Best Places to Invest in U.S. Vacation Rentals in 2023

What to Expect from the Short-Term Rental Industry in 2023

2023 will mark a year of maturation and new normals for short-term rental (STR) investments. After shock in 2020, recovery in 2021, and expansion in 2022, 2023 is expected to be a year of moderation, according to AirDNA’s latest Outlook Report. The moderation will be met by a year-over-year decline in RevPAR (revenue per available rental) and, if true, will be a first since AirDNA started collecting data on STR performance in 2014.

Regulation has continued to present a threat to vacation rental investment, and 2023 will, without a doubt, bring new challenges. Throughout 2022, a wave of new and restrictive regulations emerged in cities like Oahu, Atlanta, New York, and Breckenridge, Colorado. Regulation will increasingly be a key concern when evaluating STR investment opportunities and should also be front of mind to existing owners and operators. For the first time, this report takes into account and highlights any restrictive regulation related to short-term rental use. All industry stakeholders should consider getting involved with their local STR advocacy organizations as well as national groups like Rent Responsibly and VRMA.

Falling home values may bring a welcomed opportunity for investors, as prices have risen substantially over the past few years. According to Zillow, home prices are just 8.4% higher than a year ago and down 0.7% from the peak in June 2022. A few themes will probably persist throughout 2023 and could make new investment tricky without an increase in available inventory, such as:

• A lack of affordability, driven in part from rising home values but mostly from a more-than-doubling of the 30-year interest rate over the last 12 months, has weighed on home prices in the back half of 2022.
• A growing spread between the prices sellers want for their homes and what buyers are willing to pay has led to a stalemate in the housing market. This has brought the flow of new listings down to a trickle and left many listings languishing for months without a satisfactory offer.

Oxford Economics’ latest forecast shows home values peaking in Q3 2022 and reaching their next low point in Q1 2024 before continuing to grow once again. Oxford anticipates a peak-to-trough fall in home values by roughly 5%, with the biggest declines in home values in California, Nevada, Arizona, and Florida: all markets with significant exposure to the STR sector. The cities with the biggest declines in forecasted home values are expected in San Francisco (-20%), Las Vegas (-16%), and Phoenix (-16%).

With home values falling throughout the U.S., this may present an opportunity for prospective buyers looking to buy during the down cycle. With this analysis, we provide a framework for finding profitable investment markets using the most up-to-date data through January 2023. However, just because a market is listed here doesn’t mean that all investments will be profitable. Likewise, excellent investments can be found in markets not listed here. AirDNA’s Rentalizer tool brings together the latest short-term rental and housing market data to analyze specific investment opportunities.

2023 Market Conditions for Vacation Rental Investments

While 2021 will serve as a high-water mark for occupancy, 2022 broke records for both nights booked and revenue, with U.S. short-term rental owners/investors/hosts generating over $62 billion throughout the year. 

After two consecutive years of small and mid-sized cities dominating our Best Places to Invest reports, it's no surprise that those locations led 2022 with the highest growth in listings throughout the year, with a 30% year-over-year increase in listings.

As we look at the list for 2023, it again included mostly small and mid-size cities, with a clear concentration on markets in the Midwest and Northeast. These markets tend to score high with our investability score, as home prices have failed to keep pace with rising short-term rental revenues, highlighting new investment opportunities.

Low investability scores reflect markets that have seen the largest increases in home values over the past few years. But as 2023 progresses, falling home values could expose opportunities in markets where revenues may continue to expand, primarily large urban cities. In these markets, supply has been slow to recover and occupancy is strong, but home values are currently elevated with the potential to fall, for example in, New York, Oakland, Seattle, San Francisco, and Washington, DC. These markets may also benefit from returning international travelers to the States.

Top 10 Best Short-Term Rental Investment Markets in 2023

1. Fairbanks, Alaska

Known as the Land of the Midnight Sun, high investability and rental demand earn Fairbanks the top spot for Airbnb investments in 2023. Visitors come to experience the natural beauty of the area, including the northern lights, the midnight sun, and the nearby national parks. Filled with outdoor activities such as fishing, hiking, and hunting, Fairbanks caters to those seeking the true Alaskan experience. Additionally, Fairbanks is a popular stop for those visiting Alaska on a cruise or taking the Alaska Highway. The average full-time vacation rental property in Fairbanks earns $49K per year with an average daily rate (ADR) of $198. 

2. Evansville, Indiana

Evansville earns the second spot for Airbnb investment in 2023, with a high investability score of 93.1 and rental demand score of 80.4. Home values in Evansville are relatively low at $116K, and with an average daily rate of $129, full-time short-term rentals here can expect to earn an average $27K return on investment per year. Steeped in a rich history and culture, the city draws visitors from miles away with the Reitz Home Museum, the Angel Mounds State Historic Site, and the Evansville Museum of Arts, History and Science all located there.

