The 5 Most Profitable Places to Buy a Vacation Rental Property

Dave:
Hey, everyone. Welcome to On The Market. I’m your host, Dave Meyer, and we are here back again for part two of our short-term rental week. If you missed our episode from earlier in the week, you should definitely go check it out. We had Jesse Stein, who is the global head of real estate from Airbnb on, and Jesse shared some really interesting information and new opportunities available to short-term rental investors. So if you’re interested in this strategy, go check out that episode.
Today we have another excellent episode for anyone who’s considering buying a short-term rental next year. Daned Kirkham is joining us today, and he is the senior director of real estate for Vacasa. If you don’t know Vacasa, they’re one of the largest short-term rental property management companies in the country. And we brought Daned on because Vacasa, using all of the data and information that they have from all the properties that they manage, have compiled a list of the top 25 best places to buy a vacation home in 2023. And this is cool because a lot of times you see these magazines or articles and they’re really geared towards home buyers, people who are just trying to buy a property and enjoy it for themselves. But this list, the methodology that they use is really geared towards investors. They rank them on a couple of different criteria, but one of them is cap rate, which is a really important and valuable valuation technique. I’ll explain it a bit during the episode, but it really is investor focused. So understanding where you can actually generate a good and strong return as a short-term rental investor.
So if you’re interested in getting into the market next year, you are definitely going to stick around and hear the markets that Daned and his team have listed out for us. All right, with that, let’s bring on Daned Kirkham from Vacasa.
Daned, welcome to On The Market. Thank you for joining us.

Daned:
Thank you. Good to be here.

Dave:
Well, this week we are focusing on short-term rentals here On The Market. So Daned, can you tell us how you’re involved in the short-term rental industry?

Daned:
Yeah, I’d love to. I work at Vacasa. We’re a vacation property management company and I oversee our real estate department, which is mostly our regulatory environment, as well as working with our real estate partners and brokers.

Dave:
Great. Have you been in real estate for a long time or how did you join Vacasa?

Daned:
Yeah, it has been a while. It’s been about 25 years. I actually started here in Vail, Colorado on a project, new construction, and have moved around the country and worked in markets all throughout the United States, Europe and Mexico, mostly in the resort vacation markets. And then came to Vacasa about three years ago to work on our brokerage. I mean it’s interesting, a lot of people may or may not know, but in a lot of the markets we operate in the short-term rental as a regulated industry for property management. So we have to maintain real estate brokerages in about 32 states. And then we also have employees that work with our owners and customers and they have to be real estate licensed.

Dave:
Great. Well, I’m jealous that you’re in Vail, Colorado right now, just gearing up for a new ski season.

Daned:
We’re getting ready for another season. We’re just coming off a busy summer and here comes winter.

Dave:
We’re very excited to have you here Daned, because you and your team produced a new report called the Top 25 Best Places to Buy a Vacation Home. Can you just tell us at the broadest level, what is the methodology for this because I know our audience is going to be very eager to hear these markets, but can you just tell us a little bit about how you selected these markets?

Daned:
Yeah, this is a report we’ve done since 2018. So for a number of years now. We also do two sister reports similar to this. We do our top best places to buy a beach and best mountain communities. So the way we do this is we look at the communities that we have a significant number of homes where we have enough data that we can determine what our gross revenue projections are for homes in these markets. And then we look at median or average home price in those markets. We come up with a cap rate, we blend in what the average expenses are for homes in those markets, insurance, property taxes, and then we rank them according to cap rate.

Dave:
Awesome. And for anyone who’s listening to this, cap rate is a valuation methodology often used in real estate. It compares the net operating income of a property to the purchase price of that property. And in the context of this conversation, you should know that a low cap rate typically means it is more expensive for the buyer and a high cap rate means that you generate more income for every dollar that you invest into that property. So Daned, I assume you rank by cap rate, the higher cap rates perform better on your list.

Daned:
Yes, exactly. But it’s been interesting, what we’ve seen over the last couple of years is a lot of markets that were in our top five, top 10 year after year have dropped down because those markets have seen tremendous price appreciation, which is obviously lowering their cap rates. So some of the places that you think you’d see on here are actually lower on the list than you may expect them to be.

Dave:
That’s interesting because I guess this report is designed to help people find a place that you can invest today. So important for everyone listening to know that this list is not about the top performing markets for currently existing vacation rentals. It’s places where you can buy today.

Daned:
And you’ll see in some of these places they tend to be the smaller markets, but they’re located close to or in close proximity to some of these larger, bigger markets.

