It’s a great question. And honestly, it all depends on your rental strategy and the type of investment property you want. There are benefits and downsides to both.
That’s why we’ve developed this quick comparison guide to help determine which rental strategy is right for you.
Short-term vs. long-term rental properties
A short-term rental property, or a vacation rental, is a furnished living space available to rent for short periods. Everything from condos to single-family homes can be turned into vacation rentals. Most vacation rentals are leased at a set nightly rate. And many property owners list their short-term rentals on sites like Vrbo and Airbnb.
Short-term rentals offer many benefits for real estate investors, including higher income potential. The downsides of vacation rentals include fluctuating income based on seasonality and the time and effort required to manage a revolving door of new tenants.
A long-term rental property is a “traditional” rental property. It’s typically an unfurnished living space rented out to tenants for an extended period. Most long-term rental properties are rented out on a one-year lease agreement, but some may be rented out monthly. Property owners charge monthly rents instead of nightly rates and typically list the properties on sites like Realtor.
Long-term rentals offer many benefits to real estate investors. They include steady cash flow through monthly rent and less turnover. The downsides of long-term rental properties can include the legalities of tenant screenings and creating solid lease agreements.
|Feature||Short-Term Rentals||Long-Term Rentals|
|Longer-term lease agreements||X|
|Rapidly Growing Market||X|
|Access to unique markets||X|
|Fewer operating costs||X|
Let’s take a closer look at the benefits and downsides of short-term and long-term rental properties.
3 benefits of short-term rentals
1. Higher income potential
Vacation rentals in destinations like Nashville and Orlando have tremendous income potential. Why? Property owners can charge higher, competitive nightly rates than they could for an equivalent long-term rental property.
Let’s break it down.
Let’s say you own a single-family home near the beach in a tourist town. The average nightly rate for similar properties in the area is $275 per night. The average monthly rent is around $2,000 per month. If you decide to use it as a vacation rental, you’d need to rent it out just 87 days, about 12 weeks, each year to generate the same income that you’d get if it were listed as a long-term rental property.
According to Airbnb, the average vacation rental occupancy rate is 46%. If your property is occupied 46% of the year (175 days), you could earn $48,180. That’s double what you’d make if it were listed as a long-term rental. And, that amount doesn’t factor in nightly rate increases during peak season.
2. Rapidly growing market
The total vacation rental market in the United States accounts for over $13B in revenue in 2022 alone. That market size is expected to reach $20B by 2025. A +53% growth in market size means there will be plenty of demand from travelers choosing vacation rentals for the next few years.
3. Access to unique markets
One of the benefits of investing in short term rentals is getting access to markets that simply don’t work for long term rentals. Many investors crave diversification of markets and short term rentals allow you to access some of the larger cities or tourist destinations where the yields on long-term rentals are very low.
Vacation rentals are not subject to the same legally binding leases as long-term rentals. You get to determine when others can rent your vacation home and for how long. That means you have the freedom to block weeks or months out of the year where you can utilize the property for your own use.
3 downsides of short-term rentals
1. Tenant turnover
It’s one of the most complex parts to manage when investing in a short-term rental property. Depending on the location and season, you may be leasing to new guests every few days. This means managing everything from check-in to check-out and ensuring the property is thoroughly cleaned between tenants. It can be time-consuming and overwhelming.
Another potential downside related to tenants that’s important to note is the lack of control around tenant screening. Some listing sites have extraordinary vetting processes, while some have none. Be sure to keep this in mind when listing your vacation rental.
2. Fluctuating income
Vacation rentals may have more significant income potential, but it’s not consistent income. The reason? It’s seasonal. The average vacation is about five days long, usually during peak seasons like summer and the holidays. That means there will be a lot of time when your vacation rental is vacant. And vacant rentals don’t generate income.
3. Property management fees
As a vacation home rental owner, you’ll be responsible for all cleaning, upkeep, maintenance, and utilities. This includes hiring a cleaning service, lawn care service, all repairs on the home, electricity, water, trash, sewer, and internet. The fees associated with managing a vacation rental property can add up – even if you pay a property management company to help. However, these are qualifying tax deductions, so keep track of them.
3 benefits of long-term rentals
1. Consistent income
That’s right! Since long-term rental properties are leased to long-term tenants for long periods, it means no fluctuating income. The result? Steady, consistent income and cash flow.
2. Less turnover
Most long-term renters sign one-year lease agreements. This means you don’t have to deal with the hassle of listing your property and vetting new tenants every few days as you do with a vacation rental.
Plus, you get complete control over tenant screening. Most property owners hire a property management company to help with this process. Tenant screening can include evaluating rental history, income verification, credit check, background check, and eviction check. It gives you greater control over who rents your property and helps reduce overall risk. It’s a considerable advantage over vacation rentals.
3. Lower property management fees
It can be costly to maintain the upkeep and bookings of short-term rentals. Long-term rentals, however, are usually cheaper for the owner to maintain. There are a few reasons why:
- You don’t have to furnish the property or pay to clean it every few days.
- Long-term tenants are responsible for essential maintenance like yardwork and utilities.
- Since it’s rented on a long-term lease, you don’t have to worry about listing fees when it’s occupied.
The savings add up over time.
3 downsides of long-term rentals
1. There is a cap on the upside
Given the leases for long term rentals are fixed a certain monthly cost, there is a cap on the revenue that the property can bring in during that lease length. The investment returns can increase if the costs are lower than anticipated (less vacancy, less repairs and maintenance) but costs can only go down so much. Short term rentals on the other hand have no hard cap on the total revenue. If there are local events in a city (like a Superbowl) or the economy is doing really well, short term rental revenue can grow quickly and outperform your expectations.
2. Legal fees & considerations
For people managing their own rental home, there are some legal fees and considerations associated with leasing a long-term rental property. Most of them are related to signing and enforcing a lease agreement. Lease agreements are subject to laws and regulations which vary by state. We recommend working with a contract attorney to create lease agreements.
Think about what happens while living in your home. Drinks get spilled on carpets. Walls get banged up. The toilets get clogged. Tiles get chipped. Appliances get worn out and need to be replaced. Pets have accidents. Well, your long-term tenants will be living their lives on your property. And anything can happen. Be sure to include a damage clause in your lease to help minimize the cost to you.
3. Less flexibility
Unlike owning an entire vacation rental, you don’t have the freedom to stay in your long-term rental property whenever you’d like. And depending on the state, you may not even be able to stop by without advanced notice. This gives you less flexibility over the use of your property and less control over the daily maintenance of it.
So, what’s the best rental strategy?
There’s no right or wrong way to go. There are benefits and downsides to short-term and long-term rental properties.
Short-term vacation rentals can be very lucrative if they’re in the rental market and you don’t mind paying the property management fees. Long-term rental properties produce consistent income but come with more legal fees and offer a lot less flexibility.
As with any investment, it all boils down to what you want and the risks you’re willing to take.
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The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice. View Arrived’s disclaimers.