Long-term vacation rentals might seem to have fallen by the wayside as short-term rentals have gained so much popularity thanks to websites like Airbnb. Many homeowners and property managers are left perplexed as to why so many people are ready to put in all the effort and deal with the hassle. Getting the highest return on your investment is the main objective when you put time and money into a property. Short-term rentals and long-term rentals are the two main divisions in the field of residential real estate investing.
Both short-term rentals and long-term rentals offer benefits and drawbacks, just like practically any other type of investment. Your comfort level and expectations will determine what kind of residential real estate you include in your entire portfolio. Let’s compare the advantages and disadvantages of short-term and long-term rentals.
The Differences Between Short-Term and Long-Term Rentals
A short-term rental is commonly rented anywhere from one day up to 30 days. Vacation houses, extra bedrooms, and single-family rental homes with tenants on month-to-month leases are a few examples of short-term residential rentals.
A long-term rental is often rented for a fixed annual rent over a 12-month lease term. Although some local landlord-tenant regulations may permit leases longer or shorter than one year, the majority of residential leases are for twelve months at a time.
Pros of Long-Term Rentals
Long-term rentals have always been the preferred choice for real estate investors because they are seen as more reliable and provide steady returns. Listed below are the benefits of investing in long-term rental properties:
1. Regular Income
With long-term rental properties, your revenue will come in slow and steady. Longer leases, which are often annual ones, on long-term rentals reduce the likelihood that the property would go vacant and stop producing income, which is one of the main reasons individuals choose to invest in long-term rentals. Additionally, the likelihood of the property remaining empty is significantly less affected by seasonality and market conditions.
2. Paid Utility Bills
If your long-term vacation property is occupied by tenants, the guest may frequently be responsible for paying the utility expenses. In certain seasons, particularly in the winter and summer, this might result in significant cost savings.
3. Easier to Manage
The owner of a long-term rental property need not bother about advertising the home, keeping it clean on a regular basis, or even things like lawn upkeep once a renter has been found. Long-term tenants typically pay their own expenses and contribute to some of the property’s maintenance.
4. No Need to Furnish the Place
Long-term rental tenants typically bring their own furniture so they can decorate it anyway they like. Therefore, unless specifically stated in any marketing materials, property owners are not required to invest in items like furniture and other appliances.
5. Obtaining a Security Deposit is Possible
Landlords of long-term rentals frequently demand a security deposit before renters may move in. Any concerns about property damage can be allayed by this. If there is no significant damage to the property and the tenant leaves it in the same condition as when they moved in, they will typically receive their entire security deposit back.
Cons of Long-Term Rentals
Long-term rentals have consistently been chosen by investors because of their potential for passive income. Cons are always important to consider, though. Here are some things to think about.
1. Rent Increases Are Subject to Certain Restrictions
Less freedom to raise the rent is one of the main disadvantages of having a long-term rental. Most lease agreements provide that the rent will stay constant for the duration of the lease. That means the rent price specified in the long-term lease agreement sets a limit on the rental property’s prospective cash flow.
2. Decreased Profit Margins
Long-term leases typically have lower profit margins when compared to short-term ones. Even now, long-term rentals make a great source of passive income. However, since the rent price is fixed for the duration of the lease, they might not bring in as much money as a short-term rental in a well-liked tourist area.
3. Landlord Regulations
When renting out a home, a property owner is required to abide by a number of laws and rules. For instance, there are regulations in several states requiring landlords to notify tenants in advance before accessing a property, even for maintenance. Laws that govern application and eviction procedures are also in place.
4. Possibility of an Unsuitable Tenant
A long-term rental often includes a 12-month agreement, so it’s crucial to thoroughly vet potential tenants. Even when a renter signs a lease, it is still possible that they will not be the perfect tenant, and due to the landlord restrictions stated above, evicting a tenant may be an expensive process.
5. Higher Potential for Harm
In contrast to people who visit for a short period of time, long-term tenants typically live on your property full-time and may eventually create more wear and tear and damage. Therefore, with a long-term rental property, it may be more difficult to detect and fix minor issues before they become significant and costly. A landlord may decide to conduct property inspections on a quarterly or semi-annual basis in order to respect a tenant’s rights.
Pros of Short-Term Rentals
Tourists’ preferred choice right now is short-term lodging. These days, you can find Airbnb and VRBO rentals practically anywhere. Here are some explanations as to why a potential investor could think about providing a short-term rental.
1. Affordable Prices
Short-term rentals are more subject to the supply and demand principle than long-term rentals. Owners of short-term rental properties are free to adjust the rent for different tenants as they deem suitable. They may be able to raise their rent and generate more cash if there is greater demand for their property over the summer. Long-term rental homeowners are not restricted to the one-year lease contracts that they encounter.