Dave:
Got it. So before we get into the actual markets, and we are going to cover some of the specific markets here, I’m curious about some of the overall trends that you’re seeing in the industry. You just mentioned one important one where it’s typically smaller markets tend to do well right now. Are there any more broad trends that came up in creating this report?

Daned:
Yeah, we’re seeing a few things. Number one, I mean we’re still seeing strong demand from your traditional vacation home buyers, so that hasn’t really slowed down too much. And obviously we’re seeing less inventory in a lot of these markets. I think one of the really interesting trends that we’re seeing, which may not be as large, but it’s important is we’re seeing some of these younger buyers enter the market and a lot of times they’re buying their second home as their first home, which is-

Dave:
Interesting.

Daned:
It’s kind of a crazy thing to think about, but if they live in an urban city that they may have to rent because they’re priced out of buying their primary home, they still want homeownership and so they’re looking in some of these smaller resort vacation markets and buying their second home. So that’s an interesting trend that we’ve been seeing lately.

Dave:
Wow, I have never heard that, but that is fascinating. We’ll get into some of the lists, but I guess in my mind it’s clearly a false assumption, but I think of vacation rentals as really expensive, but with metro areas appreciating so much over the last few years, it may make sense for people who want to buy a home to rent their primary residence, buy a secondary home because they can also offset that mortgage cost or perhaps cover the mortgage cost and earn a profit by putting it on Vrbo and Airbnb.

Daned:
Yeah, it’s a great way for them to get into homeownership and I know I have some colleagues here at Vacasa and that’s exactly what they’re doing as well. So it’s a good way for them to get in and own a home.

Dave:
Very, very interesting idea. So in your evaluation of cap rates, you mentioned insurance, taxes, what else goes into this formula?

Daned:
Yeah, we try to look at all of the typical expenses you would have. So that would also include your property management expenses if you have someone taking care of your home. It would include your insurance, it would include if you need any improvements that you may have to do to get it ready. So we try to take a view that just like anyone that would be owning and maintaining a home in these resorts, expenses that they would have to cover.

Dave:
Your own internal data, you’re looking at average daily rates for these markets, I assume, and occupancy rates as well?

Daned:
Yeah, kudos to our revenue management team. This is what they do all day every day. They’re looking at thousands of different data points in these markets. So they’re looking at not just our homes, but all homes in the market, what are the occupancy levels? And they’re adjusting our rates to maximize the revenue for those owners. They’re looking at are there sporting events or events that are coming in and anything that could impact how they can adjust their daily rate or their occupancy.

Dave:
Well, in addition to the proximity to major cities and smaller ones, are these mostly vacation rentals? People, short-term rental, invest in metro areas as well. Are these beach towns, mountain towns? What do they look like?

Daned:
Yeah, we as a company have stayed out a lot of the urban areas for a number of reasons. You tend to have a lot more regulatory concerns in some of those if you look at New York City right now, what they’re going through. So we’re primarily in these vacation markets, which would be beach, mountain, golf type locations.

Dave:
All right, great. Well, let’s get into the markets. We can’t talk about all 25 and I have to be honest Daned, I looked at the list and I’ve been to only one of the 25 of these markets. So I don’t think I’m going to have any colorful stories for you, but let’s focus on the top five markets. What is number five on your list?

Daned:
Yeah, so Navarre in Florida is number five on our list, and this is a little beach market, it’s just outside of Pensacola. It’s close to the Emerald Coast and the Destin market. So a good example of one of those I think most people know of Destin, but this just tends to be a little bit of smaller market, but certainly close proximity to that.

Dave:
And can you give us some stats? What is the average home price in this area? What kind of revenue are people generating?

Daned:
Yeah, so median home price in this market is 420,000. Our homes average about 47,000 in revenue. So it’s about a 6.42 cap rate for Navarre.

Dave:
Wow, that is pretty good. Especially when you compare that to things that you see in commercial real estate right now, that is better than a lot of deals that I have seen. When we talk about the average revenue, you said 47,000, just getting back to the methodology so I’m clear. That’s the average for all the homes within your market, right? It’s not… Are you holding anything constant like two bedrooms, two bath or anything like that? Or could this span any size property?

Daned:
No, that’s our average for the homes in the market. So I mean that could obviously be quite a bit of range from the low to the high, but that’s the average.

Dave:
Okay. And have you seen in a market like… It’s Navarre, is that how it’s pronounced? I’ve never heard of this place.

Daned:
Navarre. Yeah, sorry.

Dave:
Yes. Have you seen any changes? What kind of growth have they seen over the past in revenue? You said 47,000, but is that pretty static or is it growing over the last couple of years?

