The Best Neighborhoods to Invest in Iceland: A Complete Guide to Winning Areas

Published on January 14, 2026 and written by Cyril Jarnias

Investing in Real Estate in ICELAND means entering a small, expensive, but remarkably solid market. The country boasts a robust rule of law, a diversified economy, state-of-the-art infrastructure, and a tourism sector that continues to drive rental demand. In this context, not all neighborhoods are equal. Some areas combine price growth, decent rental yields, and long-term prospects, while others lean more towards the tourism gamble or seasonal yield.

Why ICELAND remains a unique real estate market

Before diving into neighborhood specifics, it’s essential to understand the broader framework. ICELAND is a micro-market: around 390,000 inhabitants, with over 65% concentrated in the capital region. GDP is around $28 to $35 billion depending on sources and years, with one of the highest per capita incomes in the world. The country is rated A by S&P, with public finances deemed solid and effective governance.

This foundation translates into surprisingly resilient real estate. After the 2008 financial shock and the tourism dip due to Covid, prices quickly resumed their upward trajectory. Between 2020 and 2023, residential property values increased by an average of about 8% per year. The national residential price index gained nearly 8% year-over-year in early 2025, despite monetary tightening.

Strong structural demand, constrained supply

ICELAND combines several demand drivers. The demographics of young adults (22–29 years old), the core target for first-time buyers, are rising, increasing from less than 38,000 people in 2016 to over 44,000 in early 2024. Immigration of foreign workers is accelerating, particularly in tourism, construction, and fishing, to the point that nearly a quarter of the workforce is now composed of non-Icelanders. Add to this massive, high-spending tourism (from the United States, China, Nordic countries, Europe), which boosts demand for short-term rentals.

Decent rental yields, a very expensive market

ICELAND is an extremely costly country, and real estate is no exception. In the Reykjavík region, apartments frequently trade for around one million kronur per square meter, with averages of approximately 4,000 to 6,200 € / m² depending on the neighborhood. In Reykjavík, a simple “modest” apartment often sells for between 70 and 80 million kronur.

Summary table of price ranges by area (approximation in €/m²):

Area	Property Type	Indicative Average Price (€/m²)
Reykjavík 101 (center)	Apartments	5,500 – 6,200
Reykjavík 105/107 (inner city)	Apartments	4,500 – 5,500
Reykjavík suburbs	Houses	4,000 – 4,800
Kópavogur / Garðabær	Apartments	4,000 – 5,000
Hafnarfjörður / Mosfellsbær	Houses	3,500 – 4,200
Akureyri center	Apartments	3,000 – 3,800
Tourist South Coast	Vacation cottages	2,800 – 3,500
East Fjords	Apt./Houses	2,000 – 2,800
Westfjords (villages)	Houses	1,500 – 2,500
Reykjanes (Keflavík…)	Apartments	2,800 – 3,500

In this context, the “best neighborhoods” are not necessarily those with the highest rents, but those where the balance of price / rental demand / appreciation prospects remains coherent.

Reykjavík: neighborhoods to target for investment

The capital concentrates the vast majority of the country’s real estate activity. In 2024, nearly 60% of housing transactions took place in the Reykjavík region. The city, compact and pedestrian-friendly, is officially divided into ten districts, with very different profiles from an investor’s perspective.

Miðborg (101): Tourist hub, safe but expensive values

Miðborg, the famous “101,” is the nerve center of Reykjavík. It’s where the main commercial streets like Laugavegur, iconic landmarks (Hallgrímskirkja, Harpa, the Sun Voyager sculpture), museums, bars, and almost all nightlife are concentrated. For tourists, it’s “the place to be,” and for agencies, the epicenter for tours to the Golden Circle or the south coast.

In real estate terms, the 101 is the most expensive area in the country. Apartments in the heart of the center trade for over 5,500 €/m², often above 6,000 €/m² for renovated or high-end properties. Rents follow suit, with high levels for long-term leases and daily rates that skyrocket in high season for furnished short-term rentals.

This centrality has a downside: competition among investors is fierce, the density of Airbnb and other platforms is very high, and regulations on tourist rentals are tightening. General rules limit short-term rentals to 90 days per year in a residence without a specific permit, with a reduced 11% VAT to collect on these stays and mandatory registration with the municipal council and the tourism office.

On the other hand, in the medium to long term, the 101 offers rare security: tourist demand does not wane, both residents and expatriates favor the center for its accessibility, and supply remains constrained by existing buildings and strict densification rules. For a long-term investor willing to accept a gross yield rather below 5% in exchange for probable annual capital gains of 4 to 6%, this is the reference sector.

