Let’s not sugarcoat this. Recessions are real. They affect real estate. They affect consumer spending. And if you’re considering buying a short term rental right now, the question of what happens during an economic downturn is a legitimate one.
I’m not going to tell you that vacation rentals are completely recession proof, because nothing is. But after watching this asset class perform through COVID, inflation spikes, rising interest rates, and multiple rounds of economic uncertainty, I can tell you that short term rentals have some unique characteristics that make them significantly more resilient than most people assume.
Here’s what actually happens to vacation rentals during a recession, and why the reality is more nuanced than the fear.
People Still Take Vacations During Recessions
This is the single most important thing to understand. Leisure travel, particularly drive-to leisure travel, is one of the last budget items families cut during a downturn. People may skip the international flight. They may not do the European tour. But they will still load up the car and take the family to a cabin in the Smoky Mountains or a beach condo in Gulf Shores.
The data backs this up. During the 2008 recession, domestic leisure travel declined far less than business travel. During COVID (which functioned as an economic shock even more severe than a traditional recession), something remarkable happened. Markets like the Smoky Mountains and Gulf Shores actually posted record revenue in 2020 and 2021. That’s not a typo. Record revenue during the worst economic disruption in modern history.
Why? Because the “staycation” effect is real. When people cut back on expensive travel, they shift to regional drive-to destinations. They trade the resort in Cancun for a cabin in Pigeon Forge. They skip the all inclusive in the Caribbean and rent a beachfront condo in Destin instead. Private vacation rentals were the direct beneficiaries of that shift, because families wanted space, privacy, and the ability to cook their own meals rather than sit in a hotel room.
This pattern specifically benefits the types of markets where most short term rental investors buy. The Smoky Mountains draw from Nashville, Atlanta, Charlotte, and Knoxville. Gulf Shores pulls from Birmingham, Nashville, Atlanta, and New Orleans. Broken Bow is a three hour drive from Dallas/Fort Worth. These aren’t fly-to luxury destinations. They’re regional drive-to vacation markets, and that’s exactly the demand segment that holds up best when the economy tightens.
Pricing Flexibility Is a Massive Advantage
One of the biggest structural advantages of short term rentals over other real estate investments (and over hotels) is pricing flexibility.
With a long term rental, you’re locked into a 12 month lease at a fixed rate. If the market shifts, you wait until the lease expires to adjust. With a hotel, pricing decisions happen at the corporate level and often respond slowly to local market conditions.
With a short term rental, you can adjust your nightly rate daily. You can offer weekly discounts to attract longer stays during slow periods. You can run shoulder season promotions. You can respond to market conditions in real time.
But the real power move during a recession is the ability to pivot your rental strategy entirely.
Mid-term rental pivots. If short term demand softens in your market, you can shift to 30+ day stays targeting traveling nurses, remote workers, insurance displacement tenants, or corporate relocations. Mid-term rentals typically generate less per night than short term, but they offer more consistent occupancy and lower operating costs (fewer turnovers, less wear and tear).
Long term rental floor. In a worst case scenario, you can always convert to a traditional long term rental. This becomes your revenue floor. You won’t maximize income, but you’ll cover your mortgage and preserve the asset until conditions improve. Try doing that with a stock portfolio.
This layered flexibility means you’re never stuck with a single revenue strategy. You can adapt as conditions change, which is exactly what resilience looks like.
You Own a Real Asset That Appreciates Over Time
Here’s something that gets lost in the revenue conversation. When you buy a short term rental, you own real property. It’s a tangible asset that historically appreciates over time, regardless of what your nightly rate does in any given quarter.
Short term revenue might dip during a recession. Occupancy might soften for a season. But the underlying asset continues to build equity. Your tenants (guests) are still paying down your mortgage. And unlike stocks, you can’t get margin-called on a rental property that’s cash flowing.
Real estate has always been a long game. The investors who bought in 2008 and 2009, when everyone else was panicking, ended up with some of the best deals of a generation. The same was true during COVID. Investors who bought cabins in the Smokies in 2020 at $300,000 watched those properties appreciate to $450,000 or more within two years while also generating record rental income.
Recessions create buying opportunities for investors with capital and patience. The assets don’t disappear. The demand doesn’t vanish permanently. It contracts temporarily, then recovers.
