Published on and written by Cyril Jarnias
Lunar landscapes, northern lights, black sand beaches, and hot springs make ICELAND one of the most attractive tourist markets on the planet. Beyond the postcards, another phenomenon has taken hold: the explosion of short-term rentals. Wooden cabins in the middle of nowhere, designer studios in downtown Reykjavik, luxury eco-lodges in the south… the country offers a range of opportunities rarely matched, along with a particularly structured legal and tax framework.
This article analyzes short-term rental opportunities in Iceland by assessing three key aspects: the market’s tourist potential, the economic profitability of investments, and the regulatory framework to follow. It aims to provide owners and investors with a clear vision to position themselves effectively, avoiding legal pitfalls and overestimations of returns.
A Tourism Market in Managed Overheating
Short-term rentals in ICELAND can only be explained by one central fact: the explosive growth of tourism. In less than fifteen years, the country has gone from a niche destination to a global star for city breaks and Nordic road trips. The numbers show a structural transformation of the economy.
ICELAND has become a regional tourism engine with approximately 2.3 million visitors per year, a multiple of its population (around 390,000 inhabitants). Tourism accounts for about 10% of GDP and nearly half of foreign currency earnings. This progression, triggered after the 2008 financial crisis and accelerated by the 2010 Eyjafjallajökull eruption, has profoundly altered the accommodation market.
Tourist pressure in Iceland is concentrated in a few specific areas: Reykjavik and its region, the south (Golden Circle, south coast, Blue Lagoon), the Snæfellsnes peninsula, and the north around Akureyri and Lake Mývatn. This hotel saturation creates strong demand for short-term rentals, from city apartments to isolated cottages.
The authorities, aware of the risks of overheating (pressure on infrastructure, environmental impact, housing crisis), have implemented a regulatory and fiscal arsenal that closely governs short-term rentals. This particular framework now defines the real opportunities: the potential remains considerable, but one must play by the rules, not against them.
Reykjavik, Heart of the Short-Term Rental Market
Reykjavik alone concentrates a large part of short-term rental listings and associated revenue. Downtown, the neighborhoods of the old port, Laugardalur, or Grandi have become genuine micro-markets where hotels, serviced residences, and Airbnb coexist.
Recent data on the capital gives a very concrete overview of the level of performance that short-term rentals can achieve.
Average Performance and Revenue Peaks
In the recent period studied, approximately 1,985 active short-term listings are recorded in Reykjavik. The vast majority are entire homes, with a predominance of one- or two-bedroom apartments, capable of accommodating around 3 to 4 people.
In many sectors like tourism, agriculture, or seasonal commerce, income levels and occupancy rates can fluctuate significantly depending on the time of year. For example, an employee at a ski resort will have high income and hours in winter but may face a period of partial unemployment or a summer switch. A synthetic overview of these variations allows one to measure their scale and economic impact.
| Indicator (Reykjavik, STR) | Typical Value |
|---|---|
| Number of active listings | 1,985 |
| Dominant type | Entire home, apartment/condo |
| Average capacity | 3.6 people |
| Median occupancy rate (year) | ~54% |
| Median ADR (Average Daily Rate) | ~$225 |
| Median monthly revenue | ~$3,552 |
| Top 10% – monthly revenue | ≥ $9,026 |
| Top 10% – ADR | ≥ $468 |
| Top 10% – occupancy rate | > 90% |
| Average booking lead time | 69 days |
In high season (June–August), the average monthly revenue is around $6,100, with an ADR close to $300 and an occupancy rate exceeding 60%. In low season (January, April, November), average revenues drop to about $3,300, occupancy falls to around 40–43%, while ADR only declines moderately, around $260.
This price resilience illustrates a key point: in Reykjavik, international demand remains strong even in winter, driven by the northern lights, city breaks, and cultural events. Seasonality exists, but the market is not deserted outside of summer.