2. Higher Gross Income Potential
Short-term rentals in destination locations are frequently listed at higher pricing with nightly rates. A short-term rental property may produce 2-3 times the amount of monthly rent compared to a long-term rental, depending on local market demand and conditions. A home that rents for $2,000 per month on a long-term basis might fetch double that amount on a temporary basis.
3. Use for Personal Travel
Many investors like to use their vacation rental property for personal purposes while also renting it out to others while not in use. It is significantly simpler for the owner to reserve the times they want to utilize a property when it is posted on the short-term rental market.
4. Repairs are Easier to Keep up With
These homes are frequently simpler to maintain, much like the less regular wear and tear of short-term rentals. Because short-term rentals are maintained better and are cleaned and ready for new tenants more frequently, they are less likely to sustain long-term harm. Owners of short-term rentals have easier access to the property and can make repairs without upsetting the tenants.
5. Greater Adaptability
To keep their options open in case they decide to sell, some investors offer a brief rental arrangement. A buyer searching for a primary residence will not desire a home that is rented to a renter, even though another real estate investor may prefer the concept of having a tenant in place.
6. Tax Benefits and Deductions
Owners of vacation homes can deduct some—or all—of their short-term rental costs to lower their tax obligations. This comprises administration costs for vacation rental properties, labor costs for cleaning and upkeep, utility costs, channel marketing commissions, and other marketing costs.
7. The Option to Have a Different Tenant
You can end up with a renter who isn’t a good fit for you and your property or doesn’t pay rent on time, even if adequate screening was done to select a tenant in the first place. Short-term rentals make it possible to prevent this.
Cons of Short-Term Rentals
Owners of short-term rentals may enjoy a number of advantages, including the possibility for profit, but there are a few drawbacks to take into account before implementing this investment strategy. The following are some difficulties short-term rental owners could experience.
1. Income Stability is Not a Given
Even though short-term rentals have the potential to increase gross rental income, there is always a chance that the house will remain empty for an extended period of time. With long-term rentals, the property will be rented all year round, therefore this is not the case.
2. Markets with Competition
In highly competitive real estate markets, short-term rentals are frequently run to reduce vacancies and increase earnings. However, there is ongoing competition between short-term rentals in the same area. This means that in order to make their property visible to visitors, owners must be vigilant and keep marketing it.
3. There are Too Many Obligations
A vacation property can be difficult to own and maintain. It might be easy to feel overwhelmed by the amount of work required for marketing, cleaning, guest service, maintaining all of your internet listings, continually adjusting rates to meet demand in the rental market, and doing repairs.
4. Higher Operational Costs
Particularly if a tenant uses the rental as a substitute for a hotel room, short-term rentals may require extra maintenance. Short-term rental properties often need to be fully equipped, kept in good condition, and occasionally restocked with personal things like towels, toilet paper, and linens.
5. Upkeep and Repairs
Unfortunately, having new renters move in each week as you rent out your property could lead to more damage. To keep the home tidy and well-maintained, a short-term rental may require more upkeep than usual. The entire cost of operation may go up as a result.
6. Short-Term Renting Regulations in Your Community
For property leased to a renter for a prolonged duration, many communities have tougher regulations than for short-term rentals. Occupancy may have a maximum time limit, and owners may be forced to collect an occupancy tax for short-term rentals, which is comparable to a hotel room tax, depending on the city or the HOA.
The Deciding Factor
Every disadvantage of one choice is, of course, a benefit of the other. It’s probable because we haven’t reached the tiebreaker that it appears to be a coin toss that might go either way depending on the obstacles the property management finds to be more difficult.
Two criteria determine whether you choose a long-term rental or a short-term rental:
1. The Property Manager’s Level of Comfort
Long-term rentals might not be for you as the owner or property manager if you feel uneasy giving up control of your home for extended periods of time. On the other side, choosing a long-term rental will be simpler if you don’t want to put in the extra work required to manage a short-term rental.
2. Location
It makes more sense to choose a short-term rental if the home is in a well-known tourist area because you may earn more money from it during high peak seasons, which will more than make up for the off-peak seasons.
To Sum Up
Although both the long-term and the short-term have benefits, there are a few other things to keep in mind. There is neither a right or wrong answer when deciding whether long-term or short-term rentals are a better investment for you.
It fully relies on your attitude toward the risks and rewards of larger income potential compared to lower risk, steady income, as well as the time, effort, and money you invest in keeping the property maintained and occupied. However, before choosing which course is best for them, all property managers need to be informed of both because each alternative has its own distinct advantages and disadvantages.
