When it comes to investment properties, there are a variety of options to choose from. But there are also a variety of conditions to think about prior to making your purchase. In the rental space, you basically have a choice between short term rentals and long-term rentals. There are other sorts of investments available, but these are the two basic types.
Many investors own a combination of both. If you’re curious why they wouldn’t just choose one type or the other, you came to the right place. In this article, we will discuss the differences between them and why you might choose one or the other.
Short Term Rentals
Short term rentals are typically defined as rentals that last for a few days to a few weeks. They are also generally furnished and provide utilities, cable, internet, and other amenities for their guests. They are sometimes referred to as vacation rentals and serve as an alternative to staying in a hotel.
Owning short term rentals can be extremely lucrative. However, it’s important to understand the pros and cons that are specific to short term rentals. Let’s take a look.
With short term rentals, you will almost always generate more revenue. This is because you have people circulating through the property on a regular basis, paying nightly rates while on vacation. Depending on the location, you can generally charge anywhere from $150-$350 per night. If the property is fully booked the majority of the time, you will generate a significant amount of income.
These properties can be rented out on a variety of platforms such as Airbnb, Home Away, VRBO and more. The key to making them successful is to understand the market where your rental is located and which of these platforms is the most popular for that market. Believe it or not, different markets are more partial to certain platforms.
Ability to Adjust Pricing
Unlike long term rentals, the owner of a vacation rental has the freedom to adjust pricing as they see fit. If inventory is filling up quickly, the owner can choose to raise the rent in order to maximize their profits. This works really well in markets that have busy tourist seasons. You can charge more during the busy season simply based on the supply-and-demand principle.
Ability to Use Them
The beautiful thing about owning a short-term rental is that you have the ability to use it whenever you want to. You can simply block the dates so that they are made unavailable on whatever website you rent it out on. This is important to many investors because it gives you a place to go on vacation without the added expense of hotels.
If you really love a particular city and you visit often, you should consider looking into the rental market in that area. If you find that the short-term rental market is healthy, that might be a great place for you to purchase a short-term rental. Then you can fully book it when you’re not using it, but can also visit whenever you want!
You’ll find that maintenance is also listed in the “cons” section, so let’s look at both sides of the coin. The good thing about short term rentals is that they have to be cleaned frequently and you can often pass the cleaning and maintenance fees on to the renter. Because someone is in the property several times per month, cleaning and resetting the space, you are likely to find any maintenance concerns long before they become serious problems. This allows you to address them in a timely manner and protect the integrity of the property.
When it comes to risk of receiving your rental payments, you’re definitely in a better spot with a short-term rental. This is because you have lots of people coming through the property on a regular basis. If renters book your property online, they will pay the online portal directly and the portal will deposit the money into your account after the stay. This is cool because you don’t have to worry about chasing people around to collect rent payments, which can be really stressful.
Heavy Management Needs
You already know that a short-term rental needs to be cleaned and reset multiple times per month for the next renter to come in. It’s almost like running a bed and breakfast. It requires cleaners, handymen, maintenance crews, landscapers, and more. Of course, you can pay people to do all of these things, but that will take away from your total income on the property.
Generally speaking, the maintenance and management fees for a short-term rental are much higher than for a long-term rental. Since it requires more work, the property manager will require more pay. If you’re a hands-on owner and you want to do all the work yourself, you can save on these fees, but be aware that it can quickly become a full-time job.
More Rules and Regulations
As we discussed earlier, short term rentals are basically like running a business. As such, there are rules and regulations that must be followed. Every city, state, and community will have different policies around operating a short-term rental. Some will allow it, some won’t, and some will just make it really difficult on you as the property owner.
This is because the short-term rental business through portals like Airbnb, VRBO, and others, are bringing revenue into various markets. As soon as the local government learns about a new business, they will generally want their cut! Conversely, cities who risk losing money as a result of vacation rentals outside of the downtown area, often impose strict guidelines on such businesses.
Long Term Rentals
Now let’s talk about long term rentals. These are generally unfurnished spaces that are rented for periods lasting 6 months or more. They serve as the full-time residence for the tenant during the period of the lease.
