Which Properties Provide Better STR Cash Flow?

There’s nothing quite like stepping out onto the sand to gaze at the ocean or looking out over a lake. It’s a luxury sought by homebuyers and travelers alike. Demand for waterfront homes, along with their limited supply, means that homes with a waterfront view are worth about 78% more on average, according to an American Home Shield report based on Zillow data. 

Buying a waterfront property, therefore, requires a more significant investment. But, renting out a waterfront property also offers the potential to generate higher returns. 

Shoreline Properties Can Be Cash Cows

Since the beginning of 2022, waterfront properties have generated 46% more revenue per property than nonwaterfront properties, according to data from vacation property management company Evolve. “Having shoreline real estate often correlates with stronger revenue potential,” says Greg Davis, Evolve’s Owner Growth expert. 

That said, there are also opportunities for investors looking to buy less-expensive properties in a beach or lake market that don’t have direct access to the water. “Depending on the market, there can still be demand in a beach or lake town for properties that aren’t directly waterfront,” says Davis. “Homes that are in close proximity to the water or other key attractions in that market can still see strong returns at lower upfront costs.”

If you go that route, be sure the property has sought-after amenities that allow it to compete with waterfront properties for bookings, suggests Davis.  

When comparing beachfront and lakefront properties, homes with beach access or ocean views tend to get more bookings than homes with lake access or lake views. Since the beginning of 2022, beach properties have seen 7% higher occupancy rates on average than lake properties, Evolve’s data shows. But an individual lake property with stellar views and amenities could still outperform. 

Davis says it’s also important to consider the property type that performs best in each market. “Condos are often quite successful in top beach markets, while cabins are often high earners in top lake markets,” he says. 

Related: How to Buy a Vacation Rental Property

The Best Waterfront Markets for 2023

It’s up to investors to choose the properties most likely to generate high returns. But to help you zero in on the best markets, Evolve crunched the numbers. The company looked at vacation rental performance metrics for beach and lake towns across the United States. Evolve also compiled internal data, along with Zillow and Redfin data, to identify median listing prices and estimated annual vacation rental expenses to calculate the capitalization rate. 

Best places to buy a beach house

“High-earning beach houses tend to have convenient beach access and ocean views,” says Davis. “Pools are another very popular amenity across strong beach markets, whether private or as part of a beachfront condo community.” 

Evolve identified 12 markets that investors should be aware of. Here are the six markets with the highest potential cap rates. 

Hampton, Virginia

• Median rental revenue: $31,795
• Median listing price: $264,093

• Example cap rate: 8.4%
• Tips for success: Look for a home with outdoor space and three to five bedrooms, located close by popular beaches like Buckroe.

Port Saint Lucie, Florida

• Median rental revenue: $41,997
• Median listing price: $420,210

• Example cap rate: 7%
• Tips for success: Riverfront and golf course homes offer potential, as well as beachfront homes, and properties with a pool can earn higher daily rates. However, make sure you understand the permit requirements.

Newport, Oregon

• Median rental revenue: $47,339
• Median listing price: $505,425

• Example cap rate: 6.6%
• Tips for success: Larger properties with space for groups tend to perform the best, and homes with amenities like hot tubs, fire pits, and furnished decks stand out.

Grand Haven, Michigan

• Median rental revenue: $27,899
• Median listing price: $311,892

• Example cap rate: 6.3%
• Tips for success: Look for a Lake Michigan shoreline property close to downtown, or expand your search to nearby Muskegon.

Gulf Shores, Alabama

• Median rental revenue: $32,584
• Median listing price: $394,033

• Example cap rate: 5.8%
• Tips for success: Look for a beachfront condo with pool access.

Hilton Head, South Carolina

• Median rental revenue: $45,246
• Median listing price: $624,652
• Example cap rate: 5.1%
• Tips for success: Beachfront condos with resort amenities and pool access tend to perform the best here.

