A buyer touring a property in Sedona this summer had the same idea plenty of people have had before her: buy the main house, keep the detached casita as a bonus, and let short-term rental income offset the mortgage. The listing agent mentioned the casita's rental history. What nobody mentioned until she asked directly was that Sedona's rules changed on September 14, 2024. Since that date, any accessory dwelling unit issued a certificate of occupancy can only operate as a short-term rental if the owner lives in the main house on the same parcel. Buy the property as a second home and leave the casita to run itself, and the casita's rental license is worthless.
That single rule is a preview of the real question buyers should be asking when they compare Sedona to Flagstaff. Most comparisons start and end with price. Sedona's single-family median sale price ran close to $1.1 million over the three months ending in June 2026, down 11.5 percent from the same window a year earlier. Flagstaff's median sat around $710,000 over the three months ending in May 2026, down a smaller 3.3 percent. That gap of roughly $400,000 is real, and it shapes plenty of buying decisions on its own.
But if you're buying with rental income in the underwriting, the price gap tells you less than a population figure buried in a state bill that hasn't become law yet.
An Ordinance That Was Already Tight Before This Year
Sedona didn't wait for state lawmakers to act. The city has spent the past several years building one of the more detailed short-term rental codes in Arizona, and it keeps adding to it. Every property advertised as an STR needs its own permit, at $210 a year, and as of January 1, 2026, renewing late now carries an automatic fee: $50 if you're two to ninety days late, $100 beyond that. Special events, of any kind and any size, are banned outright. Weddings, corporate retreats, wellness workshops, none of it is allowed on a licensed STR, and the city treats this as a zero-tolerance rule rather than a judgment call.
The ADU restriction that caught the summer buyer off guard fits the same pattern. It wasn't written to punish existing operators. Sedona grandfathered in guest quarters that already had documented short-term rental history before the ordinance took effect. It was written to slow the addition of new STR inventory built out of guest houses and casitas, which had become one of the easiest ways to add a second rentable unit to a single lot.
That restriction only makes sense against the backdrop of how saturated Sedona's STR market already is. As of February 2026, the city had roughly 1,805 active short-term rental listings, up 62 percent from 1,113 in 2021, in a city with a year-round population of about 10,300. Do the math and that's close to one active STR permit for every six residents. Arizona's statewide preemption law still prevents Sedona from capping that number outright or banning rentals by classification, so the city has been reaching for every other lever available: permit fees, ADU restrictions, zero-tolerance event rules, and stepped-up enforcement.
Flagstaff Just Caught Up, Fast
Flagstaff took a different path for years. The city didn't formalize short-term rental licensing until November 2023, well after Sedona had already built out its framework. That gap closed abruptly this year. The Flagstaff City Council approved updates to its short-term rental code with a second reading on May 19, 2026, and the changes took effect July 1. The annual registration fee jumped from $185 to $250, the maximum the state currently allows. Owners must now prove occupancy status for any accessory dwelling unit used as an STR, carry at least $500,000 in liability insurance, and run background checks on guests within 24 hours of booking. Smoke alarms, carbon monoxide detectors, and fire extinguishers now have to meet hotel-grade standards, not just residential code.
In other words, Flagstaff spent 2026 writing rules that look a lot like the ones Sedona had already been living under. The two cities are converging on similar compliance requirements. What they are not converging on is how much further either city can go from here, and that's where the population number comes in.
| Sedona | Flagstaff | |
|---|---|---|
| Year-round population | About 10,300 | About 78,000 |
| STR licensing formalized | Long-standing, tightened repeatedly since 2022 | November 2023 |
| Active STR listings | About 1,805 as of February 2026 | Not centrally reported at comparable scale |
| Annual STR permit fee | $210 | $250 as of July 2026 |
| ADU as a separate STR | Only if owner occupies the main house (since Sept. 2024) | Proof of occupancy now required (2026 update) |
| Median sale price | About $1.1M (3 mo. ending June 2026) | About $710K (3 mo. ending May 2026) |
| Falls under SB1076's 70,000-population threshold | Yes | No |
The Number That Actually Divides Them
Arizona's 2016 preemption law, Senate Bill 1350, is still the foundation everything else sits on. It keeps cities from banning short-term rentals outright or capping how many permits they issue, which is why Sedona, for all its restrictions, still cannot simply stop new STRs from registering. State lawmakers have spent 2026 debating whether to change that, and one bill in particular draws a line straight between these two towns.
