a relaxed and secluded vibe, with sand dunes, beaches, and a wildlife refuge to explore.
It’s not a cheap destination, but guests are prepared to pay premium prices for the exclusive vacation atmosphere this place offers—hence the excellent cap rate.
4. Rehoboth Beach, Delaware
- Cap rate: 6.46%
- Median home sale price: $618,000
- Annual gross rental revenue: $58,992
Rehoboth Beach offers a traditional coastal charm that’s increasingly a rarity, which explains its popularity with vacationers. From a scenic boardwalk to narrow streets with restaurants and shops, it’s a classy destination that draws tens of thousands of visitors during the summer months. The relatively high home price is worth it here because guests are willing to pay top dollar for the vintage seaside town feel.
5. Navarre, Florida
- Cap rate: 6.42%
- Median home sale price: $420,000
- Annual gross rental revenue: $47,531
Another picture-perfect vacation rental destination that’s somehow still affordable, Navarre draws in huge crowds during the summer thanks to its unbelievably beautiful beach. The beach is not actually composed of sand but quartz, which is where the dazzling white color comes from. Water sports, snorkeling, and swimming are the most popular activities here, so looking for an oceanfront property is well worth the high short-term rents you’ll be able to command.
Do Your Homework
It pays to do your research when looking for a short-term rental opportunity. Steer your search away from major vacation destinations that are oversaturated with hotels and have unaffordable home prices. Instead, look for smaller places with a high-end feel that are still popular with visitors but are still able to maintain a sense of identity that’s different from your average resort town.
Pristine beaches are reliable draws for the summer, but you can also look for towns with a unique vintage feel (see Rehoboth Beach) or a lakeside charm that will save people time driving down to the coast.
And remember to look up those cap rates: They’ll give you a good idea of whether a vacation rental investment in your chosen location is worth it.
The Most Profitable Places to Buy a Vacation Rental Property
More than half of the markets we’re highlighting have vacation homes either under or around the median home price of the US, so you don’t need to splurge to buy your perfect beach-side short-term rental. Learn what the top markets are and where to find the full list!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
Property Chomp’s Take:
Looking to invest in a vacation home or short-term rental? Well, you’re in luck! In this article, we will explore some of the best locations for profitable short-term rentals. We will be using data from the Top 25 Best Places to Buy a Vacation Home list compiled by Vacasa to identify the key metrics that make these locations unmissable.
Before we dive into the top five locations, let’s first understand what a cap rate is and why it is essential for short-term rental investments. The cap rate is a percentage that represents the property’s net operating income divided by its current market value. In simple terms, it is the annual return on investment that an investor can expect. A cap rate under 5% is considered low, while anything between 5% and 10% is ideal. Cap rates over 10% are relatively rare but do exist.
Now, let’s explore the top five best places to buy a short-term rental:
1. Lake Anna, Virginia:
– Cap rate: 10.32%
– Median home sale price: $405,500
– Annual gross rental revenue: $64,121
Located between Fredericksburg and Richmond, Lake Anna is a charming lakeside destination. With 200 miles of sandy beaches, it offers a high-end vacation experience at an affordable price. Compared to Lake Tahoe, where the median home price is a staggering $907,000, Lake Anna is a steal.
2. Okaloosa Island, Florida:
– Cap rate: 9.08%
– Median home sale price: $360,000
– Annual gross rental revenue: $53,832
While Florida is a popular vacation destination, consider investing in lesser-known locations like Okaloosa Island. Situated on Santa Rosa Island, this hidden gem offers three miles of pristine, white sandy beaches. Its relaxed atmosphere and affordable median home price make it an attractive option for investors.
3. Sandbridge, Virginia:
– Cap rate: 6.47%
– Median home sale price: $928,900
– Annual gross rental revenue: $88,702
Located close to Virginia Beach, Sandbridge offers a secluded and exclusive vacation experience. With no hotels in the area, visitors can enjoy sand dunes, beaches, and a wildlife refuge. While the home prices are high, guests are willing to pay a premium for this unique vacation atmosphere.
4. Rehoboth Beach, Delaware:
– Cap rate: 6.46%
– Median home sale price: $618,000
– Annual gross rental revenue: $58,992
Rehoboth Beach exudes a traditional coastal charm that is increasingly rare. With a scenic boardwalk, narrow streets lined with restaurants and shops, it attracts tens of thousands of visitors during the summer months. The relatively high home prices are justified by the demand for the vintage seaside town feel.
5. Navarre, Florida:
– Cap rate: 6.42%
– Median home sale price: $420,000
– Annual gross rental revenue: $47,531
Navarre, another affordable vacation rental destination, offers a stunningly beautiful beach made of quartz. Water sports, snorkeling, and swimming are popular activities here, making oceanfront properties highly desirable.
When searching for a short-term rental opportunity, it is crucial to do your homework. Avoid oversaturated vacation destinations with inflated home prices and consider smaller locations that offer a high-end feel while maintaining their unique identity. Pristine beaches are always a reliable draw, but you can also explore towns with a vintage charm or a lakeside allure. Lastly, don’t forget to consider the cap rate of your chosen location to assess the potential return on investment.
In conclusion, investing in a vacation home or short-term rental can be a profitable venture if you choose the right location. By looking beyond the popular destinations and focusing on areas with high cap rates and affordable home prices, you can make a savvy investment that delivers excellent returns. So, start researching and find your perfect beach-side short-term rental property today!