The vacation rental market presents a compelling opportunity for real estate investors seeking passive income and portfolio diversification. While headlines have focused on market saturation in some areas, the reality is more nuanced: savvy investors who know where to buy continue to generate strong returns. According to industry data, the short-term rental sector saw demand jump 7% in 2024, pushing revenue per available room up 3.4% even as supply growth moderated.
This guide analyzes the top five U.S. markets delivering the highest return on investment for vacation rental properties in 2025, based on comprehensive data from industry leaders including Vacasa, AirDNA, and market analysts. We will examine capitalization rates, average revenues, entry costs, and the unique factors that make each destination attractive for investors.
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Find a Top Agent in Your Target MarketUnderstanding Vacation Rental ROI Metrics
Before diving into specific markets, it is essential to understand how investors measure profitability in vacation rentals. Three key metrics drive investment decisions: capitalization rate (cap rate), cash-on-cash return, and net operating income.
Key ROI Metrics Explained
Cap Rate measures the expected annual return based on net operating income divided by property value. A cap rate of 6% or higher is generally considered solid for vacation rentals. Cash-on-Cash Return calculates actual cash earned relative to cash invested, especially relevant when financing a purchase. Industry experts suggest targeting 8-12% for vacation properties. Net Operating Income (NOI) represents rental revenue minus operating expenses, excluding mortgage payments.
The vacation rental market differs significantly from traditional long-term rentals. While long-term rentals typically yield 4-10% returns, short-term properties can generate 10-15% or higher in the right markets. However, this comes with increased management complexity, seasonal fluctuations, and regulatory considerations that first-time investors must understand before purchasing.
Top 5 Vacation Rental Markets for ROI in 2025
Our analysis combines data from multiple authoritative sources to identify the vacation destinations offering the strongest investment returns. These rankings prioritize gross cap rate as the primary metric while considering factors like entry price, revenue potential, and market stability.
North Myrtle Beach, South Carolina
Grand Strand Region, Atlantic CoastNorth Myrtle Beach claims the top spot for vacation rental ROI, combining an exceptional 8.10% cap rate with one of the lowest entry points among premium beach destinations. The area comprises four distinct beach communities: Cherry Grove, Ocean Drive, Crescent Beach, and Windy Hill, offering diverse investment opportunities.
The market benefits from strong, consistent demand with 78% of overnight visitors coming primarily for beach activities and 73% for dining experiences. Atlantic-facing condos with seaside pools, hot tubs, private beach access, and balconies command premium nightly rates while maintaining solid occupancy throughout the extended beach season.
Investment Insight: The relatively affordable median price of $360,747 makes this market accessible for first-time vacation rental investors, while the strong cap rate indicates solid cash flow potential from day one.
Dauphin Island, Alabama
Gulf Coast, South of MobileThis barrier island gem delivers an impressive 8.00% cap rate with substantially higher absolute revenues than North Myrtle Beach. Located just 45 minutes south of Mobile, Dauphin Island offers beautiful beaches and historic attractions with an authentic small-town atmosphere that appeals to travelers seeking an alternative to more commercialized destinations.
The guest profile skews toward larger groups, with 27% of bookings coming from parties of seven or more people. This creates strong demand for large coastal homes with open floor plans, multiple wrap-around decks, and numerous bedrooms. Couples represent 24% of the market, providing booking diversity across property types.
Investment Insight: Higher-priced homes with multiple bedrooms and premium amenities generate the best returns here. The average revenue of $53,293 suggests properties can cash flow well despite the higher entry cost.
Okaloosa Island, Florida
Emerald Coast, Northwest FloridaSituated on the greater Santa Rosa Island between Destin and Fort Walton Beach, Okaloosa Island offers investors access to the renowned Emerald Coast market at a strong 7.70% cap rate. The area's signature white sugar sand beaches and turquoise Gulf waters draw approximately 5 million visitors annually to the surrounding region.
Condo complexes dominate the vacation rental inventory here, with properties featuring large swimming pools and direct beach access performing best. Extended stays are common: 60% of bookings in the past year were for four nights or longer, reducing turnover costs and improving operational efficiency.
Investment Insight: Florida vacation rental regulations are generally favorable compared to other states, though investors should verify local requirements. The consistent demand from the broader Destin tourism market provides stability.
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Get Matched with a Top AgentHatteras Island, North Carolina
Outer Banks, Atlantic CoastHatteras Island represents the premium segment of Outer Banks vacation rentals, featuring 50 miles of scenic coastline across seven small villages. The limited hotel inventory in the area creates natural demand for vacation rental homes, particularly larger properties that can accommodate extended family gatherings.
What distinguishes Hatteras is the length of stay: nearly 60% of bookings are for seven nights or longer. This dramatically reduces cleaning costs, guest turnover, and management overhead while maintaining strong revenue. Properties with private pools, hot tubs, and quick beach access command the highest rates.
Investment Insight: The higher median price of $805,585 requires more capital, but the exceptional average revenue of $58,862 and extended booking patterns make this attractive for investors prioritizing cash flow stability over lower entry costs.
Girdwood, Alaska
Chugach Mountains, Near AnchorageGirdwood offers something unique among top ROI markets: it is Alaska's only true resort town, home to the state's largest ski area at Alyeska Resort. Located 45 minutes south of Anchorage, this mountain destination provides year-round appeal with winter skiing and summer hiking, fishing, and glacier tours.
The booking pattern differs from beach markets, with 61% of reservations for 2-3 night stays. This appeals to weekend travelers and creates steady turnover that can actually boost annual revenue when managed efficiently. Slopeside condos with mountain views and quick lift access are particularly desirable.
Investment Insight: Girdwood represents excellent portfolio diversification for investors already holding beach properties. The moderate entry price of $485,429 combined with strong year-round demand creates a compelling risk-adjusted return.
