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Should You Buy a Short-Term Rental Investment Property?

  • Writer: Jessica Frank
    Jessica Frank
  • Feb 17
  • 5 min read

What Investors Need to Know Before Purchasing an Airbnb or Vacation Rental


Short-term rentals (STRs) — commonly listed on platforms like Airbnb and Vrbo — have become one of the most talked-about real estate investment strategies of the past decade. During the pandemic, many investors saw significant profits as travel behavior shifted and rental demand surged.


But today’s market looks very different.


If you’re considering purchasing a short-term rental investment property in markets like California or Tennessee, understanding the realities of ownership — including costs, regulations, and financial risks — is essential before you buy.


This guide explains the pros, cons, financial outlook, regulatory requirements, and hidden costs most investors don’t anticipate — plus whether short-term rentals are still profitable in today’s market.


A bedroom with shelving and nice decor.

What Is a Short-Term Rental Investment Property?


A short-term rental is a property rented for short stays, typically fewer than 30 days, through booking platforms or direct marketing. Investors purchase STRs to generate income from nightly or weekly bookings instead of traditional long-term leases.


Common STR property types include:

  • Vacation homes

  • Second homes

  • Condos

  • Single-family homes

  • Cabins or destination properties

  • Urban properties near entertainment or business hubs


Unlike traditional rentals, short-term rentals operate more like a hospitality business than a passive investment.


The Pros of Owning a Short-Term Rental


Higher Income Potential (in the right market)

Nightly rates can exceed long-term rent — especially in:

  • Tourist destinations

  • Event-driven markets

  • High-growth metro areas

  • Seasonal travel locations

A well-managed STR can generate strong revenue during peak seasons.


Flexibility for Personal Use

Owners can block off dates for personal use, turning the investment into a vacation property.


Tax Advantages

Possible benefits may include:

  • Depreciation deductions

  • Business expense write-offs

  • Cost segregation strategies

  • Mortgage interest deductions

Resource:

(Always consult a CPA.)


Appreciation Potential

Investors benefit from both cash flow and long-term property appreciation — especially in growing regions like Tennessee or high-demand California markets.


a woman holding cleaning bucket and a broom in a kitchen.

The Cons of Short-Term Rental Ownership


It Is Not Passive Income

STR ownership involves:

  • Guest communication

  • Cleaning coordination

  • Marketing

  • Pricing strategy

  • Maintenance

  • Reviews management

Many owners hire property managers, which reduces profits.


High Startup Costs

Initial investment often includes:

  • Furnishing entire property

  • Design upgrades

  • Photography

  • Licensing fees

  • Technology systems

  • Safety compliance upgrades

Startup costs often range from $15,000–$50,000+ depending on property size.


Income Volatility

Revenue varies by:

  • Seasonality

  • Travel trends

  • Economic conditions

  • Platform competition

  • Local regulation changes

There is no guaranteed occupancy.


Regulatory Risk

Cities across the U.S. continue tightening STR regulations, which can limit or eliminate rental use.


Are Short-Term Rentals Still Profitable After COVID?


Supply Has Increased Dramatically

During 2020–2022, many investors entered the market. Today there are significantly more listings competing for bookings.

Resource:


Occupancy Rates Have Normalized

Pandemic travel demand has cooled. Many markets saw occupancy drop from peak levels.


Average Daily Rates Are Stabilizing

While nightly rates rose sharply during COVID, they are now leveling off or declining in some areas.


Operating Costs Have Increased

Investors face:

  • Higher interest rates

  • Increased insurance costs

  • Rising cleaning expenses

  • Property tax increases

  • Greater platform competition


The Bottom Line

Short-term rentals can still be profitable — but success now requires:

  • Careful market selection

  • Strong financial analysis

  • Professional management strategy

  • Conservative revenue projections

The “easy profit” phase is largely over in many markets.


What Investors Should Research Before Buying

Architectural drawings on a table with a calculator and hands on top

1. Local Short-Term Rental Laws and Permits

Regulations vary dramatically by city and county.

