For years, the narrative surrounding short-term rental (STR) investment has been dominated by a select group of "destination" markets. Gatlinburg, Tennessee; Joshua Tree, California; and Scottsdale, Arizona, have long occupied the top spots on investor wish lists, fueled by travel trends and high-profile vacation popularity. However, a comprehensive analysis of national property data suggests that the highest potential for gross yield—the ratio of annual revenue to property purchase price—is occurring in markets that rarely receive mainstream media coverage.
Data compiled by the analytics platform BNBCalc, which tracks performance metrics across more than 10 million Airbnb and VRBO listings, reveals a significant discrepancy between popular vacation hubs and high-yield, overlooked secondary markets. By analyzing 462 cities across all 50 states, researchers isolated the top-performing city in every state based on gross yield, effectively bypassing the inflated asset prices found in traditional tourism hotspots.
The Methodology of Gross Yield Analysis
Understanding the distinction between gross yield and cash-on-cash return is essential for investors navigating the current high-interest-rate environment. Gross yield is defined as the annual gross revenue generated by a property divided by its total purchase price. This metric serves as a baseline, representing the "raw" earning potential of an asset before accounting for the complexities of debt service, property management fees, insurance, maintenance, and municipal taxation.
Critics of pure gross yield analysis argue that it fails to capture the true health of an investment. However, proponents suggest that it is the most reliable "apples-to-apples" metric for comparing markets. By stripping away individual variables—such as an investor’s specific down payment, interest rate, or management strategy—gross yield isolates the revenue-generating efficiency of the market itself.
The BNBCalc data set required each analyzed city to have at least 50 real properties, ensuring that the findings were not skewed by anomalous luxury listings or isolated high-performers. The result is a ranking that prioritizes revenue efficiency over brand-name tourism.
The Reality Check: When the Math Meets the Mortgage
While a 10% to 15% gross yield may appear lucrative on paper, the transition from gross revenue to net profit is often where the investment case becomes precarious. A typical analysis of a median-priced property—valued at approximately $251,338, yielding $27,671 in annual revenue—demonstrates the impact of current macroeconomic conditions.
When factoring in a standard 20% down payment and a 30-year mortgage at a 7% interest rate, the debt service alone consumes a substantial portion of revenue. Once operating expenses—typically estimated at 37.5% of gross revenue to cover cleaning, utilities, property taxes, and ongoing repairs—are deducted, the margins narrow significantly.
Financial analysts note that for many of the top-ranked cities, a gross yield below 10.5% often results in negative cash flow. This creates a scenario where roughly half of the "best-in-state" markets fail to produce a positive return on investment under current financing terms. This reality highlights a critical lesson for the industry: a high-yielding market is not synonymous with a profitable investment.
Top Markets: Beyond the Traditional Vacation Hotspots
The data highlights several municipalities where gross yields significantly outpace national averages. Notably, these markets often lack the typical "resort" profile.
Sandusky, Ohio, leads the list with a 15.35% gross yield. Its performance is largely driven by the proximity of Cedar Point, a major amusement park destination that dictates the local tourism calendar. With nearly half of the market operated by independent, non-professional hosts, the region presents a unique opportunity for investors to compete without facing the saturation of large-scale corporate management firms.
Detroit, Michigan, showcases a 15.1% gross yield. With a deep sample size of over 500 properties, the city demonstrates the importance of granular, address-level research. Unlike a homogenous resort town, Detroit’s market varies significantly by neighborhood, requiring investors to perform rigorous due diligence on specific street-level performance metrics.
Kapolei, Hawaii, offers a 15.06% gross yield, standing out as a high-revenue outlier with median annual revenues exceeding $100,000. However, this market is heavily influenced by strict local zoning regulations. In the context of Hawaiian real estate, the investment viability is dictated more by legal boundaries than by market demand, as short-term rentals are restricted to specific resort-zoned districts.
Abilene, Texas, rounds out the notable mentions with a 15.05% gross yield. Unlike seasonal vacation towns, Abilene benefits from consistent, year-round demand. This stability provides a buffer against the volatility often seen in markets that rely entirely on summer or winter tourism.
The Role of Regulatory Hurdles
The influence of local government policy on short-term rental performance cannot be overstated. In many jurisdictions, the regulatory environment is the primary determinant of success or failure. As cities like Atlantic City, Baltimore, and Myrtle Beach continue to refine their short-term rental ordinances, investors face the risk of sudden policy shifts that can effectively invalidate an entire business model.
The case of Kapolei serves as a cautionary tale. While the gross yield is high, the legal framework governing short-term rentals in Oahu is complex and subject to intense judicial scrutiny. Investors entering such markets must differentiate between citywide statistics and the specific zoning regulations that apply to a target property. Failure to do so can lead to a property being rendered ineligible for short-term operations, regardless of its revenue potential.
Strategic Considerations for Investors
For those looking to enter the short-term rental market, the current data suggests a shift in strategy. Instead of relying on generalized rankings, investors are encouraged to adopt a bottom-up approach:
- Address-Level Due Diligence: Utilize platforms like BNBCalc to analyze revenue projections at the specific address level. A citywide average is often a poor indicator of how a single house will perform relative to its neighbors.
- Seasonality Analysis: Examine the "trough" months for any given market. Understanding how a property performs during the off-season is the only way to determine if it can cover debt service during periods of low demand.
- Long-Term Rental Floor: Evaluate the property’s viability as a long-term rental. In the event of a regulatory change that prohibits short-term stays, the long-term rental market serves as a vital floor for the investment.
- Tax Math: Work with qualified tax professionals to understand how short-term rentals impact active income. Under certain conditions, depreciation losses can be used to offset W-2 income, which can fundamentally change the net return of an investment, particularly for high-income earners.
- Regulatory Verification: Beyond online guides, direct communication with municipal planning departments is the most effective way to verify the legality of a short-term rental. Municipal ordinances change frequently, and relying on outdated information is a common point of failure for new investors.
Broader Implications for the Industry
The current cooling in the short-term rental market is not merely a result of rising interest rates, but a correction in the expectations of investors. The era of high-margin, "set-it-and-forget-it" rental income is facing pressure from increased supply, rising operational costs, and the professionalization of the industry.
While the data provided by BNBCalc identifies cities with the best potential for gross yield, it reinforces the broader economic reality that capital-intensive investments require a level of analytical rigor that goes beyond simple rankings. The markets that yield the highest revenue are rarely the ones that are the most popular; they are often the markets that require the most research, local knowledge, and operational oversight.
As the industry matures, the focus will likely shift away from chasing "best of" lists and toward the identification of niche, high-demand areas where regulatory risk is low and demand is stable. Investors who prioritize this granular approach are better positioned to navigate the complexities of the current market than those who follow the prevailing trends into saturated, high-priced, and over-leveraged tourist destinations. Ultimately, the data serves not as a shortcut to profit, but as a map for where to begin the hard work of due diligence.