Cap Rate Comparison: Top Markets at a Glance
2025 Gross Cap Rates by Market
Complete Market Comparison
| Market | Cap Rate | Avg. Revenue | Median Price | Primary Appeal |
|---|---|---|---|---|
| North Myrtle Beach, SC | 8.10% | $27,603 | $360,747 | Beach, Golf |
| Dauphin Island, AL | 8.00% | $53,293 | $645,330 | Beach, Historic |
| Okaloosa Island, FL | 7.70% | $50,292 | $654,494 | Gulf Beach |
| Hatteras Island, NC | 7.30% | $58,862 | $805,585 | Outer Banks |
| Girdwood, AK | 7.20% | $34,797 | $485,429 | Ski, Adventure |
| Navarre, FL | 7.10% | $43,439 | $618,863 | Emerald Coast |
| Gatlinburg, TN | 6.90% | $42,708 | $633,162 | Smokies Gateway |
| North Topsail Beach, NC | 6.70% | $54,864 | $831,397 | Quiet Beach |
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Honorable Mentions: High-Value Markets to Watch
Beyond our top five, several markets offer compelling opportunities for investors seeking different risk profiles or geographic diversification. These destinations deliver strong cap rates while presenting unique investment characteristics.
Gulf Shores, AL
Alabama Gulf Coast
6.30%Median: $740,146
Springfield, IL
Central Illinois
8.02%Median: $147,350
St. Petersburg, FL
Tampa Bay Region
6.40%Avg Revenue: $84,000
Florence, OR
Oregon Coast
6.10%Median: $575,459
Branson, MO
Ozark Mountains
5.80%Median: $226,991
Corolla, NC
Northern Outer Banks
6.60%Avg Revenue: $80,785
Springfield, Illinois stands out as a non-traditional vacation market delivering exceptional returns. With an 8.02% cap rate and a median home price of just $147,350, it offers one of the lowest barriers to entry. Government and business travelers provide consistent year-round demand, though this market requires different management strategies than traditional vacation destinations.
St. Petersburg, Florida represents a premium play with average annual revenues approaching $84,000 and an average daily rate exceeding $354. The 6.4% cap rate reflects higher property values, but the combination of Gulf Coast beaches, cultural attractions, and year-round sunshine creates reliable demand that many vacation home investors find attractive.
Key Factors for Vacation Rental Success
Understanding market-level returns is just the starting point. Individual property performance varies significantly based on several critical factors that investors must evaluate carefully.
Location Within the Market
Not all properties within a top market perform equally. Proximity to attractions, beach access, views, and neighborhood quality dramatically impact both nightly rates and occupancy. A beachfront condo in Okaloosa Island will substantially outperform an inland property, even within the same zip code.
Property Amenities
Guest expectations have risen considerably. Properties offering hot tubs, private pools, updated kitchens, game rooms, and quality furnishings command premium rates. In mountain markets like Girdwood or Gatlinburg, fireplaces and scenic views are essential. Beach markets require pool access and outdoor living spaces.
Regulatory Environment
Short-term rental regulations vary dramatically by jurisdiction and can change with little warning. Before investing, verify that vacation rentals are permitted, understand licensing requirements, and research any pending legislation. Some areas limit rentals to owner-occupied properties or cap the number of annual rental nights.
Due Diligence Checklist
Before purchasing any vacation rental property, verify local STR regulations, confirm HOA policies if applicable, review historical revenue data for comparable properties, calculate realistic operating expenses including property management fees (typically 20-35%), and factor in seasonal vacancy patterns. Working with a real estate agent experienced in investment properties can help identify potential issues before they become problems.
Professional Management
Most successful vacation rental investors use professional property management, typically paying 20-35% of revenue for full-service management. This covers guest communications, cleaning coordination, maintenance, pricing optimization, and listing management. While this reduces returns, it enables truly passive ownership and often improves occupancy through professional marketing and dynamic pricing.
2025 Market Outlook
The short-term rental industry continues to evolve. Supply growth has moderated significantly, dropping from 22.3% in 2022 to 6.9% more recently as high interest rates and property prices make new listings harder to add. This supply constraint benefits existing owners.
The National Travel and Tourism Office projects approximately 77.1 million international visitors to the United States in 2025, representing a 6.5% increase from 2024. This inbound travel growth supports vacation rental demand across destination markets.
However, investors should note continued downward pressure on cap rates as home prices climb and vacation rental revenue normalizes from the exceptional peaks of 2021-2022. Higher ownership costs including insurance, HOA fees, and utilities have also impacted net returns. The most successful investors will focus on properties in desirable destinations with key amenities and lower relative ownership costs.
Average Annual Revenue by Market
Getting Started with Vacation Rental Investment
Entering the vacation rental market requires careful planning and the right team. Here is a strategic approach for prospective investors:
1. Define Your Investment Criteria: Determine your budget, target cap rate, acceptable risk level, and whether you will self-manage or hire professionals. Consider whether you want personal use of the property, which affects tax treatment and return calculations.
2. Research Target Markets: Use the data in this guide as a starting point, but dig deeper into specific submarkets. Understand seasonal patterns, competitive inventory, and local regulations before committing capital.
3. Assemble Your Team: Work with a real estate agent experienced in investment properties and familiar with vacation rental dynamics. Consider engaging a property manager early to get revenue projections and understand operating costs.
4. Analyze Properties Carefully: Run detailed financial projections using realistic assumptions. Account for vacancy, maintenance reserves, management fees, and seasonal revenue variations. The calculator above provides a starting framework.
5. Plan for Success: Develop a marketing strategy, identify your target guest profile, and plan property improvements that will maximize booking rates and nightly revenue.
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