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Investing in vacation rentals has become a popular real estate trend in recent years. More and more travelers are choosing to stay in other people’s second homes to benefit from a cozy experience instead of staying in overpriced and frequently unwelcoming hotels. From the point of view of real estate investors, vacation rentals give you the advantage of owning a second home and having a place to spend your vacations, while also renting out the property for the rest of the year on a short-term basis to make additional income to cover the running costs – and even profit from it!

However, as anyone who has ever dealt with any form of real estate investing, you must know that location is of utmost importance for the success of your endeavor in this industry. When deciding where to invest in a vacation rental, you should remember that it cannot simply be your favorite spot for spending holidays. The location also has to be a place where both the demand for short-term rentals and rental income are high.

In order to help you decide where to buy a vacation rental home in 2018 and beyond, we have put together a list of the best places to own a short-term rental in the US at the moment.

What Do We Mean by the Best Places to Buy a Vacation Rental Home?

There are many ways to define the top locations to own a short-term vacation rental. Since the ultimate goal of any real estate investor is to make money, here we focus on the most profitable places for buying and owning a vacation home in the summer of 2018. Using data from Mashvisor, an advanced real estate data analytics tool, we’ll highlight the US markets with the highest cap rates for short-term rentals.

For those of you who might be relatively new to the real estate investing world, cap rate – the short for capitalization rate – is a real estate metric which is calculated by dividing the net operating income of a rental property by the current market value of the property.

Cap Rate Formula:

Cap Rate = Net Operating Income (NOI)/Current Market Value (CMV)

The cap rate is a relatively simple real estate profitability metric which allows investors to compare different housing markets and decide which one offers the best opportunities to make money.

Where Should You Invest in Vacation Rental Properties This Year?

Let’s dive into our list of some of the locations with the highest cap rate for short-term rentals, according to data from Mashvisor:

1. Alton, Illinois

  • Short-Term Rental Cap Rate: 9.5%

Probably the city of Alton, IL is not the first place which comes to mind when you think about investing in real estate. However, it is actually a top location to invest in a vacation home as it offers one of the highest cap rates for short-term rentals all across the US real estate market.

Alton is a true river city located on the Mississippi River, right above the confluence of the Mississippi and Missouri rivers and right below the confluence of the Mississippi and Illinois rivers. The city offers numerous attractions which bring in short-term visitors.

As a potential real estate investor, you would be happy to hear that buying a property in Alton is really affordable – with a median property price of $88,300. In fact, it’s the cheapest on our list with an average price per square foot of $64. Combined with a monthly rental income of $1,850 for short-term rentals, this translates into a cap rate of 9.5%, which is very high in the current competitive real estate investing world.

2. Key West, FL

  • Short-Term Rental Cap Rate: 6.9%

The coral reefs around this island city make it an ideal destination for diving and snorkeling and – no wonder – a profitable location to own a vacation rental.

However, before you decide to invest in real estate in Key West, you should know that this is quite an expensive endeavor as the median property price on the island is $979,000. But the high rental income of $7,890 per month and the very high short-term occupancy rate of 73.7% make a vacation home investment in Key West very profitable ­­– with a cap rate of 6.9%.

3. Grand Junction, CO

  • Short-Term Rental Cap Rate: 6.1%

Next on our list of the top locations to buy a vacation rental this year is Grand Junction, the county seat of the Mesa County in Colorado. The city is a popular tourist destination which offers endless opportunities for outdoor sports activities including skiing, golfing, hiking, biking, horseback riding and rafting.

Good news for first-time real estate investors and other investors on a tight budget is that homes here are affordable with a median property price of $256,100, or $159 per square foot. The cap rate for short-term rentals of 6.1% is very high, compared to other hot real estate markets.

4. Grand Rapids, MI

  • Short-Term Rental Cap Rate: 5.6%

Grand Rapids is the second largest city in Michigan and the best option for buying vacation rental property in the state. The city offers both beautiful nature trails and a rich art and culture scene, as well as being one of the top brewery spots nationwide.

