Short-term vs Long-term Rentals

Investing in real estate primarily to rent out requires owners to decide how they will use their new home before buying a rental property. Purchasing a rental property can be done for short-term or long-term rental. You are entirely in control of the decision.

But owners and property managers need to consider a variety of factors when deciding how long and how often to rent their vacation properties. Based on the nature of your property and your goals, you can usually make an informed decision. However, each of these rental strategies has its advantages and disadvantages.

Our expertise on this topic can help you decide whether short-term or long-term renting will work for you.

Among the key topics that will be discussed are:

• An analysis of both types of vacation rental strategies
• Pros and cons of each strategy
• How to make an informed decision

What is a Long-term Rental?

A long-term rental property is usually rented or leased out to a tenant for an extended period of time. Depending on the landlord or property management company, this can range from 30 days to 6 months. Tenants generally pay the homeowner each month and assume other expenses, such as utility bills, regardless of whether they are renting an entire house or just a room.

As indicated by the growing market trends for 2022, long-term rentals are on the rise. As such, a study conducted by AirDNA found that gross bookings that meet or exceed 28 days will grow the fastest in 2022. Pre-pandemic, long-term stays accounted for approximately 14%-17% of total reservations on Airbnb. Since then, 28-plus-day stays account for approximately 24% (Q1 2021) and 25% (Q2 2020). The percentage remained at 21% in Q1 2022. The number of vacation homes being rented for 21-30 days has increased by 68% according to VRBO statistics.

Who is the Customer base for Long-term Rentals?

Tenants of long-term rentals are usually people who are looking to use them for work-cations, relocations, or just on holiday. Long-term rental clientele generally want a “home away from home” with all the comforts of a cozy getaway. These tenants range from traveling Nurses, gig workers, digital nomads, remote workers, as well as families who are in between homes, and so on.

Long-term Rentals: Advantages

Vacation rental properties that offer long-term stays have tangible benefits that may appeal to your bottom line. Here's how:

1. Low Vacancy Rate

Investing in long-term rentals will lower your vacancy rate much more than investing in short-term rentals due to their tendency to be occupied for longer periods.

2. Less Guest Turnover

You'll have fewer administrative responsibilities to worry about, such as documentation, key handover, and even advertising. When your tenant signs the lease, you know to a certain degree how long you can anticipate them to stay.

3. Guest / Tenant Screening

You can use a professional tenant screening service such as AutoHost or Superhog. An eviction check, rental history evaluation, income verification, credit, and background check, and other services may be included in the process. The risk of a bad guest/tenant cannot be eliminated, but you can limit it as much as possible by screening the guests.

4. A Simpler Management Process

A long-term rental requires less time than a short-term rental. As a result, you won't have to worry as much about advertising, handling frequent turnovers, or making sure the rental property is ready for rent.

5. Steady Monthly Income

Long-term rental properties offer the advantage of having a stable monthly rental income. In addition, long-term renters must pay monthly and quarterly utilities, including electricity, gas, water, and even the internet. Long-term rentals usually have annual leases, which means there is less chance of the property going unoccupied. The market conditions and seasonality of the property have less impact on keeping it vacant.

6. Low Operational Expenses

Long-term tenants handle basic items like cleaning, gardening, repairs, and maintenance. Also, tenants tend to take better care of long-term rental properties because they see them as their homes rather than hotel rooms.

7. Tax Benefits

Tax breaks are also one of the perks. For instance, landlords can deduct travel expenses related to rental activity, the cost of repairs is fully deductible, and mortgage and credit card interest are the biggest deductions.

Long-term Rentals: Challenges

1. Low Earning Potential

The rent cannot be increased once the rental agreement has been drawn up. Generally, long-term leases also mean a discount as much as 30%-40%. Additionally, you won't be able to charge premium rates during peak season. Rental income is fixed for the stipulated rental agreement period.

2. Higher Turnover Costs

Depending on how long the rental is, you may not ‌step foot in the property for a while. When a tenant doesn't keep the property clean, substantial damage can occur over time.

3. Risk of Damage

There is usually a higher risk of causing damage to a property the longer you spend in it. Renters with pets or young children could cause more wear and tear on appliances, floors, and walls. Deposits should be collected and your renters' contract should include a damage clause.

Noteworthy points:

• Long-term stays may bypass local short-term stay restrictions, which typically cap short-term rentals at 30 days or less. To prevent any issues with your rental strategy, check your local laws.

• Research the demand for long-term stays in your area and optimize your marketing to attract long-term tenants to assess this risk.

What is a Short-term Rental?

A short-term rental often refers to the renting of a residential unit or accessory building for a short period. The maximum length of stay for a rental varies by state and jurisdiction, but generally does not exceed 30 days

Who is the Customer base for Short-term Rentals?

Short-term rentals are for everyone! Millennials are the key demographic in the short-term rental market, with most guests being 24 to 35 years old. Short-term rental customers vary, and you may find a variety of segments, so you can choose your audience accordingly. You can also consider catering to a specific market, such as business travelers, families, pet owners, couples, or all of them.

