Are Short-Term Rentals Profitable?

This article was written by our expert who is surveying the industry and constantly updating the business plan for a short-term rental.

Who wrote this content?

The Dojo Business Team

A team of financial experts, consultants, and writers

We're a team of finance experts, consultants, market analysts, and specialized writers dedicated to helping new entrepreneurs launch their businesses. We help you avoid costly mistakes by providing detailed business plans, accurate market studies, and reliable financial forecasts to maximize your chances of success from day one—especially in the short-term rental market.

What occupancy rates can I expect for my short-term rental throughout the year?

Short-term rental properties typically achieve occupancy rates between 54-58% in most U.S. markets, translating to approximately 212 booked nights per year.

High-performing markets can exceed 80% occupancy, while properties in less competitive areas may fall below 50%. The average occupancy rate depends heavily on your location, property type, pricing strategy, and marketing efforts.

Urban markets with consistent business travel and tourism tend to maintain steadier year-round occupancy compared to seasonal resort destinations. Your property's quality, amenities, and guest reviews directly impact your ability to maintain bookings during slower periods.

Occupancy rates serve as the foundation for revenue projections in your short-term rental business, making location selection and property positioning critical to profitability.

You'll find detailed market insights in our short-term rental business plan, updated every quarter.

What daily rates should I charge, and how have prices changed recently?

Average daily rates for short-term rentals have grown significantly over recent years, with many markets seeing increases of 5-71% since 2019.

In the UK market specifically, the average short-term rental ADR reached £251 in September 2024, representing a 5% increase over the previous year. These pricing trends vary considerably by location, with resort and coastal properties often commanding premium rates during peak seasons.

Your daily rate should reflect your property's location, size, amenities, and competition in the market. Properties with modern furnishings, desirable locations, and exceptional guest experiences can charge premium rates above market averages.

Most successful short-term rental operators implement dynamic pricing strategies that adjust rates based on demand, seasonality, local events, and competitor pricing. This approach maximizes revenue during high-demand periods while maintaining competitive occupancy during slower times.

How much will my revenue fluctuate between high and low seasons?

Seasonal demand creates significant revenue fluctuations in the short-term rental business, with high seasons during holidays and warmer months generating peak occupancy and rates.

Coastal and resort properties experience the most pronounced seasonality, with summer months potentially generating 2-3 times the revenue of off-season periods. Urban properties serving business travelers typically show more consistent demand throughout the year, though they still experience dips during major holidays and summer vacation periods.

Revenue fluctuations depend on regional tourism cycles, local events, weather patterns, and the specific market positioning of your property. Properties that cater to multiple guest types—such as both leisure travelers and business guests—can mitigate seasonal volatility more effectively.

Financial planning for a short-term rental must account for these revenue variations by maintaining adequate cash reserves to cover operating expenses during slower months.

What are my main ongoing operating expenses?

How much will I spend on platform fees and marketing?

Platform commissions from services like Airbnb typically range from 12-15% of the booking value, with some platforms charging both host and guest fees.

When combined with property management fees, total service costs can reach 25-30% of your gross rental income. These percentages represent significant ongoing expenses that directly reduce your net profitability.

Beyond platform fees, successful short-term rental operators allocate budget for professional photography, listing optimization, and occasionally paid advertising to maintain visibility in competitive markets. Direct booking websites can reduce platform dependency but require additional investment in website development and marketing.

This is one of the strategies explained in our short-term rental business plan.

What taxes will I owe on my short-term rental income?

Short-term rental operators face multiple tax obligations including income tax on rental profits, lodging taxes collected from guests, and potentially additional short-term rental specific levies.

Income tax applies to your net rental income after deducting eligible business expenses. Lodging taxes vary significantly by jurisdiction, with state, county, and city governments each potentially imposing separate tax rates that you must collect from guests and remit to authorities.

Many platforms like Airbnb automatically collect and remit lodging taxes in certain jurisdictions, simplifying compliance. However, you remain responsible for understanding local tax requirements and ensuring proper payment where automatic collection doesn't apply.

Some locations impose additional short-term rental specific fees or registration requirements beyond standard lodging taxes. Non-compliance with tax obligations can result in penalties, back taxes, and legal complications that threaten your business operations.

Consulting with a tax professional familiar with short-term rental regulations in your specific market ensures proper compliance and identifies all eligible deductions that reduce your tax burden.

How much will I need to invest upfront to furnish my property?

Initial furnishing costs for a short-term rental typically range from $5,000 to $50,000 or more, depending on property size, target market positioning, and quality standards.

Smaller units like studio apartments or one-bedroom properties can be adequately furnished for $1,000-$8,000 with budget-conscious selections. Mid-range properties typically require $15,000-$30,000 to create comfortable, attractive spaces that meet guest expectations and compete effectively in the market.

