Short-Term Rental Investing in Key West, FL: Island Market, Supply Constraints, and Maximum ADRs

Key West is physically unlike any other STR market in the United States. A four-mile-wide island at the end of a 110-mile chain of islands, Key West cannot expand its housing supply. Every property that exists is all that will ever exist. Against a fixed supply, tourism demand continues to grow — the island draws over two million visitors annually who come for the sunset celebrations at Mallory Square, the Hemingway House, the coral reef ecosystem, and the legendary Duval Street nightlife. This supply-demand imbalance creates pricing power that few other markets can match.

Key West STR Revenue Benchmarks

Florida's No-Income-Tax Advantage for Key West STR Investors

Key West investors operate in Florida's zero-state-income-tax environment — a critical factor given the high revenue potential of this market. A Key West property generating $200,000 in annual gross revenue with $120,000 in net income pays zero Florida income tax on that income. Federal tax obligations apply, but cost segregation deductions directly reduce that federal burden. Florida's full conformity with federal bonus depreciation means there is no state depreciation recapture or adjustment to manage.

Monroe County's Tourist Development Tax (5%) and Florida's 6% sales tax are pass-through costs collected from guests — they do not reduce investor net income. For modeling purposes, investors should budget 11% of gross rental revenue for transient taxes, collected by platforms like Airbnb and VRBO automatically in most cases.

Cost Segregation Profile: Key West Properties

Key West's historic Conch houses and island cottages have distinctive cost segregation profiles. Many properties have undergone significant renovations — updated kitchens, new bathrooms, outdoor pool additions, and deck installations — all of which are prime candidates for cost segregation reclassification. Outdoor amenities are particularly valuable: a newly installed pool (15-year land improvement), outdoor shower systems (15-year), tiki bar and entertainment areas (15-year), and premium landscaping features (15-year). Interior elements including custom cabinetry, decorative lighting, and specialty tile work qualify as 5-year personal property.

A $750,000 Key West Conch cottage typically yields 22–30% in accelerated assets — approximately $165,000–$225,000 eligible for 100% bonus depreciation. At a 37% federal tax rate, that is $61,000–$83,000 in year-one federal tax savings, with zero state offset in Florida. Given that Key West properties often generate $150,000–$250,000 in annual gross revenue, cost segregation is one of the most leveraged tax strategies available to Key West investors.

Key West STR Regulations

Key West's STR regulatory environment is more nuanced than a simple 'permitted or not' framework. The City of Key West requires a Vacation Rental License for any property rented for less than 30 days. Importantly, the city has implemented a cap on the total number of vacation rental licenses available in residential zoning districts. This cap was put in place to preserve neighborhood character, and it means that not every property is eligible for a new vacation rental license — available licenses are limited.

For investors, this creates two distinct purchasing strategies: (1) buying a property that already holds a transferable vacation rental license, which may command a significant premium on purchase price; or (2) purchasing in areas where new licenses remain available (typically Transient Residential zoning). The Monroe County portion of the Keys (unincorporated areas) has its own permit system under the Florida Keys Comprehensive Plan, which also restricts new STR permits to control growth.

Insurance is a major cost consideration in Monroe County. The Florida Keys are in a high-risk hurricane corridor, and post-2023, property insurance for Key West homes has become extremely expensive. Waterfront properties and homes in FEMA high-risk flood zones (AE, VE) face the highest premiums. Budget $12,000–$35,000+ annually for combined property and flood insurance, and always obtain a flood elevation certificate before purchasing.