Daned:
Yeah, no, we’ve definitely seen that number increasing. I think what we’re seeing now is more of a normalization in this market and a lot of our other markets. I mean, we saw that number increase pretty significantly during ’21 and ’22. So we’re seeing this number kind of return to more of a normalization, which is nice to… I think it’ll stay where it is with some slight increases year-over-year.

Dave:
Okay, got it. And just so everyone knows, 420,000 median home price is about right at the average of the national median home price right now, so that… It’s obviously affordability in the country is very low right now, but this is about average affordability for people who are thinking about potentially places where they want to get in.
Now let me just ask you, Daned, in this type of market, in a beach market, in your experience at Vacasa, are there certain types of amenities or types of properties that people should be looking for?

Daned:
Yeah, absolutely. And that’s something that we talk a lot with clients. If they’re looking for a home and they want to buy, what are the amenities that are important because you want something that is really going to draw the guests that when they see it online, it has everything that they’re looking for. So obviously in a beach like this, access to the beach, maybe it doesn’t have to be right on the beach, but easy access to the beach, pool access, all of that is really important that the guests are going to want to see when they’re staying in these markets.

Dave:
Well, are there any other… I don’t want to spoil the list, but are there any other places near or like Navarre elsewhere that you think our audience should also consider?

Daned:
Yeah, actually there’s one really nearby that is on our top five list, the Okaloosa Island, which is just outside of the Destin market there in the Florida Panhandle. Has a lot of the same qualities as Navarre, but it’s kind of an interesting story. I have a good friend who was born and raised there and Hurricane Opal came through there in the ’90s and they really say that was the turning point for that market because what happened was a lot of the old hotels that there were torn down and some new developer came in. So you have new construction condominiums in that market. It’s quieter, so it doesn’t have a lot of the Dustin traffic and all that, but Dustin is just six miles away. So if you want the-

Dave:
Wow.

Daned:
… shopping and restaurants, you go over the bridge and you’re right in Destin. So that’s another good one that we see quite a bit of interest in in that area.

Dave:
Well, I’m sorry to everyone listening to you Daned, I completely ruined our list. I asked you a question not knowing that Okaloosa Island is actually number two on our list. So the second best, we were at five, but while we’re on it, we’re just going to skip three and four right now and go out of order. So you just mentioned some of the reasons, some of the background to Okaloosa Island in Florida, but can you give us some more information about the stats?

Daned:
Okay, so for Okaloosa Island, the median home price is 360,000, and the annual gross rental revenue is just over 53,000. So it has about a 9.08% cap rate.

Dave:
Wow, that is a very high cap rate for everyone listening, and I just want everyone to note how this comes. So the previous market was 420,000 median home price with the average rental about 47,000. That came out to about a six and a half cap rate. Now in Okaloosa, the median home price is 360,000, so significantly less expensive, and the annual gross revenue is nearly 54,000. So that’s higher. And when you calculate the cap rate using these different incomes, you get 9%, which means that for every dollar that you’re investing, that means you’re likely to generate more cashflow. Now, cap rate doesn’t take into effect some of the other things like demand or all these other elements that go into evaluating a short-term rental market. So you shouldn’t base them just on cap rate alone, but just when you’re looking at how much revenue you generate for your investment, it looks like Okaloosa is a really good spot.

Daned:
It’s a great spot. And there’s also something else about that market that’s a little unique. They have a convention center there. So just think of all the people that that draws for conferences, sporting events, and that’s really year-round activity. So that is driving a lot of that occupancy and that rental revenue in that market. And that’s something that also is a trend we see in a lot of these markets where you do have these longer seasons, so you don’t have just one big peak season, but you have multiple seasons, two seasons, three seasons, or just really strong year-round demand. So you don’t go into some of these markets where you just have a really low off season.

Dave:
Yeah, I mean that is definitely part of it is just trying to balance seasonality and as an investor, super important to manage your cashflow properly and just know that certain months, like in Colorado mud season, you’re not going to generate that much income in probably late April and early May or sometimes in October. So you just got to make sure that you plan your finances accordingly. So far on our list we’ve done number two and number five because I went out of order, but let’s get back to number four on our list. I think this takes us out of Florida. Daned, what is number four?

Daned:
Yeah, this is Rehoboth Beach in Delaware. Honestly, a place I have not personally been, but I think it has a lot of the qualities of the other markets that we see on the coast there. This is another important thing, look at this market. It’s in a drive to proximity to four major urban markets. So anyone from Washington, Baltimore, Philadelphia, New York can drive to this location. So again, to our point, it’s driving a lot of year-round demand for a place like this. It’s a charming town, it has a board beach walk that people enjoy walking down with restaurants. So just a lot of those attractions that people are looking for for a getaway.

