A closer look at the pros and cons of long- and short-term rentals, so you can decide what’s best for you.
The basics of short-term rentals and long-term rentals
Investing in real estate and putting your hard-earned money towards an investment property takes guts. Whether you rent to tourists through Airbnb, Vrbo, or Booking.com or to long-term residents, each option has its own advantages and disadvantages.
In this article, we aim to help you understand the basics of both strategies, the pros and cons, marketing tips, and other things you may want to consider when selecting your real estate investment journey.
Short-term rentals: what are they?
The term “short-term rental” refers to a unit or portion of a unit equipped with amenities that a guest would need for 90 days or less, similar to a hotel experience. These units are generally zoned residential and may be subject to specific regulations and by-laws that pertain to renting out to guests for the duration of a vacation or short-term stay.
Renters of vacation homes or short-term units charge a nightly rate or create weekly packages for guests staying for more extended periods of time.
In the past two decades, the “sharing economy” has made these types of accommodations more and more popular as alternatives to hotels and motels. As a result, hotel chains are beginning to take notice of how well they handled the pandemic. Companies like Marriott are now entering into the vacation rental space with their own short-term rental platform called Homes and Villas by Marriott.
Considering this, taking a closer look at vacation rental properties as viable real estate investment is worthwhile.
The pros of owning a short-term rental
#1 Higher-income potential
A vacation rental offers you the chance to earn a higher income because you can charge a higher nightly rate compared to a long-term lease. Managing occupancy effectively during peak seasons and using a wise pricing strategy during low seasons can deliver attractive returns.
#2 No long-term commitment
As a short-term rental owner, you won’t have to make a long-term commitment to your renter(s). Having the power to vet your guests before accepting their reservations makes it easier to ensure that your guests will be respectful of your property and any house rules or policies you have. If the guest proves to be difficult, you can have the peace of mind that the duration of their stay will be a short one.
To assist you in adequately vetting your guest, platforms like Airbnb have implemented background checks to help give you peace of mind when accepting a reservation. In addition, there are also online tools to assist you in running more thorough background checks to help you make an informed decision.
#3 Personal use
You may have already purchased a cottage or a condo in the city. In this case, renting your space out for short-term rental purposes can turn your recreational or secondary home into an additional income stream and help offset monthly mortgage payments. If you haven’t purchased a vacation rental yet but are considering it, the benefits of doing so mean that, as the homeowner, you have the flexibility to block off calendar dates for your own personal use.
For many real estate investors covering the cost of a vacation property and being able to enjoy the space is a win/win.
#4 Hospitality is a rewarding experience
Managing a short-term rental or vacation property allows you to provide guests with a place to relax, recharge, and create lifelong memories. Meeting people from around the world and receiving positive reviews from guests who had a good experience are some of the rewards of this business model.
#5 Less wear and tear + more control over the property
Because short-term stays generally are the duration of a weekend up to two weeks with sporadic vacancies, these properties will have less traffic and use than a home with long-term tenants. Additionally, you can inspect the property between turnovers and make improvements, fix damages, or make changes if needed without negotiating with renters.
The cons of owning a short-term rental
#1 An unpredictable cash flow
Inconsistency in bookings is one of the greatest stressors for vacation rental owners. Vacation rental businesses experience peak and low season periods depending on the time of year and the activities that draw tourists to your area. You have to ensure that you’re making a consistent income by using a dynamic pricing strategy that maximizes your nightly rate during the time of higher demand and strategically pricing your property during the low season so that you don’t undercut your competition.
[H4] #2 The learning curve involved in property management
Owning a vacation rental property is one thing, but for success, learning how to manage your property efficiently and be a stand-out host will be necessary.
Tasks that come along with running a short-term rental include:
- marketing your listing
- managing bookings from online travel agencies
- vetting potential guests
- responding to inquiries and requests during a guest’s stay
- performing turnover cleanings,
- performing inspections, and maintenance duties
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If you don’t have sufficient time or aren’t interested in managing your rental property, many vacation rental management companies will do everything from marketing to bookings, inspections, and cleanings. When choosing a property management company, make sure you have a clear understanding of what the property management fees are and what services will be included.
#3 Working with more tenants and possible negative reviews
Renting out a short-term rental means less commitment to renters, but you’ll also have to deal with more people, and there’s a greater likelihood of a challenging situation with some of them. If this happens and you aren’t able to resolve the issue, it could result in a negative review that can hurt your brand and ultimately diminish the number of bookings you receive. When hosting guests, there is also the additional pressure to ensure that each guest enjoys their stay and that the property is well maintained with the necessary upgrades to stay competitive and lucrative.