3. Rockford, Illinois

Known as the Forest City, Rockford is a city of contrasts, with the Anderson Japanese Gardens, the Rockford Art Museum, and the Burpee Museum of Natural History all located here. The eclectic attractions allow the city to maintain an occupancy rate of 60.9%, an ADR of $175, and an average annual revenue of $39K. Rockford earned the second-highest revenue growth score (98.6) on this list. Coupled with a relatively low average home value of $117K, Rockford should provide a low-cost investment with plenty of cash flow. 

4. Springfield, Illinois

The capital of Illinois, Springfield is a great location for short-term rental investors looking to enter a market where initial investment costs are low. Homes go for $119K here on average. Despite having a relatively lower ADR ($133) than other locations on this list, an average occupancy rate of 61.5% allows full-time homes to generate an average revenue of $29K per year. Short-term rental owners here host guests from all over the country who come to visit timeless pieces of American history, such as the Abraham Lincoln Presidential Library and Museum, the Lincoln Home National Historic Site, and the Lincoln Tomb. An exceptional investability score (95.0) and rental demand score (92.2) earned Springfield the fourth spot on the 2023 best Airbnb investment list. 

5. Burdett, New York

Burdett, a small-town gem in upstate New York, secured the fifth spot on this year's list with an impressive investability score of 99.6. The town boasts an average annual revenue of $77K for full-time listings, with home values averaging at just $244K. Visitors are drawn to Burdett for its charming, small-town atmosphere and its proximity to popular destinations such as the Finger Lakes and Watkins Glen State Park. The Finger Lakes Trail, a 584-mile footpath that winds through the southern Finger Lakes region, also runs through the village center of Burdett. Furthermore, with an average daily rate of $345, guests are willing to pay premium prices to experience the beauty of this picturesque paradise

6. Williamstown, Kentucky

Brimming with Southern hospitality, Williamstown is a small town in the heart of the Bluegrass State that boasts a high occupancy rate of 69.3%, an impressive rental demand score of 100, and relatively low home values at $179K, making it a budget-friendly option. Williamstown is a popular destination for tourists, thanks to its alluring downtown area, proximity to popular destinations like Lexington and Louisville, and rich history and culture. Visitors can take in the town's history at the Kentucky Gateway Museum Center, explore the well-preserved 19th-century buildings in the historic downtown area, and enjoy outdoor activities at the General Butler State Resort Park. The town's equestrian heritage can be experienced by visiting nearby horse farms, and it's also close to other popular tourist spots like the Ark Encounter and the Creation Museum.

Note*: All short-term rentals in Williamstown require a Conditional Use Permit. That permit application will go before a Board (that meets monthly) to decide whether or not it will be allowed. You also require a business license and a one-time short-term rental registration, which costs $200.

7. New Haven, Connecticut

New Haven, Connecticut, is a prime destination for short-term rental investors, with a high rental demand of 91.5 and revenue growth of 88.7. Though home values are on the higher side relative to others on this list at $261K, full-time STRs here can earn $49K per year. The city's rich history, culture, and attractions, like Yale University and New Haven Green, along with delicious pizza, a diverse food scene, beautiful parks, museums, cultural institutions, and proximity to other popular tourist destinations make it a must-see for visitors. So, whether you're interested in history, food, culture, or nature, New Haven has something to offer all types of guests, making it a great investment opportunity for short-term rental investors.

8. Ellsworth, Maine

Ellsworth is located just 15 miles from the entrance of Acadia National Park and serves as a popular location for guests looking to visit the park. Visitors to the national park often turn to Ellsworth for key vacation amenities like large grocery stores, restaurants, and even an L.L.Bean Outlet store. With the average home value in popular cities on nearby Mount Desert Island, where the park is located, reaching over $500K, Ellsworth’s relatively lower price point, around $267K, offers a smart opportunity for investors looking to buy properties while still appealing to travelers visiting the park. Ellsworth has benefited from expanded seasonality as the tourism season now extends from May through the end of October, putting occupancy at 72.8% over the past year and the average annual revenue at $67K, giving it a high AirDNA Investor Score of 84.7.

9. Cheboygan, Michigan

Set on the shores of Lake Huron, Cheboygan is the perfect spot for short-term rental investors looking to give guests the true Northern Michigan experience. An ADR of $304 allows full-time homes here to earn an average revenue of $69K per year. Not bad, with average home values at just $205K! Visitors come for the outdoor activities like boating and fishing on Lake Huron and nearby Straits State Park, as well as the town's inviting community and cultural attractions like the Cheboygan Opera House and Cheboygan County Historical Society. Winter sports enthusiasts will also love the nearby ski resorts and snowmobiling trails. Cheboygan is also well-connected to other Michigan tourist destinations, like Mackinac Island and Petoskey.

10. North Woodstock, New Hampshire

The village of North Woodstock earned itself the 10th spot on this year’s best Airbnb investment list by racking up an impressive investability score of 91.2. With an average home value of $285K, full-time listings here can expect to earn an average of $63K per year, with an average daily rate of $293. Visitors flock to North Woodstock for its natural beauty and outdoor activities such as hiking, skiing, biking, and fishing. The nearby White Mountains and Kancamagus Highway offer breathtaking views and are among some of the must-sees for visitors looking for small-town charm and a taste of New England culture.

See full article by AirDNA here