Potential Profitability and Long-Term vs. Short-Term Comparison
Return estimates show the extent of the gap between traditional long-term rentals and short-term rentals in the capital. For a typical two-bedroom apartment in Reykjavik, a comparative table summarizes the scale.
| Indicator (2 bedrooms, Reykjavik) | Long-Term Rental (LTR) | Short-Term Rental (STR) |
|---|---|---|
| Estimated annual revenue | ~$19,440 | ~$77,330 |
| Average property price | ~$450,000 | ~$450,000 |
| Estimated gross yield | ~4.3% | ~17.2% |
These aggregate figures (based on market tool data) show a spectacular gross yield differential in favor of short-term rentals. Of course, they do not account for:
Short-term rentals involve higher operating costs (cleaning, linen maintenance, management, platform commissions), inevitable vacancy periods, as well as specific tax charges like VAT, income tax, and the tourist tax. They are also subject to strict regulatory constraints, notably caps on rental days, the potential requirement for a license, and the need for an appropriate tax classification.
But they explain why a portion of owners and investors have rushed into the breach, even if it contributes to the housing crisis. This is precisely the imbalance that the Icelandic state is now seeking to correct.
Beyond Reykjavik: The Rise of Regions and Coastal Villages
While Reykjavik concentrates the majority of listings, short-term rental opportunities in ICELAND extend far beyond the capital. Entire regions are only at the beginning of their development, with a purchase price-to-income ratio often more favorable than in the city center. For an investor, these areas offer both geographic diversification and direct exposure to major tourist routes.
Examples of Regional Markets: The Case of Rif (Snæfellsnes)
Rif, a small village on the Snæfellsnes peninsula, illustrates an emerging market where only a few dozen listings are active. In a recent year, there were about 22 listings, with profiles quite different from Reykjavik.
Performance indicators remain significant despite more moderate land costs.
| Indicator (Rif, STR) | Typical Value |
|---|---|
| Number of active listings | 22 |
| Dominant type | Private rooms, small hotels |
| Median occupancy rate | ~19% |
| Top 10% occupancy rate | > 41% |
| Median ADR | ~$149 |
| Top 10% ADR | ≥ $296 |
| Median monthly revenue | ~$1,037 |
| Top 10% monthly revenue | ≥ $4,392 |
| High season – average monthly revenue | ~$3,613 |
| Low season – average monthly revenue | ~$768 |
The market is narrower, seasonality is more pronounced, but limited competition and growing appeal for “off-the-beaten-path” destinations leave real space for well-positioned accommodations: designer guesthouses, cottages with a view, transparent domes for stargazing… Nearby localities like Ólafsvík, Hellnar, or Stykkishólmur present similar profiles.
Countryside Cottages, Renovated Farms, and Eco-Lodges
On a national scale, the types of properties best suited for short-term rental are very varied. You can find:
Discover a varied selection of vacation rentals for all tastes, from rustic to luxurious, in the heart of nature or in a residence.
Located by lakes or nestled in valleys, for a stay in the heart of nature.
Authentic and cozy bed and breakfasts, set up in old farms.
For a unique stargazing and northern lights experience under a clear sky.
Enjoy a luxurious stay with a private jacuzzi and a stunning ocean view.
Practical and functional accommodation in serviced residences, ideal for an urban or professional stay.
Numerous examples of “best-seller” properties regularly appear in platform rankings: small houses with a hot tub, seaside lodges, cozy family farms, glass igloos, isolated cabins in the middle of nature…
This diversity responds to two structural trends: travelers’ search for “unique” experiences, and the development of high-end ecotourism, with eco-lodges displaying very high occupancy rates (up to nearly 87% on average, compared to about 72% for classic hotels) and nightly rates that can far exceed $500.
Management Services: A Key Link to Profit Without Drowning
The rise of short-term rentals in ICELAND has given birth to an entire ecosystem of specialized management companies. For an absent investor or an owner who does not want to manage the day-to-day (cleaning, check‑in, pricing), these players can make the difference between a profitable project and a logistical nightmare.
Heimaleiga, Isleiga, Birta Rentals, Stay in Iceland: Some Profiles
Several structured companies share this short-term management market, notably in the Reykjavik region and in key tourist areas.
Officially founded in 2017 but stemming from an older family activity, the company has progressively industrialized its model: first multi-unit apartment complex, launch of SIF Apartments (the first large apartment-hotel built specifically for short-term rentals), creation of an internal laundry, expansion of its portfolio to residences like Blue Mountain Apartments, AVA, Swan House, Frost Apartments, or EIR Apartments.
