Military service did not dampen the entrepreneurial spirit of Scottish immigrant Simon Berkley. While still serving in the Israel Defense Forces, the 29-year-old set up his company, "Stay at My Place," on Facebook after noticing that more and more of his friends were looking to sublet in Israel for short periods of time.

Very quickly, however, Simon says he understood that the real market potential was to be found elsewhere: in second homes that lie empty for most of the year, and which are now being targeted with increased local property tax (arnona ) payments, under the recommendations of the Trajtenberg Committee tasked with finding ways to reduce Israel's high cost of living.

Today, the company rents out apartments in Tel Aviv, Netanya, Jerusalem, Herzliya Pituah, Eilat and Ra'anana. Ninety-five percent of the apartments are owned by foreigners and rented for short periods, usually to tourists visiting Israel on vacation.

"I began renting a couple of years ago when I became concerned that our Tel Aviv property was lying empty for months at a time, in a city where living space is at a premium," says Richard, a property owner from Great Britain who works with the company, who preferred not to give his last name.

U.K. immigrant Naomi Chanoch, who set up her property management company "Home to Home" four years ago, says she has seen a definite growth in the market since she started the company. "People are always asking me if I will rent their flats out for them," she says. "When I first started out there were a few web sites you would advertise on, and now there are a lot of new companies who specialize in this," she says, adding, "The market for this is huge."

Indeed, in the current global economic climate, people who have less disposable income are "looking for ways to save," says Simon. A night in one of his Tel Aviv apartments costs between $100 and $350, while a night in a Tel Aviv beachfront hotel can cost that or more for only a room. What's more, staying in an apartment in Tel Aviv in particular has become even more popular as "people are starting to catch on to Tel Aviv being a cool place to go," says Simon.

Meanwhile, Israel is still falling short of some 18,000 hotel rooms to accommodate the Tourism Ministry target of attracting 5 million tourists a year by 2015. With this shortfall, growth in the vacation rentals market is to be expected, says Amnon Liebermann, spokesman for Tourism Minister Stas Misezhnikov. According to Tourism Ministry figures, in the first half of 2011, 2 percent of Israel's approximately 3.4 million tourists stayed in rented apartments. In 2010, a year that saw a record number of visitors to Israel, 1 percent stayed in vacation rentals; in 2009 that figure was about 2 percent.

In some cities, however, it appears that supply is actually outpacing demand. Debbie, a U.S. immigrant based in Modi'in, says the number of vacation rentals in her city has exploded since she first started renting out her granny flat 10 years ago to supplement her income and help pay a mortgage she and her husband could not afford. "We were the only ones, but now everyone is doing it," says Debbie, who preferred not to give her last name. Debbie says she has seen the local market become saturated with those offering apartments for rent, while the demand has appeared to stay steady. In a city with a large immigrant community and little hotel accommodation, the vast majority of her guests have been in town to visit family. "I have never had a tourist," she says.

Although she no longer rents out the secondary suite, today Debbie rents out an apartment, which her parents bought down the road from her, while they are out of town. She does it "not to make millions, but to cover costs," she says.

It's a sentiment that many property owners share, according to Simon. Especially with the spike in arnona costs, the vacation rentals market is a no-brainer for property owners, who can earn some NIS 10,000 a month from their properties "for doing nothing," he says.

Sharon Marcovitz Hart, a 57-year-old Canadian and regular visitor to Israel, says she first started staying in vacation rentals in the 1990s during summer vacations with her husband and children. Marcovitz Hart says she chooses apartments over hotels primarily because of price.

"Once you have more than two kids, and you start needing two hotel rooms, the prices are astronomical for what you get [at a hotel]," says Chanoch.

On top of the price, Marcovitz Hart says she also prefers the experience of staying in an apartment. Vacation rentals allow her and her family to feel more "at home," more like locals and less like tourists, she says.

"I have a lot of clients who know Israel," says Chanoch. "They want to spend two weeks in Tel Aviv and they don't want to be in a hotel. It's a different way of life, you get to see how people live."

Thirty-year-old Brett Wilks from South Africa also opted recently for a vacation rental, though for different reasons. When Wilks came to Israel in January for a wedding, he chose to rent an apartment with six friends as an alternative to staying in a hostel.

"We didn't want the noise that comes with hostels," he says. "We can afford to stay in better accommodation, but hotels are too expensive."

Vacation rentals do have their share of risks, as Wilks can attest. With the large majority of transactions happening online, tourists risk being misled by glossy online photographs of what looks like decent accommodation. The apartment Wilks and his friends stayed in turned out to be a "dump," he says, and the experience left him with the feeling "that the entire operation is a sham."

Lack of oversight is also an issue, according to Liebermann, of the Tourism Ministry, who notes that some of the market is still unregulated. "Tourism services need to be given at the highest level, with oversight," he says. With hotels, tourists "get a better service," says Liebermann, "and there is recourse if anything happens."