Short-term Rentals: Advantages

1. High Income Potential

Typically, short-term rentals in tourist areas cost more than long-term rentals. During holidays, festivals, sporting events, concerts, and peak periods, you can expect to charge a premium and can adjust your nightly rates according to the demand. This results in high-income potential.

A short-term rental property may generate 2-3 times more rent per month than a long-term rental property, this would depend largely on the local market conditions.

2. Flexible Pricing

The price of a short-term rental can be easily adjusted to meet the prevailing market rate, maximizing rental income. Dynamic pricing tools could be used to accomplish this to gain maximum benefits.

If a long-term rental property can generate $2500 per month, a short-term property may make twice as much. That number increases even more in popular vacation spots.

3. High Demand

The oldest law of economics applies more to short-term rentals than to long-term rentals – supply and demand. For example, if you own a beach home, demand surges during the warmer times of the year. Short-term rentals can create substantial income compared to the carrying costs of the property (mortgage, insurance, association fees, taxes, etc.).

4. Less Wear and Tear

The average length of stay in short-term rentals ranges from a few days to a few weeks at most. Since these are short visits and quick turnovers, the property gets cleaned far more often than under a standard long-term lease. It gets cleaned at least a few times a week between guests, making it cleaner than one occupied by long-term renters who may or may not clean and keep the place tidy.

In terms of wear and tear, Airbnb guests rarely spend much time at the property. In most cases, they're visiting an area for tourism or business purposes, so they're out and about at work or exploring the area, spending less time indoors. This results in less time-wear on the property, resulting in lower maintenance costs.

5. Increased Maintenance

With more frequent tenant turnover, short-term rentals receive regular, professional-level maintenance on a much more consistent basis than long-term rentals. Properties are cleaned, and minor repairs are addressed almost immediately upon one guest vacating and the next guest taking occupancy.

6. Flexibility

The flexibility involved for owners who rent out their properties short-term is much greater. You have the option of blocking off calendar periods you want to keep free for your own personal use inconveniencing no one by doing so.

Additionally, as the property owner, you can also use the property for your own vacations as needed.

7. Tax Benefits

The best tax breaks for homeowners go to short-term rental owners. Make sure you are familiar with the tax laws in your state. In general, a place could qualify for the 14-day rule if it is rented for 14 or fewer days per year. If a property owner rents for 14 days or less a year, they will not have to pay taxes. Insurance, maintenance, and utilities related to the rental can also be deducted.

The best thing about running a short-term rental is meeting people from all walks of life. Your next Short-Term Rental acquaintance could become a lifelong friend!

Short-term Rentals: Challenges

1. Inconsistent Income

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. When a property is rented long-term, it’s much easier to predict how much rental income will be collected each month.

2. High Maintenance Costs

There are many maintenance costs associated with short-term rentals such as housekeeping, gardening, pool maintenance, repairs, and general upkeep. The maintenance of short-term rentals can be more intense. Typically, a property rented short-term needs to be fully furnished and well maintained, and may need to be consistently stocked with personal items such as linens, toilet paper, and other supplies.

3. Utility Expenses

A tenant in a short-term rental usually expects a landlord to pay for utilities such as electricity, gas, water, trash, and even cable TV and internet service. While utility expenses may be added to the rent, all of these additional bills can end up being too many items to manage for some real estate investors.

4. Local Laws and Regulations

Many cities have stricter rules and regulations 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 and owners may be required to collect an occupancy tax for short-term rentals.

5. Risk Factors

You are likely to experience theft, breakage, or problems with renters when there is a high volume of people passing through your doors. Investing in a security system could help in avoiding such incidents.

6. Fluctuating Demand

Due to short stays, there may be periods when no one rents the property, especially during the off-season. There is also a chance of a high vacancy rate if prices are not competitive and not on par with similar properties in the vicinity.

Key Takeaways

What may seem like a downside to you may be a benefit to someone else. A short-term rental's earning power, however, differentiates it from a long-term rental.

According to Forbes, short-term rentals can generate about 30% more profits than long-term rentals. However, to determine what you should do, weigh the pros and cons for yourself and make your decision. Whether long-term or short-term rentals are a better investment depends on your personal goals and circumstances. How much time, effort, and money you put into maintaining the property rely entirely on how you feel about the potential risk/reward of higher income versus lower risk, steady income.

How can Hostaway Help?

Managing short-term rentals requires more oversight, but the additional income is well worth the effort, especially with property management software that automates your tasks. The benefits of long-term and short-term renting go far beyond those listed here. However, if you would like to understand more, working with trusted and experienced property management software is strongly recommended for property owners.

Hostaway is an All-in-One vacation rental software solution for growing property managers. We provide tools to automate and simplify marketing, sales, communication, operations, reporting, and accounting. Our software differs from every other PMS and Channel Manager because it is flexible and grows with your business. It’s customizable and we provide a fantastic team that helps you set it up and help you on your path to success.

Schedule a demo call at your preferred time with one of our product experts to receive actionable advice and discover how Hostaway can fit your business model.