Tax Benefits Are Actually More Valuable Before and During a Recession
This is one that most people miss entirely. The tax benefits of owning short term rental property, specifically bonus depreciation and cost segregation, can be more valuable during high income years leading into a recession.
Here’s how it works. If you purchase a short term rental and do a cost segregation study, you can accelerate depreciation on certain components of the property (appliances, flooring, fixtures, landscaping, etc.) and take a large paper loss in year one. If you materially participate in managing the property (which many short term rental owners do), that paper loss can offset your W-2 income.
So imagine you’re a high earner making $300,000 a year. You buy a $400,000 cabin, do a cost segregation study, and generate $100,000+ in paper depreciation losses in year one. That offsets a significant chunk of your W-2 income, potentially saving you $30,000 to $40,000 in taxes. Meanwhile, the property is actually generating positive cash flow from guests.
During the high income years before a recession hits, this strategy is especially powerful. You’re reducing your tax burden while building a real asset that generates income. If a recession does come and your W-2 income drops, you’ve already captured the tax benefit during your highest earning years.
This is portfolio protection that most asset classes simply can’t offer. Talk to a CPA who specializes in real estate, because the specifics matter, but the general principle is sound and well established.
What the Historical Data Actually Shows
Let’s look at what happened during the most recent economic shocks.
COVID-19 (2020-2021): Hotel occupancy cratered. Airlines lost billions. But vacation rental markets that serve drive-to demand saw a massive surge. The Smoky Mountains, already the most visited national park in the US with 14 million+ annual visitors, saw revenue explode. Gulf Shores and the Emerald Coast saw similar patterns. Occupancy dipped briefly in March and April 2020, then came roaring back by summer 2020 and stayed elevated through 2021.
Vacation rental occupancy recovered faster than hotel occupancy because the product was different. Families wanted private homes, not shared lobbies. They wanted full kitchens, not room service. They wanted space for the kids, not adjoining rooms. The pandemic accelerated a structural shift toward private vacation rentals that hasn’t reversed.
Rising interest rates (2022-2024): When rates climbed, many predicted a collapse in vacation rental revenue. It didn’t happen. Revenue per property did normalize from the unsustainable highs of 2021, but markets like the Smokies and Gulf Shores continued to generate strong income that exceeded pre-COVID levels. Properties that were well located, well managed, and well priced continued to perform.
The common thread in both scenarios: short term rentals proved more adaptable and more resilient than the headlines suggested.
The Real Risk Isn’t Revenue Collapse. It’s Overleveraging.
Here’s the honest truth about recessions and short term rentals. The investors who get into trouble aren’t the ones who see revenue dip 15% for a season. They’re the ones who bought with no reserves, underwrote to the 90th percentile, and assumed peak performance would last forever.
The real risk in any economic environment is overleveraging. If you’re stretching to make the mortgage payment when everything goes right, you have zero margin for when things go sideways. And things always go sideways eventually, recession or not.
The solution is straightforward. Buy with adequate reserves (six months of mortgage payments minimum). Underwrite conservatively. Build in a margin of safety.
Underwrite to the Middle, Operate at the Top
This is where the percentile data becomes incredibly valuable. Let’s look at what properties actually generate across some of the most popular short term rental markets.
Even at the 25th percentile (meaning 75% of properties do better than this), the numbers are meaningful:
- Gulf Shores: 25th percentile properties generate around $38,048 annually
- Smoky Mountains: 25th percentile comes in at roughly $33,055
- Panama City Beach: Even the 25th percentile generates approximately $29,822
Now look at the 50th percentile (median):
- Gulf Shores: $59,881
- Smoky Mountains: $53,656
- Destin: $65,421
- 30A: $80,784
- Broken Bow: $52,013
- Panama City Beach: $47,122
And at the 75th percentile:
- Gulf Shores: $89,287
- Smoky Mountains: $81,641
- Destin: $98,604
- 30A: $134,815
- Broken Bow: $78,833
- Panama City Beach: $68,858
Top performers (90th percentile) generate even more. In 30A, 90th percentile properties bring in around $216,754. In Destin, roughly $145,317. In the Smoky Mountains, approximately $120,372. Gulf Shores comes in around $126,092, Broken Bow at $115,548, and Panama City Beach near $95,285. And some properties exceed even that.
