Short-term rentals (STRs) have become an increasingly popular real estate investment strategy. They have the appeal of strong cash-flow potential and flexible use, and are driven in part by the rise of platforms such as AirBNB and Vrbo. But making a successful, profitable STR is more than just buying a vacation home and listing it on the rental market. Smart investors need a long-term, data-driven approach that accounts for regulations, financing, risk, and efficiency.

Here are some tips on building a sustainable short-term rental investment portfolio, whether you’re just getting into the game or expanding into multiple markets.

1. Develop a Clear Investment Strategy

As previously mentioned, it’s not enough to just purchase a property and list it online. You need to define exactly what you want your STR portfolio to achieve. This will keep you from potentially making emotional purchases and help you focus on long-term performance.

First, clarify your goals. Is your priority monthly cash flow? Long-term appreciation? Market diversification? Financial freedom or early retirement? Do you want to make rental income and retain the property for personal use? Your goals will influence how you’ll choose and finance properties.

Next, think about your preferred property types. Common STR property types include urban apartments, suburban single-family homes, beach houses, mountain cabins, luxury vacation rentals, and budget-friendly studios. Again, each property will attract a different kind of guest and will carry different benefits and risks.

After that, think about your risk tolerance and acquisition criteria. Some criteria you set might include:

• Your minimum cash-on-cash return
• Minimum occupancy
• Acceptable seasonality levels
• Maximum mortgage payment relative to your expected revenue
• Renovation budget / timeline
• Local regulations

Taking these into consideration can keep you from overpaying or picking a property that can’t perform.

2. Research Markets Using Reliable Data

Another important step is to eliminate the guesswork from your buying as much as possible. Successful STR investors analyze instead of speculating. Market research can determine whether a property will thrive and generate stable income — or not.

A data-driven approach is key. Use industry-leading data tools to analyze things like occupancy rates, average daily rate (ADR), seasonality trends, annual revenue potential, competitor density, and expenses typical for that particular market. Put your priorities on markets with high, consistent occupancy.

You can also identify high-performing markets with platforms like Airbtics, which provides real-time STR analytics. With a tool like this, you can identify top-performing neighborhoods, evaluate regulations, check market volatility, analyze the housing supply vs. demand, and compare revenue potential across multiple cities.

3. Finance Property Purchases Strategically

Financing will play a major role in how fast you can grow your STR portfolio. Instead of putting all your cash into one property (thus limiting your flexibility and tying up your assets), strategic financing allows you to scale faster and diversify.

Typical financing options for STR investors include:

• A traditional mortgage loan, good for stable markets and when you have strong credit
• Second-home loans, which are a good fit for properties you’ll occasionally use personally
• DSCR loans, which are designed for investors — their approval is based on property income instead of personal income
• HELOCs — a home equity line of credit, which is a flexible way to finance down payments or renovations by leveraging equity from an existing property
• Home equity loans, which are fixed-rate loans secured by either your main residence or another investment property
• Cash-out refinancing, where you use accumulated equity from one of your properties to finance another.

You’ll want to match your loan type to your investment strategy; for example, fixed-rate loans are better for long-term stable income, while adjustable-rate mortgages are more well-suited for short-term holds or flips. HELOCs are good for rapidly funding acquisitions, which can be useful when you’re buying in competitive markets.

4. Build a Strong Team

If you’re planning to run multiple short-term rentals, you should know you’ll need a good team. A single person can’t manage all that’s required without sacrificing quality. Once your portfolio grows large enough, you’ll need property managers, co-hosts, cleaning and maintenance teams, and an accountant or tax professional.

5. Know Your Local Regulations

Finally, it’s important to be familiar with local regulations, which can make or break an STR investment. A number of cities have tightened up rules or ordinances due to concerns over noise and housing supply. With this in mind, be sure to examine zoning restrictions, vacation rental permits, owner-occupancy requirements, taxes, HOA / condo rules, and tenant’s right laws. It’s also important to keep an eye out for potential regulatory changes by attending city council meetings, joining local STR advocacy groups, and so on. Investing without understanding the regulations first can spell financial disaster.

With a thoughtful, data-driven approach, STRs can be a great source of investment income and long-term wealth — but it requires treating your investment like a business, not a hobby or a way to get free money.