Heimaleiga
A few indicators illustrate its rise and its recent average performance (on a sample of properties tracked by an analysis tool):
| Indicator (Heimaleiga) | Value |
|---|---|
| Average review score | 4.8 / 5 |
| Average occupancy rate | 88% |
| Average ADR | $419 |
| Average revenue per listing | $98,081 / year |
| Number of listings analyzed | 11 |
| Apartments cleaned (year 2022) | 11,592 |
| Staff in high season | Up to 80 people |
This combination of service quality (self check-in, professional cleaning, 24/7 customer service) and operational mastery explains occupancy rates higher than many competitors and the market average.
Isleiga, positioned specifically in Reykjavik, displays other interesting figures. On its managed properties, we observe:
– an ADR around $255,
– an occupancy rate of about 73%,
– an average annual revenue per listing close to $19,630,
– an average Airbnb rating of 4.9 / 5.
Compared to the Reykjavik market average, Isleiga’s rates are about 18% higher, with a slight occupancy deficit (–6%) but an overall revenue significantly lower than the city average, suggesting a positioning more oriented towards partial management or more modest-sized properties. However, the company increased its portfolio by over 30% in one year, a sign that demand for these services remains strong.
Birta Rentals, founded in 2013, illustrates another approach: a family business, a portfolio scattered across the country (luxury apartments in downtown Reykjavik, lakeside cabins, villas near the Golden Circle, vacation homes in Akureyri, chalets in Húsafell, etc.), and a promise to allow travelers to book two or three accommodations across the island in a single contract. This “itinerant package” logic fits perfectly with the structure of Icelandic tourism, dominated by road trips.
Finally, Stay in Iceland, created in 2016, has also positioned itself in full management for often absent owners, with classic services like pricing optimization, professional photography, communication with travelers, and cleaning coordination.
Management Fees and Co-Hosting
In Reykjavik, commission levels for short-term rental management follow a fairly wide range:
The maximum percentage commission that can be charged for premium property management services, including advanced concierge and revenue optimization.
Alongside these structures, independent co‑hosts are appearing, like Viktor, based in Reykjavik, active since early 2021, who charges about 8% per booking for co-management (communication, check‑in/check‑out, basic assistance). This type of profile allows small owners to stay below high management costs while securing day-to-day operations.
To Outsource or Not? The Calculation to Make
For an investor or owner, the question is not only the commission level, but the value generated. A professional manager who improves occupancy rate, increases ADR through dynamic pricing, and reduces cancellations can easily compensate for a 20–30% commission.
The analysis should therefore be based on compared scenarios:
| Scenario | Without Manager | With Pro Manager (25%) |
|---|---|---|
| Estimated gross revenue | $40,000 / year | $55,000 / year |
| Commission | 0 | $13,750 |
| Net income before taxes | $40,000 | $41,250 |
| Owner workload | Very high | Low to moderate |
In this stylized example, net income is higher with a manager despite the commission, while significantly lightening the operational burden. This type of simulation is essential before deciding.
Rules of the Game: Understanding the Legal Framework for Short-Term Rentals
Short-term rental opportunities in ICELAND are real, but they run up against a complex legal and fiscal framework. It is imperative to integrate it from the project’s conception, under the risk of facing back taxes or substantial fines.
The “Home Hosting” Regime: Renting Your Residence Within a 90-Day Limit
The first step in short-term rentals is the so-called “home hosting” regime. It applies to individuals who rent out their primary residence or another property on a limited basis. It is strictly regulated.
The main conditions are as follows:
The activity is reserved for individuals, limited to a maximum of two properties (including the home) with a cap of 90 rental days per year. Annual gross income must not exceed 2,000,000 ISK and each property is limited to 5 bedrooms or 10 people. Registration with the district commissioner, at a cost of approximately 9,200 ISK, is mandatory. Exceeding these thresholds subjects the entire activity to commercial hospitality rules (license and category II to IV standards).