Vesturbær (107) and Grandi: The chic “west side” undergoing transformation

Immediately west of the center, Vesturbær is one of Reykjavík’s most sought-after neighborhoods. Historically residential, with old townhouses and modest-sized buildings, the area has seen its attractiveness explode as the old harbor transformed into a cultural and gastronomic district.

Vesturbær is among the most coveted areas in the residential market. Prices are close to those in the 101 for the best-located properties, but with a more diverse tenant profile: affluent families, expatriates, professionals working downtown, and high-end tourist clients seeking a more residential environment. For Airbnb-style rentals, the neighborhood is often presented as a more peaceful alternative to the center while remaining within walking distance.

From an investment perspective, Vesturbær stands out for a good yield/security compromise: solid rents, low vacancy rates, and an interesting diversification between long-term (residential) and short-term (tourism). It’s one of the best choices for those wanting to avoid the bustle of the 101 without giving up on metropolitan core appreciation.

Hlíðar (105): The “central budget” to optimize yield

East of the center, Hlíðar (postal code 105) offers a radically different face. The neighborhood is dense, largely residential, with a strong presence of students, young professionals, and backpackers. This is where you find the highest concentration of hostels and budget hotels in the capital.

This “budget” focus is reflected in rents: they remain high by European standards but are significantly lower than Miðborg and Vesturbær. The long-term rental market is very dynamic, driven by proximity to several educational institutions, cultural facilities (one site of the Reykjavík Art Museum), and the futuristic Perlan dome nearby, on the Öskjuhlíð hill.

For a yield-oriented investor, Hlíðar is particularly attractive. The entry ticket, although substantial, is more affordable than in the 101. Gross yields are often higher, thanks to slightly lower acquisition prices and near-permanent rental demand. Many expatriates on a limited budget target this neighborhood for a good compromise between price, accessibility, and services.

Laugardalur (104): The top choice for families and expatriates

Laugardalur, northeast of the center, is regularly cited as the best neighborhood for families, including among foreigners living there. The district is greener than the center, with a huge park, a botanical garden, a zoo, and especially the large geothermal swimming pool complex Laugardalslaug, a true community hub for residents.

For the investor, Laugardalur offers a dual advantage. On one hand, prices per square meter are lower than in the center and Vesturbær. On the other, demand for long-term rentals is particularly stable, driven by Icelandic families and expatriates seeking a more peaceful environment without moving away from urban services. Many newcomers with children make Laugardalur their first choice, limiting vacancy risk and anchoring the neighborhood in a trend of progressive appreciation.

Árbær: The green “suburb” within the city

Further southeast, Árbær offers an almost village-like experience about ten kilometers from the center. The district is known for its open-air museum, which recreates an old Icelandic village with historic buildings, and for the Elliðaárdalur valley, a nature corridor with a river and waterfalls, very popular with joggers and walkers.

In the real estate market, Árbær positions itself as a family residential extension of Reykjavík. Few hotels, few structured tourist rentals: the neighborhood remains dominated by long-term rentals. Prices are more affordable, at the cost of increased dependence on cars or buses. For investors aiming for regular yield, with a clientele of households seeking space and tranquility at a lower cost, Árbær is worth studying, particularly for single-family houses intended for traditional rental.

Seltjarnarnes: The tranquil peninsula, a showcase for discreet luxury

Seltjarnarnes is not administratively part of Reykjavík, but the peninsula is a direct extension of Vesturbær. Entirely surrounded by the sea, it offers a spectacular setting, with the Grótta lighthouse as a prime spot for viewing the northern lights, a local geothermal pool, and a seaside golf course.

Gross yields may be slightly lower than in other sectors, but demand for this type of privileged setting is sustainable, and land is inherently limited.

Kópavogur, Garðabær, Hafnarfjörður and Mosfellsbær: The profitable residential ring

Around Reykjavík, several municipalities form the capital region’s ring, each with its profile and opportunities.

Kópavogur, just south of the city, is the country’s second most populous municipality. It is home to one of Iceland’s largest shopping centers (Smáralind) and modern infrastructure. The Sky Lagoon spa, which has become a major tourist attraction, reinforces its international visibility. Prices per square meter are slightly below Reykjavík’s, while rents remain high. Gross yields are generally comparable, or even slightly higher, benefiting from both residential and, in some areas, tourist clientele.

Garðabær, further south, is an affluent residential stronghold, known for housing the official residence of the President of Iceland. The area offers a high quality of life, green subdivisions, and an image of stability. Again, investment here is more long-term, with a strong orientation towards long-term rentals to affluent households.

