Experts predicting huge surge in short-term rentals – here's why

For landlords and real estate investors, the next two years could represent one of the most attractive windows for short-term rental (STR) investment in recent memory. A combination of favorable tax policy, declining interest rates, and strategic market conditions is creating what many industry experts are calling a perfect storm for STR growth.

If you've been considering entering the short-term rental market or expanding your existing portfolio, understanding what's driving this momentum—and how to position yourself to take advantage—could make the difference between mediocre returns and exceptional ones.

What is an STR?

Before diving into the opportunities ahead, let's clarify what we're talking about. A short-term rental (STR) is a property rented out for brief periods, typically less than 30 days at a time. These properties are commonly listed on platforms like Airbnb, VRBO, and Booking.com, and can range from urban condos to vacation homes in resort destinations.

Unlike traditional long-term rentals, short-term rentals offer landlords greater flexibility and often higher revenue potential. However, they also require more active management, including guest communication, frequent turnovers, and property maintenance between bookings.

The tax policy shift: 100% bonus depreciation returns

The most significant catalyst for the anticipated STR boom is the return of 100% bonus depreciation under the recently passed One Big Beautiful Bill. This legislation has fundamentally changed the economics of short-term rental investing, particularly for high-income W-2 earners.

Bonus depreciation allows property owners to deduct the full cost of certain improvements and equipment in the year they're purchased, rather than spreading those deductions over many years. For short-term rentals, this includes items like appliances, furniture, landscaping, and flooring—essentially any asset with a useful life of 20 years or less.

After phasing down from 100% to just 40% in recent years, the Big Beautiful Bill restored full bonus depreciation for qualifying purchases made after January 19, 2025. This change extends through 2029, giving investors a five-year runway to maximize this tax advantage.

The STR loophole: what makes it powerful

Here's where short-term rentals become particularly attractive: the STR loophole. Under current tax law, landlords who materially participate in their short-term rental business—generally meaning they're actively involved for at least 100 hours per year and more than anyone else—can treat rental losses as "active" rather than "passive."

This is a game-changer for high earners. While typical rental property losses can only offset other passive income, STR losses resulting from depreciation can offset W-2 income, potentially eliminating or drastically reducing your tax burden.

Consider a real-world scenario: An investor earning $200,000 annually purchases a short-term rental property valued at $400,000. Through a cost segregation study, they identify $120,000 in assets eligible for immediate depreciation—furniture, appliances, landscaping improvements, and specialized finishes. With 100% bonus depreciation, they can deduct the entire $120,000 in year one, potentially offsetting more than half their taxable income.

The financial impact is substantial. For someone in a high tax bracket, this could translate to $40,000 or more in tax savings in a single year—savings that can be reinvested into additional properties or improvements.

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Read more: The REAL short-term rental loophole for landlords

What to expect from market dynamics in 2026-2027

The restoration of full bonus depreciation is already creating ripple effects across the short-term rental market. Many experts are predicting a boom in STR buying over the next couple years, with BiggerPockets laying it out nicely in a recent feature article. Here's what we can expect:

Increased competition for turnkey properties

With the tax incentives now firmly in place, demand for established, revenue-generating STR properties is intensifying. Investors looking for properties that can meet the material participation requirements immediately—meaning properties that are already licensed, furnished, and operational—should expect to move quickly.

Properties in proven markets with strong booking histories are likely to see multiple offers, particularly during the peak buying season from spring through fall. Sellers and their agents are adjusting pricing strategies accordingly, recognizing the enhanced value these properties offer under the new tax regime.

A shift from speculation to strategic investment

The days of blindly buying any property in a vacation market and expecting easy returns are over. The 2026-2027 boom will reward investors who approach short-term rentals with sophisticated financial planning and operational excellence.

Successful STR investors in this environment will need to:

• Calculate after-tax yields, not just gross cash flow
• Work with CPAs who specialize in short-term rental taxation
• Ensure properties can meet material participation thresholds in time to capture tax benefits
• Verify STR licensing and zoning compliance before closing (some markets have waiting lists that could delay operations)
• Understand their local market's demand drivers and seasonal patterns

Lower borrowing costs creating additional momentum

Beyond tax incentives, declining interest rates are making the math even more attractive. With mortgage rates dropping and many investors expecting further reductions in 2026, the cost of financing STR acquisitions is becoming more manageable. This convergence of lower borrowing costs and enhanced tax benefits creates a powerful one-two punch for real estate investors.