Possible requirements:

  • STR permit or license

  • Business registration

  • Occupancy limits

  • Safety inspections

  • Hotel or lodging taxes

  • Primary residence restrictions

  • HOA restrictions

  • Zoning limitations


    Research Tools:

  • Tennessee Department of Revenue → https://www.tn.gov/revenue.html

  • California Department of Tax and Fee Administration → https://www.cdtfa.ca.gov

  • Local city planning departments (always required)

Some California cities have strict limitations. Tennessee tends to be more flexible but varies by municipality.

Never assume STR use is allowed.


2. Realistic Revenue Projections

Investors should review:

  • Historical occupancy rates

  • Seasonal demand patterns

  • Comparable listings

  • Local tourism data

  • Event calendars

  • Market saturation levels

Helpful research platforms:

3. Financing Requirements

Lenders may classify STRs differently than primary residences.

You may need:

  • Larger down payments

  • Higher interest rates

  • Investment property loan terms

  • Proof of reserves


4. Insurance Requirements

Standard homeowner policies usually do not cover short-term rental activity.

Investors often need:

  • Commercial or STR insurance

  • Liability coverage

  • Business interruption coverage

Resource:


Hidden Costs Most Investors Don’t Expect

Many new STR owners underestimate ongoing expenses.

Typical Annual Costs Include:

  • Cleaning and Turnover

    $150–$400 per stay depending on property size.

  • Furnishing Replacement

  • Furniture, linens, and décor wear out quickly.

  • Utilities

    Owners typically cover:

    • Electricity

    • Internet

    • Water

    • Trash

    • Streaming services

  • Maintenance and Repairs

  • Higher wear due to frequent guest turnover.

  • Platform Fees

    Booking platforms typically charge 3%–15%.

  • Property Management

    Full-service management: 15%–40% of revenue.

  • Local Lodging Taxes

    Often required and sometimes complex to manage.

  • Vacancy and Seasonal Slow Periods

  • Income gaps must be planned for.


How Rental Demand and Pricing Have Changed

The short-term rental market has matured significantly.

Key Market Shifts:

  • More professional operators entering the market

  • Increased guest expectations for design and amenities

  • Greater competition from new inventory

  • Pricing pressure in oversupplied markets

  • Travel demand becoming more seasonal again

Properties now compete on experience, design quality, and location — not just availability.


Who Should Consider Owning a Short-Term Rental?

STR ownership may be a good fit for investors who:

  • Have strong cash reserves

  • Enjoy hospitality-style business operations

  • Plan for long-term property appreciation

  • Want diversification beyond traditional rentals

  • Buy in high-demand travel markets


Who Should Think Carefully Before Investing?

You may want to reconsider if you:

  • Need predictable monthly income

  • Have limited financial reserves

  • Prefer passive investments

  • Are uncomfortable with regulatory risk

  • Cannot handle operational management

For many investors, long-term rentals or diversified real estate investments may offer more stability.


Final Thoughts: Is a Short-Term Rental Right for You?

Short-term rentals can be profitable investment properties, but they are no longer the easy, high-return opportunity they once appeared to be. Today’s investors must approach STR ownership with a clear understanding of market realities, regulatory requirements, and ongoing costs.


Before purchasing, run conservative numbers, research local laws carefully, and evaluate whether you are prepared to operate a hospitality business — not just own a property.

For the right investor, short-term rentals can be rewarding. For others, the risks and operational demands may outweigh the potential returns.


Thinking About Buying an Investment Property?

A short-term rental can be a powerful wealth-building tool — when purchased in the right market with the right strategy.


At The Cherished Home Group, we help investors:

  • Identify STR-friendly locations

  • Analyze profitability potential

  • Understand local regulations

  • Evaluate long-term appreciation opportunities

  • Compare short-term vs long-term rental strategies


We’ve helped hundreds of families make confident real estate decisions — including relocation and investment purchases in Southern California and Middle Tennessee.

Schedule a strategy call with our team:👉 www.mycherishedhome.com

We’re happy to help you explore your options.



Download this FREE Short-Term Rental Investment Analysis Worksheet and Decision Checklist to help guide you as you explore the purchase a Short-Term Rental.



 
 
 

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