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Year-Round Profit Potential: 5 Markets Short-Term Investors Should Watch
I hail from a city where just stepping outside for a moment makes you break a sweat (Houston, Texas). My first trip to New Hampshire was last September, and the weather was unlike anything I’d ever experienced. After returning home, I was eager to escape the oppressive heat of my concrete surroundings.
Fast forward to December of the following year. I came back to New Hampshire armed with only a few light jackets, completely unaware that I was about to experience an Arctic-like chill the moment I disembarked from the plane. At one point, my phone registered a shocking -4°F, making me question if it was even possible for anyone to survive in such an environment. The insides of my nose froze as soon as I stepped outside, and I quickly realized that I wasn’t suited for life in the Northeast (apologies to my friends living there).
I share this experience to illustrate the extremes of some of the most appealing short-term rental (STR) markets. Seasonal markets might be the key to maintaining year-round activity without drastic changes in wardrobe.
What is a Nonseasonal Market?
A nonseasonal market is one that tends to remain active year-round. These markets generally have mild weather fluctuations and enough events or occupancy levels to attract guests consistently throughout the year.
However, don’t assume that all markets with pleasant weather are guaranteed successes. Some of the top markets in the country can generate significant income within just four to five months, allowing owners to achieve solid returns with minimal effort.
When exploring short-term rental markets, it’s easy to dream about charming cabins and beach houses, but the numbers are crucial. Thankfully, we have AirDNA to delve into important data points such as seasonality, average daily rate (ADR), and occupancy.
Unless you’re investing in a vacation-only destination like Pigeon Forge, Tennessee, or Gulf Shores, Alabama, it’s vital to understand all potential exit strategies for a sound long-term investment. Using tools like the BiggerPockets Market Finder, you can access the necessary data to compare different markets.
If you ever need to shift away from STRs due to regulations or poor performance, long-term metrics such as the rent-to-price ratio (RTP), median home price, and affordability percentage can provide peace of mind, knowing your investment still has great potential.
Understanding the Metrics
While both AirDNA and Market Finder rely on data averages, nothing compares to researching a specific market and evaluating the competition there.
Consider the comparables that have sold. What are the best-performing STR properties in the area? How can you surpass them in terms of amenities? What is the average long-term rental rate in the locality? Ask any questions that will help you gain a comprehensive understanding of a market.
Seasonality Rate
You might think that a high seasonality rate is unfavorable, but it’s not necessarily so. A higher seasonality rate indicates that demand remains relatively stable throughout the year. If you’re looking at a market with a high rate, you’re less likely to face long periods of inactivity during slow months. The higher the number, the fewer slowdowns you’ll encounter.
Average Daily Rate (ADR)
This term simply refers to how much revenue you can generate per night. A higher ADR means more income per booking, which is advantageous.
Occupancy Rate
This metric indicates how often people are staying in your property. Even if your ADR is high, if bookings are low, that revenue remains just a dream.
Rent-to-Price (RTP) Ratio
This ratio is calculated by dividing the median home price by the annual median rent. Think of it as your return on investment; a higher RTP ratio signifies a better return compared to your initial expenditure on the property.
Affordability Percentage
This metric tells you the portion of the average household income required to afford the median home price in that market. A low percentage suggests homes are priced higher than what residents typically earn, while a high percentage indicates that your dream home is more affordable.
The Top 5
While I’d like to mention Las Vegas as one of the most nonseasonal markets in the U.S., its strict regulations make it a less favorable investment choice. With 13,000 active listings, it’s clear that operations continue, but I would still have reservations.
1. Oklahoma City, Oklahoma
Seasonality Rate: 86 (Consistent, like a cowboy’s work ethic)
Annual Revenue: $23,400
Average Daily Rate (ADR): $154.9
Occupancy Rate: 52%
Median Home Price: $233,372
Rent-to-Price (RTP) Ratio: 0.57%
Affordability Percentage: 29.13%
Oklahoma City is straightforward and reliable. With a seasonality rate of 86, the city maintains steady activity. Although the ADR isn’t extraordinarily high at $154.9, the reasonable home prices present a solid entry point for STR investments. The 52% occupancy rate means you won’t have to wait too long for bookings, and you won’t feel the pinch when purchasing your first property.
2.Tuscaloosa, Alabama
Seasonality Rate: 80
Annual Revenue: $44,100
Average Daily Rate (ADR): $413
Occupancy Rate: 36%
Median Home Price: $214,305
Rent-to-Price (RTP) Ratio: 0.72%
Affordability Percentage: 27.13%
Tuscaloosa? Yes, that $413 ADR is accurate. The football season here is lucrative, but the 36% occupancy rate means you should prepare for the off-season.
Alabama’s travel trends have been improving, with record tourism income in the last five years. With home prices slightly above $200,000, it doesn’t take much to make a profit, especially during peak demand.
3.Columbia, South Carolina
Seasonality Rate: 72
Annual Revenue: $32,500
Average Daily Rate (ADR): $208.1
Occupancy Rate: 53%
Median Home Price: $246,082
Rent-to-Price (RTP) Ratio: 0.61%
Affordability Percentage: 25.8%
Columbia is like that dependable friend who’s always there for you. With a seasonality rate of 72, it offers moderate consistency, and its RTP ratio is one of the best. The affordable median home price means you won’t break the bank. Expect decent year-round traffic—ideal for newcomers to STRs. Easy entry, solid returns.
4. Flagstaff, Arizona
Seasonality Rate: 89 (Winter? What winter?)
Annual Revenue: $50,200
Average Daily Rate (ADR): $268.3
Occupancy Rate: 59%
Median Home Price: $625,695
Rent-to-Price (RTP) Ratio: 0.38%
Affordability Percentage: 10.75%
With a seasonality rate of 89, Flagstaff doesn’t slow down, even in winter. In fact, business might pick up thanks to outdoor enthusiasts flocking to the ski slopes.
While the median home price may seem high, with an ADR approaching $270 and solid occupancy, it’s more manageable than it appears. You’ll need to come prepared (and perhaps with a little extra in savings).
5. Shenandoah Valley (Harrisonburg), Virginia
Seasonality Rate: 93
Annual Revenue: $40,400
Average Daily Rate (ADR): $262.9
Occupancy Rate: 47%
Median Home Price: $317,509
Rent-to-Price (RTP) Ratio: 0.52%
Affordability Percentage: 21.05%
The Shenandoah Valley, particularly Harrisonburg, has an impressive seasonality rate of 93, indicating that visitors are attracted nearly year-round—apparently, those mountain views are timeless. With an ADR of $262.9, you can command premium rates for that fresh air. Plus, with a median home price of $317,509, the entry barrier isn’t too high, allowing you to invest without excessive financial strain. It strikes a perfect balance of high rates, low home costs, and nature marketing itself.
Final Thoughts
If you’re seeking year-round activity, Flagstaff should top your list, particularly since it can even see an uptick during winter with skiing enthusiasts arriving. For those leaning toward budget-friendly options, Shenandoah Valley, Columbia, and Oklahoma City provide solid returns without breaking the bank. And don’t overlook Tuscaloosa, where high ADRs can compensate for lower occupancy—just remember to say “Roll Tide” when you visit, and you’ll be fine.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
Year-Round Profit Potential: 5 Markets Short-Term Investors Should Watch
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“