Short-Term Vs. Long-Term Rentals
Renters Warehouse Blog
When it comes to rental property, you’ll want to ensure that you’re getting the best returns possible.
One consideration that can impact the returns that you’re generating is the way that you choose to rent out your property; whether you rent it as a short-term rental, also known as a vacation rental, or as a long-term residential rental.
While long-term residential properties can be a great way to generate wealth and when done right, can even serve as a form of passive income, vacation rentals offer a number of advantages as well. Namely, the fact that in some especially hot vacation markets, they can be a way to generate more income, or at least, more gross income.
But are vacation rentals everything they’re cracked up to be? The answer is: it depends! The profitability of your property as a vacation rental will hinge on a number of factors, including where the property’s located –and how popular that destination is. Another thing to consider is management costs. With a short-term rental, there are a lot more maintenance and ongoing management costs, which can quickly eat into your profits.
If you’re on the fence about operating your rental as a long-term or vacation unit, or if you’re in the market for another investment property and considering a vacation rental, then read on. In this article, we’ll delve into the options and pros and cons of each to help you discover the best option for you.
What’s Considered a Short-Term Rental?
Before we get started, let’s quickly clarify what is considered a short-term rental. While the exact definition can vary, most would consider a short-term rental to be anything rented out for less than a month. Vacation rentals, including Airbnb rentals, are usually considered short-term rentals, while long-term rentals are those that are rented out for long periods of time.
Now, let’s take a look at some of the advantages, along with some of the downsides, of residential and vacation properties.
Vacation rentals can be a good investment: depending on the market and the cost of management. There are a few other factors that should go into your decision as well.
- The Potential for More Income: Short-term rentals can bring in more money than long-term residential units. Of course, your gross income will often be offset by expenses –so you’ll want to keep in mind that your net income will most likely be much lower. The reason that these properties tend to bring in more income is that they’re often located in popular vacation destinations, and are usually priced higher than their long-term counterparts since vacationers are usually willing to pay more than residents.
- More Flexibility: Another reason you might consider a vacation rental is if you are planning to visit the area yourself and would like to stay there. With a short-term rental, the owner has the ability to use the property whenever they wish; you can simply block out the days that you’d like to stay at the property. Having a vacation rental can be a great way to avoid having to stay in a hotel when visiting, while still generating an income the rest of the year. This is in contrast to a long-term rental, which is almost always continually occupied unless you time your visits to a period when you’re in between tenants.
- Damage is Often Easier to Spot: While short-term rentals may see a lot of visitors, the short-term aspect means that there’s time to keep up with maintenance, and crucially, to spot small problems before they escalate into bigger issues.
- The Ability to Adjust the Rent at Any Time: Another benefit of short-term rentals is that you can adjust the rent whenever you’d like. As long as it’s in line with the market rate, that is. With a long-term rental, you’ll need to wait until the lease expires. Or until the next month if your tenants are on a month-to-month lease.
- More Expenses: While these properties often generate more income, keep in mind that a good portion of that will go into management and upkeep. Cleaning and management costs for short-term rentals are much, much higher. You’ll have to ensure you are either cleaning yourself in between visitors or have a reputable housekeeper who does it for you. Business Insider estimates that the cost of short-term rentals is similar to hotels, hovering between 60-75%.
- Loss of Income During the Off-Season: Another downside with short-term rentals is the dreaded off-season. While peak season means that your rental might be occupied, the off-season means more vacancies and the loss of income. If your short-term rental is a vacation rental in a popular vacation spot, you must consider if the area is popular year-round, or if there are peak times when it is most popular. Be sure to factor in the cost of your rental sitting empty for long periods during the off-season.
- More Legislation to Follow: Another potential downside to short-term rentals is that there’s often more legislation to follow, especially in hot markets, where cities may have implemented their own regulations surrounding short-term rentals. Some cities have limited the amount of time a property can be rented as a vacation rental, while others (Santa Monica, CA for instance) have even banned them altogether or restricted them from operating in certain districts.
- Higher Risks: The events that have taken place over the last couple of years have made things financially challenging for many short-term rental owners. Lockdowns and travel restrictions that were implemented in many states impacted the vacation industry. Meanwhile, single-family residential units (SFR) generated strong returns throughout 2021 and much of 2020 as well. Having a long-term residential unit can help to insulate you from financial loss due to unexpected shutdowns and shifting government policies.
Long-term rentals are a tried-and-true investment. They’re a popular form of rental for good reason: they produce steady and reliable income. Of course, there are pros and cons to long-term rentals as well. Here are a few things to consider.