Properties must also meet all safety requirements (smoke detectors, fire extinguishers, fire blankets, evacuation plans) and, for summer houses, have access to certified potable water.
Penalties for non‑registration can reach up to one million ISK per violation, making the idea of “trying” discreetly illusory.
Short-Term Rental as a Commercial Activity
As soon as one exceeds 90 days or 2 million ISK in annual revenue, or operates more than two properties, short-term rental is legally considered a commercial accommodation activity.
In this case:
– the operator must obtain an operating license (categories II to IV depending on services: accommodation only, with meals, with alcohol),
– the establishment must be located in a compatible urbanized zone (e.g., zones permitted by Reykjavik’s urban plan),
– checks for hygiene, noise, waste management, and, where applicable, compliance with food regulations apply,
– specific registration with the Public Health Council and the district commissioner is required.
This shift comes with tax consequences (VAT, business income tax) and a change in property tax category (higher property tax rates for commercial premises).
Taxation: From Income Tax to VAT and the Tourist Tax
Beyond zoning laws and operating licenses, a short-term rental project in ICELAND must integrate at least four major tax blocks: income tax, VAT, the tourist accommodation tax, and the municipal property tax.
Income Tax: Commercial Activity or Capital Income?
Since a reform in 2018, renting out real estate is in principle considered an activity generating taxable profits in the category of business income, with exceptions.
For individuals in “home hosting” who strictly respect the limits (maximum two properties, less than 2,000,000 ISK annual income, respect of the 90-day rule), rental income falls into the capital income category. In this case:
– it is subject to capital gains tax (22% for individuals),
– 50% of rental income can be exempt in certain cases (e.g., renting a residential property to a long-term tenant),
– no deduction of expenses is possible, except for a mechanism called “rent for rent” which allows deducting rent paid elsewhere.
If your rental income exceeds 2,000,000 ISK or if the primary residence conditions are no longer met (rental too long or too many properties), all your rental income is considered business income. It is then taxed according to the progressive income tax scale. You can deduct operating expenses such as cleaning, maintenance, loan interest, and management fees.
Income tax scales are structured in three monthly brackets, with rates reaching over 46% for the highest incomes, mitigated by a personal tax credit that makes part of the income non‑taxable.
Non‑residents who own a property in ICELAND and rent it out must also, in principle, declare this income to the Icelandic tax authorities. Icelandic tax residents are taxed on their worldwide income, with the possibility of a tax credit for taxes paid abroad.
VAT: The 2,000,000 ISK Threshold
VAT is another pivot to integrate. The standard rate is 24%, but a reduced rate of 11% applies to short-term accommodation (less than 30 days) in hotels, guesthouses, campsites, apartments, and similar spaces.
The essential rules are as follows:
Any person (including foreign) achieving VAT‑liable turnover exceeding 2,000,000 ISK over 12 months must register, at least eight days before starting the activity. Below this threshold, registration is not mandatory. For rentals under 30 days, an 11% rate applies to the total price including tax. Rentals over 30 days are exempt. If annual turnover is below 4,000,000 ISK, VAT can be declared annually; beyond that, declarations are bi‑monthly.
A technical point often forgotten: when the VAT rate is 11%, the VAT portion in a total price including tax is calculated by multiplying this price by 9.91%. This detail matters for distinguishing tax‑exclusive revenue from gross revenue.
Tourist Accommodation Tax: A Flat Rate Per Night
Since January 1, 2024, a specific tax applies to each overnight stay. It concerns:
– hotels, apartments, guesthouses,
– campsites and pitches for motorhomes and caravans,
– cruises.
Amount in ISK of the tourist tax per night and per accommodation for apartment or bed and breakfast rentals, for stays up to 30 days.
This tax:
– is included in the VAT base (it is itself subject to VAT),
– must be collected by the host from the guest, then remitted to the tax authority,
– is due even when the booking is made via platforms like Airbnb or Booking.com; the final responsibility lies with the host,
– requires keeping detailed records of stays, amounts collected, and guests, to be retained for several years.
The stated goal of this tax is to contribute to protecting natural resources and funding tourist infrastructure, with a perspective of carbon neutrality by 2040.