Dave:
Sounds great. I’ve never been, but I grew up in New York and I’ve heard a lot about Delaware beaches that they’re very nice.

Daned:
I was doing a little research and I found out that tourism is actually the second-biggest leading industry in Delaware.

Dave:
Really?

Daned:
Little fun fact, over 3 million tourists a year in Delaware.

Dave:
Is number one, corporations making tax basis there?

Daned:
Agriculture.

Dave:
Every corporation is based in Delaware.

Daned:
Yeah, right?

Dave:
Well this market is interesting because it’s a bit more expensive. So the median home price here is $618,000, and the annual gross rental revenue is about 59,000, which comes out to a cap rate, again about 6.5. So very similar to number five on our list, Navarre, Florida. So just for anyone who is interested in investing in this type of area, it is a bit more expensive to get into it. Now, from what I understand, Rehoboth Beach is actually quite small of a town only 1500 local residents. Is that right?

Daned:
Yeah, that’s right. And in the summer they get up to 25,000 people coming into that little tiny town. So you can-

Dave:
Wow.

Daned:
[inaudible 00:18:55]. But I just wanted to speak to the point of the median home price because I think it’s interesting in some of these markets, some of them like we’re looking at the beaches are probably smaller condos, so most of the inventory is going to be studio, one bedroom condominiums. When you get on some of these other beach locations, you’re looking at the larger homes that are four or five, six bedroom beachfront homes. So obviously going to have a higher average medium price in those markets.

Dave:
Yeah, that’s a very good point. And I just looking at it now, found out that Rehoboth Beach is ranked as National Geographic’s Top 10 Boardwalks in the USA list. So if you like a good boardwalk, go check out Rehoboth Beach.

Daned:
There you go.

Dave:
All right, moving on. Let’s get to number three on our list. What do you got?

Daned:
Number three on our list is Sandbridge in Virginia. This is a very small market. It’s just south of Virginia Beach. Here’s a really unique fact about this market. There are no hotels in Sandbridge, so it’s almost exclusively vacation rental homes.

Dave:
Very interesting. Do you see that a lot of places? The place I own my one short-term rental, I actually noticed that there weren’t a lot of hotels in the area, but do you see better performance in markets where there are fewer other logic options?

Daned:
Yeah, absolutely. In fact, Navarre, which is what we talked about earlier, it’s close to Pensacola and the Pensacola market, you probably do see some more of those hotels and you see less in that market and it benefits from that. So certainly some of these markets that are smaller don’t have a lot of hotels. This is the best option, but it’s also the trend that we’ve been seeing even before COVID, where people in these locations necessarily don’t want to be in a hotel, they want the convenience of a home. They’re coming with family, they’re coming with relatives, they want a kitchen, they want a living room, they want those things that they can’t necessarily get in the hotel room.

Dave:
And because of the lack of alternatives, does that push up the average daily rate for short-term rentals in that market?

Daned:
Yeah, it can certainly. And then there’s the seasonality factor as well. So you see your prices fluctuate based on the time of the year, but if you’re in a peak season in a market like that where there’s high demand and limited inventory, you’re definitely going to see that reflected in your daily rate.

Dave:
Now this market of Sandbridge Virginia is, I think it’s the priciest one on the list, at least in the top five with a median home price of 918,000. That is hefty, but it also comes with annual gross rental revenue of about 88,000 or 89,000, excuse me. And it gives us close to a six and a half cap rates. So number three, four and five on this list all have similar cap rates. I have to say though, Daned, for most investors that I know, an entry point of 918,000 is a little bit outside their comfort zone. So what kind of investors or what kind of people are buying in this market?

Daned:
Yeah, that’s a great question. We see a lot of 1031 buyers in these markets. So 1031 is someone that’s sold another property and they’re moving those funds into another property tax-free if they do it properly. So they’re really attracted to these types of markets and these types of homes. They don’t have to be selling another vacation rental to get into this. Maybe they’ve sold a small commercial investment or property that they had and then they’re using those funds to purchase these homes. So we see a pretty steady demand from those types of buyers. And then we see people moving up that maybe owned in this market, a smaller home that they’ve had for a number of years, maybe it was part of their family before, and then they’re moving up into larger, more expensive homes.
An interesting trend is in some of these beach markets, the larger homes are much more desirable because they are traveling with multiple families. So when you get in some of these six, eight, maybe even 10 bedroom homes, there’s a lot of demand for those.