Luxury properties or larger homes may exceed $50,000 in furnishing costs to provide the premium amenities and design elements that justify higher nightly rates. Essential categories include furniture, bedding and linens, kitchen equipment and dishware, bathroom supplies, electronics, and decor.

Beyond basic furnishings, successful short-term rentals invest in quality mattresses, durable furniture that withstands frequent use, and amenities that enhance guest experience such as smart TVs, fast Wi-Fi, and coffee makers. These upfront investments directly impact guest satisfaction, reviews, and your ability to maintain premium pricing.

What legal requirements and penalties should I know about?

Most locations require proper licensing or registration for short-term rental operations, often governed by hotel or tourism regulations that vary significantly by jurisdiction.

Non-compliance with legal requirements can result in substantial penalties including fines, daily penalty assessments, and in extreme cases, criminal charges. For example, Thailand's Hotel Act imposes fines up to THB 20,000 plus potential daily penalties for unregistered short-term rental operations.

Beyond municipal regulations, condominium associations and homeowner's associations frequently restrict or prohibit short-term rental activities entirely. Violating HOA or condo rules can result in fines, legal action, and forced cessation of your rental operations.

Zoning laws, business licenses, safety inspections, and tax registrations represent additional compliance requirements that vary by market. Research all applicable regulations before launching your short-term rental business, as retroactive compliance after violations become significantly more complicated and expensive.

We cover this exact topic in the short-term rental business plan.

What will my actual cash flow look like after all expenses?

Net cash flow from short-term rentals varies significantly based on occupancy rates, operating expenses, and debt service, but successful properties typically achieve positive cash flow after the first year.

Your net cash flow calculation must account for mortgage payments, insurance premiums, property management fees, platform commissions, utilities, maintenance, cleaning costs, and reserves for major repairs. Short-term rentals generate higher gross income than long-term leases but also incur substantially higher operating expenses, typically consuming 40-50% of gross revenue.

Properties with mortgages require careful analysis to ensure rental income covers debt service while maintaining adequate reserves. Unleveraged properties (owned outright) naturally achieve stronger cash flow since they eliminate mortgage payments from the equation.

Seasonal revenue fluctuations create cash flow management challenges, requiring reserves to cover expenses during slower booking periods. Conservative financial planning for short-term rentals maintains 3-6 months of operating expenses in reserve to handle vacancies, unexpected repairs, and seasonal variations.

What risks should I prepare for and how can I reduce them?

• Vacancy and Cancellation Risk: Unexpected gaps in bookings due to cancellations, seasonal slowdowns, or market changes directly impact revenue. Mitigation strategies include maintaining flexible cancellation policies that balance guest preferences with your revenue protection, diversifying marketing across multiple platforms, and building a base of repeat guests through exceptional service.
• Regulatory Change Risk: Local governments increasingly regulate short-term rentals through new restrictions, licensing requirements, or outright bans. Stay informed about pending legislation in your market, maintain full compliance with current regulations, and consider markets with established, stable regulatory frameworks when selecting properties.
• Property Damage Risk: Guest-caused damage exceeds normal wear and tear and can result in costly repairs between bookings. Screen guests through platform reviews, maintain proper insurance coverage including short-term rental specific policies, collect security deposits when appropriate, and document property condition before and after each stay.
• Market Competition Risk: Increasing supply of short-term rental properties can compress rates and occupancy in your market. Differentiate your property through superior amenities, exceptional guest service, professional photography, and strategic positioning to maintain competitive advantage regardless of market conditions.
• Operating Cost Inflation: Rising expenses for cleaning services, utilities, maintenance, and supplies reduce profitability over time. Build expense escalation into financial projections, regularly review vendor pricing for competitive rates, and maintain efficient operations to control costs without compromising guest experience.

How does short-term rental profitability compare to traditional leasing?

Short-term rentals typically generate 2 to 3 times the monthly income of comparable long-term rentals in the same location, making them significantly more profitable on a gross revenue basis.

However, this higher revenue potential comes with increased upfront investment, substantially higher operating expenses, and greater management intensity. Long-term rentals offer stable, predictable income with minimal management requirements, while short-term rentals provide higher returns in exchange for active operational involvement.

Return on investment for short-term rentals depends heavily on location quality, management efficiency, and consistent occupancy maintenance. Properties in high-demand tourist destinations or business centers with strong year-round demand typically deliver superior ROI compared to properties in markets with limited visitor appeal.

The profitability comparison shifts when factoring in your time investment—self-managed short-term rentals require significant ongoing effort for guest communication, property maintenance, and operational management that long-term rentals don't demand.

It's a key part of what we outline in the short-term rental business plan.

Which property features matter most for profitability and guest satisfaction?

Conclusion

This article is for informational purposes only and should not be considered financial advice. Readers are encouraged to consult with a qualified professional before making any investment decisions. We accept no liability for any actions taken based on the information provided.

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