Hafnarfjörður, a medium-sized town to the southwest, is famous for its Viking culture, annual festival, and folklore related to supposed “elves” living in the surrounding lava fields. The town boasts prices softer than Reykjavík’s while remaining easily accessible. Its combination of harbor charm, cultural life, and proximity to the capital may interest investors looking to mix residential rental and, potentially, tourism.

Mosfellsbær, north of Reykjavík, presents itself as a gateway to the Golden Circle. Surrounded by mountains and hot springs, the municipality attracts outdoor enthusiasts. It offers attractive real estate prices compared to the capital, strong potential for family homes, and a strategic position for nature-oriented vacation rentals.

Simplified comparison table of capital region municipalities:

Municipality	Position relative to Reykjavík	Main Profile	Indicative Prices (€/m²)	Typical Gross Yield
Reykjavík 101	Center	Tourism, offices, mixed	5,500 – 6,200	4.5 – 5.2 %
Vesturbær 107	Immediate West	Chic residential, leisure	4,500 – 5,500	4.5 – 5.5 %
Kópavogur	Immediate South	Residential + commerce	4,000 – 5,000	4.0 – 5.0 %
Garðabær	South	Affluent residential	4,000 – 5,000	4.0 – 4.8 %
Hafnarfjörður	Southwest	Harbor town, families	3,500 – 4,200	4.5 – 5.0 %
Mosfellsbær	North	Nature, families	3,500 – 4,200	4.5 – 5.5 %

These figures illustrate a central observation: moving slightly outside the center often allows for improving your gross yield, without completely sacrificing appreciation dynamics, as projected price growth remains at 3 to 5% per year across the entire capital region.

Beyond the capital: High-potential provincial towns

Even though two-thirds of Icelanders live around Reykjavík, ICELAND is not just its capital. Some regional towns show an interesting combination of lower prices, higher yields, and positive economic trajectories, driven notably by tourism and local industries.

Akureyri: The “Capital of the North,” a credible alternative to Reykjavík

Akureyri is the country’s second-largest city, at the head of a northern fjord. Its modest size hides true regional centrality: hospital, university, dense cultural activity, cruise port, winter sports, and booming nature tourism. Real estate prices are significantly lower than in Reykjavík, with central apartments around 3,000 to 3,800 €/m².

For an investor seeking a better price-to-yield ratio without giving up on a city with full services, Akureyri clearly ranks among the best “neighborhoods” in the broader sense for investing in ICELAND.

Selfoss and the South Coast: Strategic residential living close to the Golden Circle

Selfoss, in the south, is a reasonable distance from Reykjavík, while being on the route to the Golden Circle and the major attractions of the south coast. The town is developing rapidly, with growing housing demand linked to the densification of the region and its role as a service hub for the surrounding agricultural and tourist areas.

Prices here are lower than in the capital, while rental demand is strong, driven both by families seeing it as a more affordable alternative and by proximity to tourist circuits. For vacation cottages or small furnished residences, yields can be significantly above 6%, with the south coast showing forecasts of annual appreciation between 5 and 7% in the medium term.

Húsavík, Westfjords, and tourist regions: The eco-tourism bet

Certain localities appear as niches for more adventurous investors, betting on eco-tourism segments and alternative accommodation.

The Westfjords, a very remote but spectacular region, remain at some of the country’s lowest price levels (1,500 to 2,500 €/m²). The rise of eco-tourism, trekking, and expedition cruises creates new accommodation needs, but the market remains niche. Price appreciation forecasts there are more modest (1 to 3% per year), making it a playground for development projects integrating accommodation within a broader tourist offering rather than a simple classic rental investment.

Reykjanes and Keflavík: Benefiting from the country’s gateway

The Reykjanes peninsula, home to Keflavík International Airport, combines several contradictory factors. On one hand, it’s the entry point for the majority of tourists, with relatively moderate prices (2,800 to 3,500 €/m²) and a large-scale development project, the “K64” plan, which aims to transform 55 km² of land around the airport into a mixed-use zone (housing, offices, logistics, tourism). On the other hand, the region has been hard hit by a resurgence of volcanic eruptions and the evacuation of the town of Grindavík, declared a risk zone.

ICELAND: A particular regulatory environment for foreigners

The question “best neighborhoods for investing in ICELAND” cannot be separated from the buyer’s status. The rules differ significantly depending on nationality and residence status and condition the very feasibility of certain projects.

EEA / EFTA vs. rest of the world

Citizens of the European Economic Area (European Union, Norway, Liechtenstein, Iceland) and EFTA benefit from a more flexible regime. If they are legally domiciled in ICELAND (with a “kennitala”, identification number, and a registered address), they can buy a property without special permission, provided they file a formal declaration. However, they cannot acquire agricultural land, a sector reserved for Icelanders.