Dave:
Got it. Wow. Those are very large. I guess that’s what explains some of the prices. All right, so just as a recap, number five on the list was Navarre, Florida, number four, Rehoboth Beach, Delaware. And number three, which we just discussed was Sandbridge, Virginia. All of those had very similar cap rates around 6.5%. Now I went out of order, but as a reminder, number two on the list is Okaloosa Island, Florida, which brings us Daned, to number one recommended market by Vacasa for where to buy a vacation home in 2023. What is the winner?

Daned:
Yeah, so also in Virginia, but inland is Lake Anna, Virginia. This is actually the second year it’s been number one on our list. It kind of rocketed up there out of nowhere, but very popular lake destination, very family friendly, lots of water sports activities. You have obviously some very nice homes on the water on the lake, but you also have some that are off the lake kind of up in the woods. A lot of nice charming little towns. And so just a really popular destination in Virginia.

Dave:
Well, I can see why it’s popular and number one on your list because according to this data, the median home price is 405,000. So just a little bit under the national median home price, but the annual gross revenue is over 64,000, which gives us a cap rate of over 10%. Was there any other markets you looked at in this analysis that had a cap rate in the double digits?

Daned:
No, no, this was the only one. A few years ago we might’ve seen a couple creep over the 10%, but currently this is the only one.

Dave:
And since you’ve been doing this list for a couple years, is it normal for a top-performing market like Lake Anna to stay towards the top of a list for more than one year? Once the word gets out, do they sort of start to drop down?

Daned:
And that’s what we’ve seen and that’s where you see some of the names that we had up at the top, probably top five, top 10 have certainly dropped down in the last couple years, primarily just due to the price appreciation in those markets. So we’re starting to see some of these secondary or smaller markets that are moving up higher in the rankings.

Dave:
And is there anything unique or interesting about Lake Anna that you think our listeners should know?

Daned:
Yeah, something unique about Lake Anna is we see longer stays in this market than some of the other markets. So 69% of the stays were over three nights, so people staying for longer times. This is actually another trend we’re seeing nationwide where these stays are getting longer and longer and longer.

Dave:
As an investor, that’s obviously great and I see the appeal. I would imagine that pre-pandemic, most people were coming for a weekend. Obviously some people stay longer, but it would probably be quite common for someone to go visit for a weekend. But now with work remote, people are traveling for longer periods because maybe they show up on a Wednesday or Thursday, work remote for a few days, and then enjoy the destination over the weekend. Is that sort of the hypothesis as to why stays are getting longer?

Daned:
Exactly. No, that’s exactly it. And something else that we see in markets like Lake Anna is you just have a very strong visitor return. So these are families that come year after year after year and have been doing so for generations. So you have a lot of repeat visitors in these markets.

Dave:
Awesome. Well, Daned, thank you so much for sharing this list with us. We really appreciate it. For anyone who wants to look at the entire report and entire list, we will put it in the show notes. We’ll put it in the description so you can check that out. Daned, if people want to learn more about Vacasa or see any of the other research or reports you put out, where should they find that?

Daned:
They can find us at vacasa.com. We put out several reports. I mentioned we also have the beach report and the mountain reports, as well as some other travel trends. I mean, we’re just coming off of extremely busy summer season. We had 500,000 stays this summer season of reservations, so a busy time and gearing up for a busy winter season as well.

Dave:
Awesome. Well, thank you so much for sharing your report and knowledge with us. We really appreciate it.

Daned:
Thank you.

Dave:
Big thank you to Daned and his team at Vacasa for sharing that data and that report with us. I do want to reiterate something that I said during the podcast. Companies like Vacasa and people like me put out lists of great markets, and I hope they’re very helpful to you, but make sure that you do due diligence beyond just what Daned and his team say or what I say about a market. Just because a market has a great cap rate does not mean that there are not some risks associated with it. And just because I think a market is good does not necessarily mean that it is good for you and your strategy and your personal situation. So take this all with a grain of salt. The idea behind these lists are to point you in the right direction, so then you can go and do your own research about these markets and find perhaps one of them that works for you.
Hopefully this does just that for you. There are a lot of interesting opportunities in the short-term rental space coming up over the next couple of years, and perhaps one of these markets might land you a great deal.
Thank you guys so much for listening. If you enjoyed the show, if you enjoyed the short-term rental focus of the shows this week, please make sure to give us a great review or share one of these episodes with someone that you think would learn something from our podcast. Thanks again. We’ll see you for the next episode of On The Market.
On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.