Best places to buy a lake house

“High-earning lake houses tend to have direct lake access, private docks or beaches, functional outdoor space, like a spacious deck or backyard, and lake views,” says Davis. “Taking outdoor enjoyment to the next level with amenities like hot tubs, fire pits, and complimentary gear, like kayaks or paddleboards, can also help owners stand out.” 

Evolve identified 12 markets for investors to consider. Here are the six markets with the highest potential cap rates. 

Finger Lakes, New York

• Median rental revenue: $31,434
• Median listing price: $202,257
• Example cap rate: 10.9%
• Tips for success: Look for a waterfront property in Seneca Falls, Geneva, or Penn Yan, and make sure you understand the permitting and zoning restrictions.
  

Saranac Lake, New York

• Median rental revenue: $29,151
• Median listing price: $264,598
• Example cap rate: 7.7%
• Tips for success: Look for a cabin, which is the highest-performing property type, that’s in a wooded area or close to downtown, and make it pet-friendly.
  

Traverse City, Michigan

• Median rental revenue: $40,191
• Median listing price: $424,731
• Example cap rate: 6.6%
• Tips for success: Look for a property with lake access and outdoor amenities on Silver Lake, Long Lake, Island Lake, or Bass Lake.
  

Branson, Missouri

• Median rental revenue: $22,962
• Median listing price: $246,472
• Example cap rate: 6.5%
• Tips for success: If you can’t find a property right on the lake, look for one near other attractions, like Dolly Parton’s Stampede, and pay attention to zoning restrictions.
  

Pocono Lake, Pennsylvania

• Median rental revenue: $20,594
• Median listing price: $279,959
• Example cap rate: 5.1%
• Tips for success: Look for a lakefront property with a private dock or beach or one in a prestigious community like Arrowhead Lake Village to potentially earn double the median revenue.
  

Buckeye Lake, Ohio

• Median rental revenue: $24,264
• Median listing price: $335,438
• Example cap rate: 5.1%

Tips for success: Look for a larger property in Millersport or Thornville, or any home in proximity to Buckeye Lake State Park.

Disadvantages of Buying a Waterfront Property

Waterfront properties tend to have higher maintenance and insurance costs than nonwaterfront homes. Flood insurance is a requirement for properties in high-risk flood areas with government-backed mortgages, and lenders outside these areas may require flood insurance to issue a mortgage as well. 

Related: How to Read Your Property Insurance Policy

Even if it’s not required, you should consider purchasing the coverage to protect your investment since your landlord policy won’t cover damage from a flood. 

If you buy flood insurance from the National Flood Insurance Program, your coverage will come with limitations. For example, you won’t be able to recoup lost rental income while you make repairs, and if your pool, hot tub, or deck are damaged, you won’t be reimbursed. You may want to evaluate private flood insurance policies, which have varying limits, but understand that these policies tend to be more expensive. When you run the numbers for a waterfront property, be sure to account for the increased insurance and maintenance costs.

Growing climate risks, which tend to be more severe in oceanfront markets, can also impact the value of your property in the future. Appreciation for waterfront properties is already slowing due to rising sea levels, The New York Times reported in 2019, with older properties most affected. 

Recently built homes are designed to resist flooding and tend to list at higher prices. Inland properties in waterfront areas are also appreciating faster than homes directly on the waterfront. A property’s future appreciation is important to consider in addition to short-term rental cash flow when making an investment decision. 

The Bottom Line

A waterfront home can be a great investment, given strong vacation rental demand and high revenue potential in areas with lake or beach access. While homes on the shoreline capture more revenue, inland homes in waterfront markets can still perform well and may be more resistant to flood risks, which are worth consideration. Some of Evolve’s top waterfront markets still have median listing prices well below the national median, such as Finger Lakes and Saranac Lake in New York and Hampton, Virginia. 

Smart investors also have the opportunity to beat the median revenue in a market by choosing a property with the right amenities in the right location. Evolve’s top-performing properties capture double the median revenue in some markets, for example. If you’re considering a property and want to know how it might perform, experts at Evolve are available to provide data-informed guidance.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.