- Reliable Income: First up, one of the benefits of long-term residential units is that it allows you to generate steady, predictable income. When it comes to long-term rentals, you don’t have to worry about extended vacancies or seasonal downtime. While it is certainly possible to have some gaps in between tenants, your downtime in between tenants should be minimal. Ideally, 2-3 weeks at the most.
- Lower Operating Expenses: With long-term rentals, your expenses are much lower than with short-term rentals. With residential units, your tenants will pay for most of the operating expenses such as utilities, electricity, water, sewer, and more.
- Easier Management: Another benefit of long-term rentals is that they are easier to manage and often much more cost-effective too. Managing long-term rentals requires some work upfront with tenant sourcing and screening, but after that, it is just lease enforcement, management, maintenance, repairs, and rent collection; unlike short-term rentals which require constant upkeep and cleaning (sometimes daily). This makes a significant difference in terms of cost. It’s estimated that for vacation rentals, you can expect 30% of your income go straight to management, due to the extent of work that’s required overseeing this type of property.
- Less Income: One of the main risks of having a long-term rental is that in a popular, booming tourist destination is that you could be losing money if you’re running a long-term rental as opposed to a short-term one. Still, this depends greatly on the market in question and what your returns would be after expenses.
- Risk of Unqualified Tenants: Long-term rentals carry the risk of unqualified tenants gaining access to your property. Of course, bad guests are a risk with short-term rentals too, although their duration will most likely be much shorter. Fortunately, though, this risk is one that can be mitigated by implementing an airtight tenant screening policy. It’s the best way to reduce your risk and ensure that you get qualified tenants in your property. See 11 Tenant Screening Mistakes You’ll Want to Avoid.
- Less Flexibility: Long-term rentals also have less flexibility. You can’t simply raise the rent or use the property when you need. The loss of flexibility can lead to loss of profit if you’re not careful to plan ahead.
- Challenging Maintenance: Long-term rentals tend to experience less wear-and-tear than their heavily-used vacation counterparts, but there’s a downside to this as well. Maintenance often goes unperformed or undetected with long-term rentals, especially when there are longer tenancies. Delays can lead to more extensive repairs or maintenance needing to be done once the issues are finally discovered. Still: this is one reason why having routine maintenance and inspections are so important. This step is something that can help to prevent undetected maintenance.
Which Option’s Best for You?
There is no right or wrong way to invest. Instead, it’s all about choosing the best route to help you reach your goals the most effectively. So make sure you take the time to sit down and assess your big-picture objectives from the start. This will help you to create an investment strategy that’ll enable you to reach your goals, and save you from wasting time and resources, not to mention tying up your capital in an asset that’s just not performing as well as it could be.
Start by setting long-term goals. Where would you like to be in ten, twenty years? What type of returns are you hoping to generate by that time? How much income do you need to have coming in each month? What does that look like practically? Maybe you need to invest in five or even ten properties, with each one generating cash flow of 10-12%. Or, maybe you’d like to set up your rentals, or vacation properties, to operate independently of you so that you can generate passive income. Determine what you need to reach your goals, and then look for properties that will allow you to reach them. Finally, make sure you set those properties up to operate in a way that’ll fit your needs.
Then there are markets to consider as well. Depending on your goals, the market that you will want to invest in will vary. Some investors look primarily for cash flow, others for appreciation. Many look for both. The type of property that you invest in should dictate the market that you’ll be investing in. Many properties that tend to do well as short-term rentals are located in hot vacation markets. These areas tend to experience better appreciation however; the returns in terms of cash flow are often lower in these locations as well. For long-term residential real estate, you may be better investing in a market in the Midwest, or a suburb that’s located just outside of a booming metropolis. These areas may not be ideal for vacation rentals, but they can be ideal if you’re looking for a long-term residential property that’ll generate predictable cash flow each month. See good cash-flowing markets to invest in.
Take a look at this guide: A Look at the Housing Market as we Enter 2022 for a look at markets to consider investing in for 2022.
At the end of the day, make sure you’re clear on your goals, and never generalize. Just because someone says that a specific market is good, doesn’t mean that every property in this market will yield the same returns. You’ll still want to do your research, assessing individual investments, in order to find something that’ll generate the returns that you’re looking for: whether it’s a short-term or a long-term rental.
Do you own a rental property? Or maybe you’re looking for one? If so, you’ll want to head over to the Renters Warehouse Research Center. There you can find up-to-date data on the local housing market, allowing you to assess its health and eligibility as a rental market. Check out stats on housing appreciation, employment, population growth, and more.
Or, take a look at our available inventory of investment properties, ready to go, many of them complete with tenants.
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