Long-term Rental Vs Short-term Rental | What is the Best Strategy?

With platforms such as Airbnb bringing much popularity to short-term rentals, it may feel as though long-term vacation rentals have taken a bit of a back burner position, leaving lots of homeowners and property managers scratching their heads wondering why so many people are willing to do all that work and deal with the headache. When you invest time and money into a property, getting the best possible return on your investment is the main goal. In the world of residential real estate investments, things tend to boil down simply into two categories – short-term rentals and long-term rentals.

Like almost any form of investment, both short-term rentals and long-term rentals have their advantages and drawbacks. Deciding what type of residential real estate to have as part of your overall portfolio depends on your comfort level and expectations. Let's look at the pros and cons of short-term rentals vs long-term rentals.

Short-term Rental Vs Long-term Rentals - The Definitions

A short-term rental is usually rented anywhere from one day up to 30 days. Examples of short-term residential rentals include vacation rental homes, spare bedrooms, or single-family rental homes with tenants on month-to-month leases.

A long-term rental is typically rented with a 12-month lease term at a fixed annual rent. Most residential leases are for 12 months at a time, although some local landlord-tenant laws may allow for leases longer or shorter than 1 year.

Long-term Rentals - The Pros

Long-term rentals are viewed as more stable and consistent investments, and for this reason, they have been the traditional option for property investors. Listed below are the benefits of investing in long-term rental properties:

1. Consistent Income:

Slow and steady—that’s how you’ll earn income with long-term rental properties. One of the main reasons people opt to go into long-term rentals is that longer, typically annual, leases on long-term rentals mean less of a chance the property will go unoccupied and not generate income. In addition, seasonality and market conditions have far less of an effect on keeping the property from sitting vacant.

2. Utility bills paid:

If you have tenants occupying your long-term vacation rental, then oftentimes, utility bills can be passed on to the guest. This can create significant cost savings in certain seasons, especially during winters and summers.

3. Less to manage:

Once a tenant has been found for a long-term rental the owner doesn't have to worry about marketing the property, cleaning it regularly, and even things like lawn maintenance. For the most part, long-term tenants take care of their own bills, plus some of the upkeep of the property.

4. No need to dress the property:

Tennants for long-term rentals usually come with their own furniture as they'd like to style it to match their taste. This means that property owners don't have to invest in things like furniture and other appliances unless promised on any marketing material.

5. A security deposit can be collected:

It’s common for long-term rental landlords to require a security deposit before tenants move in. This can ease any worries about damage to the property. Tenants can generally get their full security deposit back if no major damage was left behind and the property is in the same condition as when they moved in.

Long-term Rentals - The Cons

Investors have consistently favored long-term rentals for their passive income potential. However, there are always cons to think about as well. Here are some factors to consider:

1. Limitations to increasing the rent amount:

One of the biggest drawbacks to having a long-term rental is less flexibility in raising the rent. Lease agreements normally call for the rent price to remain the same through the term of the lease. That means the potential cash flow from a rental property is limited by the rent price outlined in the long-term lease agreement.

2. Lower Profit Margins:

When looking at short vs long-term rentals, long-term units tend to have lower profit margins. Long-term rentals are still an excellent source of passive income. However, because of rent price is constant throughout the lease period they may not generate the same income as a short-term rental in a popular vacation destination.

3. Landlord Regulations:

As a property owner, there are certain laws and regulations that must be followed when renting out a property. For example, many states have laws requiring landlords to give advance notice before entering a property, even for maintenance purposes. There are also laws regulating the application and eviction processes.

4. Risk of an unqualified tenant:

Since a long-term rental usually has a lease of 12 months, screening prospective tenants is critical. Even after they’ve signed a lease, there’s still the possibility that the tenant may not be ideal and because of the landlord regulations discussed above evicting a tenant may be a costly affair.

5. Higher risk of damage:

Long-term renters generally live on your property full-time and could cause more damage and wear and tear over time than guests only staying for a few days. Therefore, it can be harder to catch and repair minor problems before they become big and expensive with a long-term rental property. To avoid violating a tenant’s rights, a landlord may choose to perform property inspections on a quarterly or semi-annual basis.

Short-term Rentals - The Pros

Short-term rentals are the go-to option for tourists at the moment. You can now find Airbnb and VRBO rentals in almost any location. Here are some reasons why an investor may wish to consider offering a short-term rental:

1. Flexible Pricing:

The oldest law of economics applies more to short-term rentals than to long-term rentals – supply and demand. Short-term rental homeowners can change the price of rent between occupants as they see fit. If there is a higher demand for their rental in the summer season, they can raise their rent and produce more income. They are not limited to year-long lease terms that long-term rental homeowners experience.