Property Tax: Beware of Category Change
Finally, the property tax, levied by municipalities, is another parameter not to be underestimated. Depending on the property’s use:
– a property used primarily as a residence can be taxed up to about 0.5% of its official value,
– a property classified as commercial premises (e.g., used professionally for tourist rentals) can be taxed up to about 1.32%,
– in some cases, municipalities can raise the rate to about 1.65%.
A change of use (residential → commercial) can therefore lead to a significant increase in local taxation, to be integrated into yield projections.
Regulation, Housing Crisis, and Announced Tightening
While the economic opportunities of short‑term rentals in ICELAND are obvious, their downside is just as evident: pressure on housing supply for permanent residents, soaring rents, real estate speculation in urban centers. Several studies and public reports have sounded the alarm, particularly regarding Reykjavik.
An in‑depth study on the “Airbnbification” of the capital showed that:
Analysis of the presence and characteristics of Airbnb listings in the capital region, revealing high concentration and a trend toward commercialization.
In 2018, there were over 4,000 Airbnb listings in the capital region.
About 60% of listings were concentrated in three central postal codes.
In some downtown neighborhoods, between 50% and 70% of apartments were listed on Airbnb.
About 77% of listings were for entire homes, a proportion higher than in many large European cities.
A significant share of hosts consisted of “professionals” or investors owning multiple properties.
In other words, a significant portion of the residential stock in central Reykjavik has been absorbed by the short‑term market, worsening an already acute housing shortage. The rate of apartments used for short‑term rentals is estimated at nearly 7% of housing, more than three times the average observed in other major European tourist cities.
The consequences are visible: rising rents, increased difficulty for young families or tourism sector workers to find housing near jobs, a feeling of “museumification” in some neighborhoods.
Faced with this situation, the Icelandic government has announced making the housing crisis a political priority, with the intention to:
– strengthen rules governing short‑term rentals in urban areas,
– more strictly limit tourist use to the primary residence and possibly a second home,
– implement new landlord registration obligations,
– revise tenancy laws to better protect long‑term tenants,
– promote the construction of affordable housing, notably non‑profit.
For an investor, this means that rules will likely tighten in the coming years, particularly in urban centers. Models based on acquiring multiple apartments to dedicate them exclusively to Airbnb risk being increasingly constrained, or even challenged.
Structural Trends: Eco‑Tourism, Seasonality, and Diversification
Beyond numbers and regulation, three major trends structure short‑term rental opportunities in ICELAND: the rise of high‑end eco‑tourism, the public will to smooth seasonality, and the development of alternative forms of accommodation (campervans, eco‑lodges, renovated farms).
Eco‑Lodges and “Nature + Wellness” Stays
ICELAND has established itself as one of the world leaders in eco‑lodge stays. These establishments, often of small capacity (10 to 30 rooms or units), combine:
– architecture integrated into the landscape (wood, volcanic stone, green roofs),
– almost exclusive use of renewable energy (geothermal, hydropower),
– wellness experiences (spas, hot baths, yoga, organic cuisine),
– a low‑impact policy: recycling, local sourcing, limiting motorized traffic, etc.
Eco-lodges, particularly in winter for the northern lights, show occupancy rates higher than classic hotels. They represent a major opportunity for investors capable of carrying out structured projects in the high-end segment (nightly rates from $550 to $1,200+), on the imperative condition of scrupulously respecting environmental requirements and avoiding greenwashing.
Smoothing Seasonality: The Winter Bet
Historically, ICELAND concentrated most of its visitors between June and August. This summer peak strained infrastructure, while leaving accommodations under‑utilized in winter. In response, the public sector and private companies have developed a full range of winter activities:
– glacier hiking and ice cave visits,
– super‑jeep tours, snowmobiling, dog sledding,
– northern lights hunting,
– music festivals, cultural events,
– spa and wellness tourism.
To increase bookings outside the summer season, adapt your accommodation and communication. Ensure safe road access, good insulation, efficient heating, and offer amenities like a jacuzzi or sauna to create a cozy atmosphere. Highlight the winter experience in your communication with photos of snow, northern lights, etc., targeting demand for eco-lodges and isolated cottages in particular.