The median property price in Grand Rapids is comparable to that in Grand Junction, CO at $248,900. The cap rate of 5.6% is definitely worth the attention of those hoping to start their vacation rental business.

5. Anaheim, CA

  • Short-Term Rental Cap Rate: 5.5%

Anaheim is an ideal tourist destination, located outside Los Angeles and home to the Disneyland Resort. Thus, it comes as no surprise that this is one of the top locations to invest in a vacation rental for the maximum return.

Beware though, property prices in Anaheim are high with a median of $627,900. However, the high rental income for short-term rentals of $5,330 brings the cap rate up to 5.5%.

6. Nashville, TN

  • Short-Term Rental Cap Rate: 5.3%

Nashville, the capital of Tennessee and home to Vanderbilt University, is famous for its music scene. The city is already a popular tourist destination – which reinforces its position as one of the best places to buy a vacation rental.

Even though Nashville is a major city, property prices are still relatively affordable with a median value of $412,900.

7. Joshua Tree, CA

  • Short-Term Rental Cap Rate: 5.2%

Another place to invest in a short-term rental in California for high cap rate is Joshua Tree. Being home to two distinct desert ecosystems, the Joshua Tree National Park offers unique landscape views to its visitors. In addition, the community hosts several festivals throughout the year, which makes it even more attractive for visitors.

The median property price in Joshua Tree is $328,100, while short-term rental income is $2,440 – together resulting in a cap rate of 5.2%.

8. Sonoma, CA

  • Short-Term Rental Cap Rate: 5.1%

This is a historic city known for its 19th-century adobe buildings as well as its art galleries, located at the heart of the Sonoma Valley winemaking region. All of these factors (and others!) make Sonoma a top vacation rental location.

But before you decide to invest in a short-term rental in Sonoma, you should know that the median property price here exceeds $1,100,000. Nevertheless, the high rental income results in a cap rate of 5.1%, which can bring in huge profits for your business.

9. Panama City Beach, FL

  • Short-Term Rental Cap Rate: 4.9%

White sandy beaches, clear water, fishing piers, protected nature reserves, hiking trails… what more do you need to be convinced that Panama City Beach is one of the best places around the US to invest in a vacation rental.

Property prices are affordable with a median level of $334,700, while short-term rental income stands around $3,260. The average cap rate for vacation rentals is 4.9%.

10. Honolulu, HI

  • Short-Term Rental Cap Rate: 4.2%

The endless beaches, the numerous attractions, and the rich culture make Honolulu yet another top vacation destination in the US real estate market.

While properties are expensive here with a median property price of $951,000, the monthly rental income for short-term rentals is also high at $4,120, which translates into a cap rate of 4.2%.

Promising some of the highest return on investment nationwide, these 10 destinations are currently some of the best places in the US to buy a vacation rental. However, before you decide to become a vacation home investor in any of them, make sure to check the local short-term rental legislation to assure that vacation rentals are legal and to familiarize yourself with the taxes and fees that you will need to pay. Once you have all legislation issues covered, you can embark on the exciting and profitable journey of investing in real estate and starting your vacation rental business!


About the Author

Daniela Andreevska is Content Marketing Director at Mashvisor, a real estate analytics tool which helps real estate investors quickly find traditional and Airbnb investment properties. A research process that’s usually three months now can take 15 minutes. 

What do you think about this article?

The 10 Best US Locations to Invest in a Vacation Rental in 2018
3 (60%) 4 votes
  1. Chris Reply

    One thing to consider, relative to CAP rates, occupancy, etc is the legal environment in each destination. Nashville, as an example, has had sweeping changes to the short-term rental landscape in the city over the past 5 years. Some properties that were stellar ROI producers several years ago have effectively been legislated out of the rental market entirely.
    Definitely something to consider before investing!

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