Your income is not likely to fluctuate very much with a long-term rental. Your tenants should be paying a monthly rate that you both agreed upon when you signed the lease. This is great for budgeting purposes because you know exactly how much is going to come in and when it’s going to come in.
The main caveat to this scenario would be if your tenant doesn’t pay their rent. That causes a whole other set of problems! But if you’re screening your tenants well (hint hint), you hopefully won’t have to deal with this situation very often.
With a long-term rental, you generally will have a lot less to worry about on a daily basis. This is because you have one tenant paying their rent once a month. It doesn’t get much simpler than that. Moreover, many long-term renters will stay in the same place for long periods of time. If you have a family renting one of your properties on an annual basis, they may stay there for several years!
Another great piece of the management puzzle is that property management for a long-term rental is usually much less expensive than it is for short-term rentals. Since tenants are usually in the space for an extended amount of time, there is less of a need for ongoing maintenance, cleaning, and marketing fees.
Another great thing about long-term rentals is that the tenants pay for the utilities. When a new tenant moves into the property, it is customary for them to setup their own water, electric, cable/internet, etc. There is no need for you to worry about these utilities unless the property becomes vacant, at which time you’ll need to turn them on to get the property ready for the next tenant.
With a long-term rental, you also don’t have to worry about furnishings. They typically come completely empty and it’s up to the tenant to bring in their own furniture and décor. As the landlord, you will usually be expected to provide appliances, but that tends to be pretty simple to do.
This isn’t necessarily a con, but it’s definitely something that could be more difficult than you might think. Finding good tenants is critical to being successful with long term rentals. Since your tenants will likely be with you for a long time, it’s helpful to have good ones!
There are a variety of tools available online to help you understand how to screen your tenants and what to look for. Getting this process nailed down before signing your first lease is a great strategy for success right out of the gate. Investors often make the mistake of being a little loose with their first rental, which has the potential for disaster.
One of the most difficult things to do as a landlord, is evict someone from your property. Not only is it a complicated legal process, it’s just not fun. You’ll need to send an eviction notice, file a complaint with the city clerk, go to the court hearing, etc. Like I said – not fun. The best thing you can do to protect yourself from this is to screen your tenants! Have an excellent screening process and evictions will be a lot less likely.
Long term rentals generate less revenue than short term ones. This is because you are only able to charge the amount that you agreed upon in the lease. You are further limited by what the rental market in your area can handle. That means if all of the comparable rentals around your property are going for $2,000 per month, it’s gonna be really hard for you to charge $3,000 per month and actually secure a tenant.
You Can’t Use It
Last, but not least, there’s the obvious factor that you can’t use the property whenever you want to. If you have long term tenants in your property, you can’t just pop in for the weekend and ask them to leave. You have a contract that says they will live in the property full time in exchange for “x” amount of dollars. You’ll be better off purchasing long term rentals in an area where you don’t necessarily want to visit on a regular basis, and short-term rentals somewhere that you’d love to vacation.
Making Your Decision
Now that you know a little bit more about short term and long-term rentals, you can start to build a plan based on your needs and what you’re interested in doing. There’s no right or wrong answer when it comes to which type of property to invest in. Only you know which of these items are the most important to you.
Here are some additional tips and tricks to consider when making this decision.
- Ask your realtor to help you investigate the regulations on rental properties in the area that you’re looking for a property. They will have access to this information and can help you make an informed decision.
- Follow the regulations in your area once you purchase a property. Getting caught violating them can have severe penalties that are rarely worth the risk.
- Choose your marketing platform wisely. Many new investors will put their property on multiple listing sites to make sure it gets booked. This is great in the beginning, but once you find a platform that consistently books your property, you can probably discontinue using the others and have one less thing to worry about!
- Screen your tenants and your property management company REALLY well. These two things can nearly make or break your rental business.
Real estate is a fantastic way to build wealth over time, but it will take some education and planning to get started. Working with a real estate professional whom your trust is an important piece of the puzzle. Make sure your realtor is doing his/her homework and helping you make the best decisions for your long-term goals.