Campers, Converted Vans, and Alternatives to House Rentals
A related segment, but one that influences demand for short‑term accommodations, is that of converted vans and campers. Renting an equipped vehicle allows travelers to combine transport and lodging, which:
– reduces their need for classic overnight stays,
– but creates increased demand for campsites, specially equipped parking, services (showers, shared kitchens).
The vacation home and campervan markets are not substitutes, but complementary: some travelers mix fixed accommodations and nights in a van, others choose a cottage as a base and take day trips.
For an investor or farmer with well‑located land, transforming part of the property into a legal, equipped micro‑campsite can represent a parallel opportunity, provided local rules are respected (ban on wild camping without authorization, respect for the environment, sanitary compliance).
Positioning Strategies: How to Seize the Right Opportunities
The density of information can be dizzying. Yet, a few sober guidelines emerge for those wishing to invest in or develop a short‑term rental activity in ICELAND.
An urban investor attracted to Reykjavik must integrate:
– a high entry price, but a very liquid market,
– a gross yield differential very favorable to short‑term,
– increasing regulatory risk (possible additional restrictions),
– strong competition, including from very seasoned professional managers,
– a very international clientele, heavy users of platforms.
To stand out, focus on quality (design, comfort, location), impeccable management (ratings above 4.8/5), and a clear strategy regarding regulation: either strict respect of the days allowed for home hosting, or an assumed transition to professional hospitality with the required licenses.
A rural owner or farmer with a potential bed and breakfast in the south, west, or north can, on the other hand, leverage:
– more reasonable land prices,
– a spectacular natural environment,
– growing demand for green stays and authentic experiences,
– the possibility of combining accommodation and activities (horse riding, educational farm, whale watching, etc.).
The most promising strategies in these areas are often:
Cornerstone of a competitive and sustainable tourism offering, these four axes allow maximizing the attractiveness and profitability of a property.
Qualitative transformation of an existing property (farm, cabin) while preserving and enhancing its authenticity and original character.
Obtaining recognized labels (Vakinn, Nordic labels) to attest to environmental quality and the experience offered.
Integration into effective sales channels via tour operators, online platforms, and specialized management companies.
Implementation of a polished online presence: multilingual website, storytelling on Instagram and other social media.
Finally, one constant imposes itself: in ICELAND more than elsewhere, short‑term rental cannot be conceived without integrating the long term – climate, tourist pressure, infrastructure capacity, social acceptability. The authorities have understood this, the residents too. The accommodation projects that will find their place sustainably will be those that create value while respecting this fragile balance.
A French business owner around 50 years old, with a financial portfolio already well structured in Europe, wanted to diversify part of his capital into residential real estate in Iceland to seek rental yield and exposure to the Icelandic krona. Allocated budget: 400,000 to 600,000 euros, without leveraging credit.
After analyzing several markets (Reykjavik, Akureyri, southern tourist areas), the chosen strategy involved targeting an apartment or small house in a dynamic neighborhood of Reykjavik, combining target gross rental yield of 7–8% – the higher the yield, the higher the risk – and potential for appreciation linked to tourism and the housing shortage, with an overall ticket (acquisition + fees + potential renovations) of about 500,000 euros. The mission included: market and neighborhood selection, connection with a local network (real estate agent, lawyer, Icelandic tax advisor), choice of the most suitable structure, and integration of the strict regulations on short‑term rentals.
This type of support allows the investor to benefit from the opportunities of the Icelandic market while mastering legal, tax, and rental risks.
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Cyril Jarnias is an independent expert in international wealth management with over 20 years of experience. As an expatriate himself, he is dedicated to helping individuals and business leaders build, protect, and pass on their wealth with complete peace of mind.
On his website, cyriljarnias.com, he shares his expertise on international real estate, offshore company formation, and expatriation.
Thanks to his expertise, he offers sound advice to optimize his clients' wealth management. Cyril Jarnias is also recognized for his appearances in many prestigious media outlets such as BFM Business, les Français de l’étranger, Le Figaro, Les Echos, and Mieux vivre votre argent, where he shares his knowledge and know-how in wealth management.