The smart approach: underwrite your deal to the 50th percentile. If your property can cover its mortgage, expenses, and still produce acceptable returns at median revenue, you have a built-in cushion. Because if you manage the property well, optimize your listing, invest in the right amenities, and price strategically, you should be operating closer to the 75th percentile.
That gap between your underwriting assumption (50th percentile) and your actual performance (75th percentile) is your recession buffer. If revenue drops 15% or even 20% during a downturn, you’re still above your break even point. You’re still cash flowing. You’re still building equity. And you’re positioned to capture the recovery when it comes.
Conservative Underwriting Is the Entire Game
The Short Term Shop teaches investors to underwrite conservatively and build resilient portfolios across multiple markets. This isn’t just about picking the right cabin or the right condo. It’s about structuring your investment so that it survives the bad years, not just thrives in the good ones.
That means realistic revenue expectations from day one. It means factoring in vacancy, maintenance, property management fees, and capital expenditures. It means having reserves. It means not buying the most expensive property you can technically qualify for.
Every agent at The Short Term Shop lives in the market they serve. They see what properties actually rent for, which neighborhoods hold up during slow seasons, and what amenities drive bookings. That local knowledge is the difference between buying a property that looks good on a spreadsheet and buying one that actually performs through every economic cycle.
With over 5,000 closed investor transactions and agents in 18 dedicated vacation rental markets, our team has seen how different properties and markets respond to economic uncertainty. That experience informs how we help investors build portfolios designed to weather downturns, not just capitalize on booms.
FAQ
Do short term rentals lose money during a recession?
Some can, particularly properties that were overleveraged or in markets without strong drive-to demand. But most well located, well managed short term rentals in established vacation markets see revenue dip modestly rather than collapse. The key is conservative underwriting and adequate reserves. Properties that can cover their expenses at the 50th percentile of market revenue have a significant cushion against temporary downturns.
Are vacation rentals safer than stocks during a recession?
They offer different advantages. You own a real, tangible asset that historically appreciates over time. You can’t be margin-called on a property that’s generating rental income. You have the flexibility to pivot strategies (short term to mid-term to long term). And the tax benefits, particularly bonus depreciation and cost segregation, can offset W-2 income. That said, real estate is illiquid and requires active management, so “safer” depends on your definition and your financial situation.
What happened to short term rental revenue during COVID?
Markets that serve regional drive-to demand, like the Smoky Mountains and Gulf Shores, actually saw record revenue in 2020 and 2021. Occupancy dipped briefly in the initial months of the pandemic, then surged as families shifted from hotels and flights to private vacation rentals. Vacation rentals recovered faster than hotels because travelers preferred private homes with space, kitchens, and separation from other guests.
Can I convert a short term rental to a long term rental during a downturn?
Yes, and this is one of the biggest advantages of the asset class. If short term demand softens significantly, you can pivot to mid-term rentals (30+ day stays for traveling nurses, remote workers, or insurance claims) or convert entirely to a long term rental. The long term rental income becomes your revenue floor, covering your mortgage while you preserve the asset until conditions improve.
How much reserves should I have before buying a short term rental?
At minimum, six months of mortgage payments in liquid reserves. This gives you a cushion to handle seasonal slowdowns, unexpected repairs, or a temporary drop in bookings. Conservative investors keep even more. The goal is to never be in a position where one slow month threatens your ability to hold the property.
How does The Short Term Shop help investors prepare for economic downturns?
The Short Term Shop teaches investors to underwrite conservatively from day one. Every agent lives in the market they serve and understands local performance patterns across all seasons and economic conditions. With over 5,000 closed investor transactions across 18 markets, our team helps investors select properties and markets that are positioned for resilience, not just peak performance. That includes guidance on reserve requirements, revenue expectations by percentile, and building diversified portfolios across multiple markets. Find your agent →
Ready to invest in a recession resilient market? The Short Term Shop has a dedicated agent who lives in your target market and works exclusively with short term rental investors. Find your agent →
Disclaimer: Revenue figures cited in this article are based on market-wide data from third-party analytics platforms and reflect ranges across all properties in the market. They are not projections or guarantees for any specific property. Individual property performance varies significantly based on location, condition, amenities, management quality, and market conditions. Always conduct your own due diligence before making an investment decision.