Maintaining positive relationships with the neighbors
Vacation rentals can be a point of contention with some neighbors and cause complaints. Visitors may cause some neighbors to feel uncomfortable, and having neighbors perpetually on vacation could result in loud noises or parties late at night. Because of this, it will be crucial that you maintain a strong relationship with your neighbors and take proactive measures to help them feel more comfortable. For example, you can give them your phone number so they can call you rather than the police if they have a noise complaint.
Things to consider when investing in a vacation rental
Before investing in a vacation rental, here are a few things you’ll want to consider:
- Ensure that owning and operating a short-term rental in your area complies with local laws and regulations.
- Consider asking for a security deposit to deter potential guests who may be planning to use your property for a party and to offset any damages.
- Contact your insurance company to discuss insurance premiums
- Consult a tax law professional to see if any items qualify as tax write-offs that you are unaware of.
Long-term rentals: what are they?
Most long-term rentals are referred to as lease agreements that last at least six months. The owners and tenants of long-term properties typically draw up one-year agreements, especially if you’re renting a single-family home to renters with children who plan to enroll them in school and integrate into the community.
It is crucial to carefully weigh the advantages and challenges of owning a long-term property before making any investment decisions.
The pros of owning a long-term rental
#1 Less upkeep and maintenance duties
The advantage of owning a long-term investment property is that maintenance and upkeep aren’t as demanding. When renting short term, you’ll need to be available for cleaning and upgrading amenities and replacing consumables like toiletries. Tenants who rent long-term usually maintain the grounds and are responsible for maintaining the interior (aside from significant repairs) and stocking the property.
#2 Consistent monthly rent
Another reason many property owners choose long-term rentals is that they can count on dependable monthly rent to provide a consistent monthly income. This allows you, as the investor and homeowner, to plan and forecast your revenue year-round.
#3 Less turnover
With less turnover comes much fewer administrative tasks. With a short-term rental, there is a constant need for marketing, answering inquiries, making reservations, and all the other duties that accompany hosting a vacation rental.
#4 Less operating costs
You will also save on potential management fees if you choose to rent to long-term tenants, such as hiring a cleaning service, paying online travel agency booking fees, maintenance fees, and using software to automate your workflow if you choose to subscribe to one.
The cons of managing/owning a long-term rental
#1 Potential of having to deal with an eviction
You must screen potential long-term tenants to avoid leasing to an unqualified tenant. However, even with a thorough screening of a prospective renter from time to time, you may rent to an individual who chronically misses paying their rent, complaints, and demands a lot of attention, or doesn’t properly maintain the property. In this case, as the property owner, following the eviction process to regain access to your property and rent the property out to new tenants can be a long and expensive process.
#2 Less control over the property
Renting long-term means having much less access and control over the property. In the case of short-term rentals, you have the opportunity to check in on the state of the property regularly and make upgrades as you see fit. However, with a long-term tenant, you will have to respect the landlord-tenant laws in order to gain access to the property or make any changes.
#3 Unable to use the property for personal use
It is possible to block off time on your calendar when you rent a short-term rental, so you, your family, and friends can enjoy the space, but when you lease a long-term property, it becomes someone else’s private space, and you are not able to use it for your own enjoyment.
#4 Lower profit margins
It’s also important to note that a long-term rental will likely have lower profit margins. While you can depend on receiving consistent monthly rent and not have to worry about vacancies or low seasons, the trade-off is that you won’t be able to charge the premium on nightly rates that you can charge in the vacation rental space.
Things to consider when operating a long-term rental property
These are a few tips to assist you in successfully renting long term:
- If you have good tenants living at your property, consider offering them an attractive incentive like a free month’s rent if they sign an extended lease agreement beyond a standard one-year agreement. This way, you can have peace of mind knowing that you’ve secured qualified tenants for a longer period of time and won’t have to go through the screening process again next year.
- When drawing up your lease agreement, make sure to have a professional look it over and ensure that the specifics, such as who is responsible for the upkeep of the home, are clearly stated.
- Ensure that your agreement is in line with your state and federal regulations.
There’s no right or wrong answer at the end of the day. Choosing whether to become a landlord for a long-term rental property or the host and property manager of a vacation rental comes down to your financial goals, how comfortable you are with fluctuating monthly income, your interest in dealing with fewer turnovers, and whether your investment property is in a vacation destination and how much time and money you have to invest in property management