Hot markets to watch

While the tax advantages apply nationwide, certain markets are particularly well-positioned for the coming STR surge. When evaluating potential markets, investors should look for a combination of strong year-round demand, reasonable entry costs, and favorable regulatory environments.

Mountain and resort destinations

Traditional vacation markets continue to deliver strong performance. Areas near national parks, ski resorts, and outdoor recreation hubs maintain consistent demand throughout the year. Properties in these markets often command premium nightly rates while still qualifying for bonus depreciation on substantial improvements.

Parts of Colorado, California, Montana and Wyoming are likely to have year-round appeal.

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Secondary cities with growing tourism

Emerging markets in secondary cities—places with developing tourism infrastructure but not yet saturated with STR supply—offer compelling opportunities. These locations often feature lower acquisition costs while still generating respectable occupancy rates and daily rates.

Austin, Texas and Orlando, Florida are a couple notable examples in the US.

Warm-weather states with year-round appeal

Florida, Arizona, and Texas continue attracting both tourists and investors. The combination of no state income tax (in Florida and Texas), strong tourism demand, and generally STR-friendly regulations makes these states particularly attractive for the loophole strategy.

Business travel hubs

Don't overlook markets driven by business travel. Cities with major corporate headquarters, convention centers, or medical facilities can provide more stable, predictable booking patterns. While nightly rates may be lower than resort destinations, consistent occupancy can offset this difference.

When evaluating any specific market, pay close attention to local regulations. States like California and New York have implemented varying restrictions on short-term rentals in different municipalities, so thorough due diligence is essential.

How to prepare for the STR boom

If you're considering entering the short-term rental market or expanding your portfolio in 2026-2027, strategic preparation is critical.

Assemble your expert team early

The complexity of STR investing—particularly when leveraging the tax loophole—requires specialized expertise. Start building relationships with:

• STR-Specialized Real Estate Agents: Agents who understand short-term rental markets can identify properties with the right characteristics and help you move quickly when opportunities arise.
• Tax Professionals with STR Experience: Not all CPAs are familiar with the material participation requirements and bonus depreciation strategies specific to short-term rentals. Find one who specializes in this area and can guide your tax planning throughout the year.
• STR-Friendly Lenders: Some lenders have specific programs for short-term rental financing and understand how to underwrite properties based on STR income projections rather than traditional long-term rental metrics.
• Insurance Providers: Short-term rentals require specialized insurance coverage. Standard landlord policies won't adequately protect properties with frequent guest turnover.

Understand the material participation requirements

To benefit from the STR loophole, you must prove material participation in your short-term rental business. This generally means documenting at least 100 hours of active involvement annually and demonstrating you participate more than anyone else (including property managers).

Qualifying activities include:

• Guest communication and booking management
• Property maintenance and repairs
• Marketing and listing optimization
• Financial recordkeeping and analysis
• Coordinating with service providers

Keep detailed logs of your time spent on these activities. The IRS may require documentation if you're audited, and meticulous records provide the proof you need.

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Prioritize properties with high depreciable value

To maximize bonus depreciation benefits, focus on properties where a substantial portion of the purchase price can be allocated to assets with shorter useful lives. Newer properties or those with recent renovations typically offer the most depreciable value.

Consider ordering a cost segregation study on properties you're evaluating. While these studies cost $2,000-$5,000, they can identify tens of thousands of dollars in additional deductions, making them well worth the investment for properties over $300,000.

Model your complete financial picture

Don't invest in a short-term rental solely for tax benefits. The property must make financial sense on its own merits. Run comprehensive projections that include:

• Expected gross rental income (based on comparable properties' actual performance)
• Operating expenses (including property management, cleaning, utilities, supplies, and maintenance)
• Mortgage costs at realistic interest rates
• Tax savings from depreciation (your "after-tax yield")
• Potential appreciation over your holding period

A property that generates strong cash flow and benefits from tax advantages is ideal. A property that requires tax savings to break even is risky—tax laws can change, and operational challenges can quickly erode thin margins.