2. Higher gross income potential:

Short-term rentals in destination areas are usually listed at higher prices with nightly rates. Depending on local market demand and conditions, a short-term rental property may generate 2-3 times the amount of monthly rent compared to a long-term rental. A dwelling that may fetch $2,000 per month as a long-term rental may go for double that as a short-term property.

3. Personal vacation use:

Many investors like to make personal use of their vacation rental property and rent it out to others when it is not in use. When a property is listed on the short-term rental market, it is much easier for the owner to block off the dates they would like to use the property.

4. Easier to keep up with repairs:

Similar to the less frequent wear and tear of short-term rentals, these properties are often easier to maintain. Short-term rentals are cleaned and prepared for new occupants more regularly, which translated to better-maintained properties thus helping to prevent any long-term damage to the property. If any maintenance problems arise, short-term rental owners have easier access to the property without disturbing residents.

5. Increased flexibility:

Some investors offer a short-term rental agreement to keep their options open if they are thinking about selling. While another real estate investor may like the idea of having a tenant in place, a buyer looking for a primary residence will not want to have a home rented to a tenant.

6. Deductions and tax breaks:

Vacation rental owners are eligible to write off some—or all—of their short-term rental expenses to reduce tax responsibilities. This includes vacation rental property management fees, cleaning, maintenance and repairs, utilities, channel marketing commissions, and other marketing fees.

7. Not tied to the same tenant:

Even if proper screening is gone through to find a tenant in the first place, you can get stuck with a renter who ends up not being a good fit for you and your property or doesn’t pay rent on time. This can be avoided with short-term rentals.

Short-term Rentals - The Cons

Short-term rentals can provide owners with several benefits, such as profit potential, but there are a few cons to consider before adopting this investment strategy. Here are some of the challenges short-term rental owners may run into:

1. Consistent income is not guaranteed:

While short-term rentals may hold the promise of generating more gross rental income, there’s always the risk the home will sit vacant for an extended period of time. This is not the case with Long term rentals where the property will be rented year-round.

2. Competitive Markets:

Short-term rentals are often operated in competitive real estate markets to minimize vacancies and maximize profits. However, short-term rentals in the same locality are in constant competition with each other. This means that owners must constantly be aware and continue marketing the property in order to make it visible to guests.

3. Too many responsibilities:

Owning and managing a vacation home can require a lot of work. Marketing, cleaning, responding to guests, keeping up with all your listings online, constantly setting rates to match rental market demand, conducting repairs—it can quickly become overwhelming.

4. Higher operating expenses:

Short-term rentals can be more maintenance intensive, especially if a tenant is using the rental as an alternative to a hotel room. Property rented short-term typically needs to be fully furnished and well maintained, and may need to be consistently stocked with personal items such as sheets, towels, and toilet paper.

5. Maintenance and Repairs:

Unfortunately, renting out your property to new tenants each week could result in increased wear and tear. A short-term rental may need more maintenance than normal to keep the property clean and well taken care of. This can increase overall operating costs.

6. Local laws regulating short-term rentals:

Many municipalities have stricter rules for short-term rentals than for property leased to a tenant for a long term. Depending on the city or the HOA, occupancy may be limited to a maximum period of time, and owners may be required to collect an occupancy tax for short-term rentals, similar to a hotel room tax.

The tiebreaker

Of course, every con of one option is a pro of the other. If it seems like a toss-up that can go either way, depending on which challenges the property manager finds more daunting, that’s probably because we haven’t gotten to the tiebreaker.

Whether to go for a long-term rental or a short-term rental is dependent on two factors:

1. The comfort level of the owner or property manager.

As the owner or property manager if you are uncomfortable with relinquishing control of your property over long periods of time then perhaps long-term rentals are not for you. On the other hand, if you don't want to do the extra work that comes with running a short-term rental then it will be easier to opt for a long-term rental.

2. Location! Location! Location!

If the property is in a popular tourist area then it makes more sense to opt for a short-term rental and make more money out of it in high peak seasons that will more than cover up for the off-peak seasons.

In conclusion:

While both long-term and short-term have advantages, there are several factors that should also be considered. Like many investment decisions, there is no right or wrong answer to whether long-term rentals or short-term rentals are the better decision for you.

It depends entirely on how you feel about the risk/reward of higher income potential versus lower risk, steadier income, as well as the time, effort, and money you put into keeping the property maintained and occupied. In truth, however, both options present their own unique challenges and rewards, and all property managers need to be aware of both before deciding which route is right for them.

If you are having trouble running your short-term rental business consider Hostaway. Request a free demo to find out how we help out property managers around the world run their businesses.