Synthetic table of the acquisition framework for a foreigner:

Buyer Profile	Main Conditions
EEA/EFTA citizen resident	Free purchase (excluding agricultural land), mandatory declaration
EEA/EFTA citizen non-resident	Purchase in practice very complicated, requires establishing residency
Non-EEA citizen	Ministry authorization, professional use or “close connection,” max. 3.5 ha
Legal entity	Specific rules, control of shareholding and registered office

Important: owning real estate in ICELAND does not grant the right to residency or citizenship. The country does not offer a “golden visa” linked to real estate investment.

Taxation and transaction costs

On the tax front, ICELAND applies a relatively readable set of taxes, but which erodes net yields.

Municipalities levy an annual property tax, varying by property type and municipality, between 0.18% and about 1.6% of the assessed value. In Reykjavík, for example, the rate on residential property is at the floor of 0.18%. At purchase, transfer and registry fees are around 0.9 to 2.7% of the price, plus legal fees. The real estate agent’s commission, typically 1.5 to 2.5%, is most often borne by the seller.

For short-term tourist rentals, a reduced 11% VAT applies to nightly rates, while long-term unfurnished rentals are exempt.

Yields, prices, and dynamics: How to choose your neighborhood in practice?

Once these elements are laid out, the key question remains: in which neighborhoods is the balance between yield, security, and appreciation potential most interesting?

Center vs. periphery: Prestige versus profitability

In ICELAND, a fairly clear inverse relationship is observed between neighborhood prestige and gross yield level. Miðborg (101) and Vesturbær (107) offer higher capital gains prospects, driven by scarcity and centrality, but entry prices reduce yields to levels close to 4.5–5% on average. In the capital’s periphery (Kópavogur, Hafnarfjörður, Mosfellsbær), gross yields are more readily between 4.5 and 5.5%, with still dynamic rents and expected price increases on the order of 3 to 5% per year.

Long-term residential vs. short-term tourist rental

Rental yield projections clearly differentiate several segments:

– apartments in Reykjavík center: 4.5 to 5.2% gross,

– residential in the capital region: 4 to 5%,

– residential in Akureyri: 5 to 6.5%,

– vacation rentals in tourist areas: 6 to 8%,

– small hotels and guesthouses: 7 to 9%.

In other words, the neighborhoods in the center and first ring of Reykjavík are the best choices for long-term residential investment, combining steady demand, legal security, infrastructure, and appreciation. The more touristy areas (south coast, Húsavík, certain fjords) can generate higher yields from short-term rentals, but in exchange for marked seasonal volatility and sometimes stricter local regulations on platforms like Airbnb.

The tourism effect on central neighborhoods

In Reykjavík, the tourism boom since 2010 has resulted in an explosion of short-term rental supply, particularly in postal codes 101, 105, and 107. At one point, the 101 alone concentrated over a third of the capital’s Airbnb-style supply, with “hot spots” around Laugavegur, Þingholt, Kvosin, and the east of Vesturbær.

Sample investment scenarios by profile

In summary, several strategies emerge depending on the investor’s profile and risk appetite.

A long-term, wealth-preservation investor, aiming for capital preservation and moderate exposure to Icelandic growth, would do well to favor Miðborg, Vesturbær, Laugardalur, or Seltjarnarnes, with good-quality properties, potentially in well-insulated new buildings connected to geothermal heating. The primary target will be long-term rentals to solvent households or expatriates, with a long holding horizon.

A more opportunistic profile, interested in short-term rentals and eco-tourism, would explore Selfoss, the south coast, Húsavík, or some spectacular villages in the Westfjords, keeping in mind that high yields come with higher seasonal variability, regulatory risks, and, in some cases (Reykjanes, Grindavík), significant natural hazards.

Conclusion: Choosing neighborhoods with an Icelandic lens

Investing in the best neighborhoods for investing in ICELAND requires moving beyond some continental reflexes. The minuscule market size, high cost of properties, presence of volcanic eruptions, central role of tourism, and specific regulations for foreigners create a very particular environment.

In this context, Reykjavík and its region remain the backbone of any reasonable strategy, with well-identified districts: Miðborg as the showcase, Vesturbær as the chic safe bet, Hlíðar and Laugardalur as curious mixes of centrality, daily life, and better profitability, and the ring of Kópavogur, Hafnarfjörður, Garðabær, Mosfellsbær as a pool of middle and upper classes.

ICELAND will never be a mass market. But for a diversified portfolio, the combination of a robust economy, 100% renewable energy, a strong rule of law, and well-chosen neighborhoods makes it a singular, demanding, yet opportunity-rich real estate investment terrain for those who take the time to understand its specifics neighborhood by neighborhood.