Verify licensing and regulatory compliance

Before signing any purchase agreement, directly confirm with local authorities that:

• The property is legally permitted to operate as a short-term rental
• No waiting lists or caps would prevent you from obtaining necessary licenses
• You can meet material participation requirements within your first year of ownership

Some investors have purchased properties only to discover they couldn't obtain STR permits in time to qualify for tax benefits that year. This due diligence step cannot be outsourced solely to sellers or their agents—verify directly with city or county offices.

The property management question

One of the most common questions from prospective STR investors is whether they can hire a property manager and still qualify for the tax benefits. The short answer is yes, but with important caveats.

To meet material participation standards, you must personally log more hours than anyone else working on the property, including property managers. This doesn't mean you can't delegate tasks—you absolutely should for efficiency—but you need to remain actively involved in decision-making, guest relations, and business operations.

Many successful STR investors use a hybrid approach: they hire help for routine tasks like cleaning and maintenance but handle guest communications, pricing strategy, and financial management themselves. This allows them to meet participation thresholds while avoiding burnout from operational details.

Potential risks and considerations

While the opportunities are substantial, prudent investors should also consider potential headwinds.

Regulatory uncertainty

Local regulations continue evolving, often restricting short-term rentals in response to housing affordability concerns. Some jurisdictions are limiting STR permits, increasing compliance requirements, or banning them altogether in certain zones. Always invest with awareness that regulations could change during your ownership period.

Market saturation in popular areas

The tax incentives drawing investors to short-term rentals could lead to oversupply in popular markets. As more properties enter the market, occupancy rates may decline and price competition could intensify. Choose markets carefully and avoid areas already showing signs of oversaturation.

Time and management intensity

Short-term rentals require significantly more active management than long-term rentals. Guest turnover, constant communication, review management, and coordinating cleaners and maintenance vendors can be time-consuming. Make sure you're prepared for this operational intensity or have systems in place to handle it efficiently.

Tax law impermanence

While 100% bonus depreciation is scheduled through 2029, tax laws can change. Future legislation could modify or eliminate these benefits. Don't build an investment strategy entirely dependent on current tax provisions remaining unchanged indefinitely.

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Why 2026-2027 represents a unique window

The convergence of factors making this period special—full bonus depreciation, declining interest rates, and growing investor awareness of STR tax strategies—creates a time-limited opportunity. As more investors enter the market, competition will intensify and cap rates will likely compress in the strongest markets.

For W-2 earners with significant taxable income, the ability to offset those earnings with rental property depreciation is exceptionally powerful. Combined with the cash flow and potential appreciation of well-selected properties, short-term rentals represent one of the most compelling wealth-building strategies available to real estate investors right now.

However, success requires more than simply buying any property and listing it online. The investors who will thrive in this environment are those who:

• Approach STR investment with sophisticated tax planning and financial modeling
• Select markets based on data rather than hunches or emotional appeal
• Build operational systems that deliver excellent guest experiences consistently
• Maintain meticulous records of their material participation
• Protect their investments with appropriate insurance coverage

Protecting your investment

As you scale your short-term rental portfolio, protecting your properties becomes increasingly critical. Traditional homeowners insurance won't cover the unique risks associated with frequent guest turnover, commercial activity, and liability exposure inherent in STR operations.

Landlord insurance specifically designed for short-term rentals provides the coverage you need, including protection against property damage, liability claims, and loss of rental income. At Steadily, we specialize in fast, affordable landlord insurance tailored for property investors operating short-term rentals.

Final thoughts

The short-term rental market in 2026 and 2027 offers exceptional opportunities for informed, strategic investors. The return of 100% bonus depreciation, combined with the STR loophole allowing active loss treatment, creates powerful tax advantages that can dramatically improve investment returns.

But the window for maximum benefit is finite. Bonus depreciation phases down after 2029, and as more investors recognize these opportunities, competition for the best properties will intensify. Taking action now—while assembling the right team, educating yourself on tax strategies, and identifying promising markets—positions you to capitalize on what may be the strongest short-term rental investment period in years.

Whether you're a seasoned real estate investor looking to diversify or a W-2 earner seeking your first rental property, the time to explore short-term rental opportunities is now. With proper planning, expert guidance, and strategic property selection, 2026 and 2027 could be the years that accelerate your real estate investment journey significantly.