Introduced earlier this year, SB1076 would let cities and towns with a population under 70,000 set a maximum number of STR permits and impose minimum distance requirements between rental properties. Larger cities, the bill specifies by name, would not receive this authority: Phoenix, Scottsdale, Mesa, and Tempe are excluded. Flagstaff, at close to 78,000 residents, sits over the threshold too. Sedona, at roughly 10,300, sits well under it.
That means if this bill or something like it becomes law, Sedona could gain the power to cap its STR inventory. Flagstaff could not, at least not under this particular bill, regardless of how crowded its own rental market gets. A separate measure, HB 2429, would apply more broadly and was still working through the Senate as of this summer after passing the House 36-19 in March. But the population-based bill is the one that treats these two towns differently by design, and it's the one worth watching if your investment thesis depends on rental supply staying finite.
What This Means If You're Underwriting Rental Income
None of this is a reason to avoid either market. It's a reason to underwrite them differently.
- If you're buying in Sedona expecting to run a guest house as a separate rental, confirm in writing whether the ADU has a certificate of occupancy issued before September 14, 2024, and whether it carries documented STR history. That grandfathering detail determines whether the math works at all.
- If you're buying in Flagstaff for rental income, budget for the compliance costs that arrived this July: the higher permit fee, the insurance minimum, and the hotel-grade safety equipment. These are new fixed costs that didn't exist a year ago.
- If your holding period runs past the next legislative session, treat Sedona's smaller population as a variable, not a footnote. A city under 70,000 residents has a realistic path to permit caps that a city near 78,000 does not, under the bill currently on the table.
- Ask for the property's STR permit status directly from the city, not just the seller's representation. Both cities have moved to stricter proof-of-occupancy standards, and a prior owner's rental income doesn't transfer automatically with the deed.
Price, not pace, is where Sedona's softening actually shows up. The median sale price fell 11.5 percent over the three months ending in June 2026 even as homes moved faster than they had the year before, averaging 48 days on market compared to 60, with monthly sales volume up as well. Flagstaff tells a smaller version of the same story: prices down 3.3 percent over the three months ending in May 2026, with days on market also compressing, averaging 31 versus 40 the year before. Neither pace tells you anything about which city's rental rules will look different in three years. Only the population number does that.
A Few Questions Worth Asking Before You Write an Offer
Does an existing STR permit in Sedona transfer to a new owner? No. Permits are tied to the property and its compliance history, not automatically to whoever holds the deed, and the city can review occupancy status again at renewal.
Can Flagstaff's HOA rules override the city's short-term rental license? Yes. The city license only confirms compliance with municipal code. If the property sits inside an HOA that restricts or bans short-term rentals in its CC&Rs, that governs regardless of what the city allows.
If SB1076 or a similar bill passes, would it affect STRs that are already permitted? The bill as currently written addresses future permit caps and spacing rules going forward. Existing operators should still confirm renewal terms directly with the city, since permit conditions can be revisited at renewal even without new legislation.
Buying a second home in either town is still fundamentally a lifestyle decision first. But if rental income is part of the plan, the ordinance language and the population column matter as much as the listing price. That's the kind of detail that's easy to miss scrolling through comparable listings and easy to regret missing after closing.
If you're weighing Sedona against Flagstaff for a second home, or trying to figure out how either market's rental rules affect what you should offer, ROCO Luxury Homes can walk through the current permit landscape property by property. Book a Private Consultation before you write the offer, not after.
