Investors: Should You Buy a Short-Term or Long-Term Rental?
An investor who buys a rental property has the choice of renting for the short or long-term. Typically, short-term rentals are properties that are rented for 90 days or less and long-term rentals typically have a tenant on a lease that is 12 months or longer. Many investors opt for offering a long-term rental, although that may not be the best option for everyone.
Like any form of investment, both short-term and long-term rentals have advantages and drawbacks. Deciding on which route to take depends on your comfort level and expectations. We’re mapping out the pros and cons of each, to help investors decide which rental strategy may make the best choice for their goals.
Short-Term Rental Pros
Potentially higher rental income due to higher nightly rates
Simply put, short-term rentals can create substantial income compared to the carrying costs of the property (mortgage, insurance, association fees, taxes, etc.). A dwelling that may fetch $2,000 per month as a long-term rental may go for double that as a short-term property. In popular vacation areas, that number becomes even higher.
Greater flexibility to use the property for personal use
Having a short-term rental property in a tourist area allows owners to use the property themselves as they desire. You may decide to rent your vacation property for all but two weeks of the high season when you and your loved ones may enjoy the property yourselves.
Easier to maintain
Because a tenant only stays for a limited length of time, a short-term rental property can be easier to clean, as it may receive regular, professional-level maintenance. Minor repairs are addressed almost immediately upon one tenant vacating and the next tenant taking occupancy.
Short-Term Rental Cons
Higher operating costs due to more frequent cleaning and maintenance
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, toilet paper, and cooking supplies.
Potentially more regulatory requirements, such as local occupancy and zoning laws
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.
Greater uncertainty of rental income due to seasonality and demand fluctuations
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. On the other hand, when a property is rented long-term it’s much easier to predict how much rental income will be collected each month.
Long-Term Rental Pros
Steady, predictable rental income
Rental income is consistent throughout the entire year when a tenant is on a 12-month lease and pays the rent timely. Knowing how much cash is coming in each month makes it easier to budget for maintenance and repairs, and to more accurately forecast the potential return on investment.
Lower operating costs due to less frequent turnover and maintenance
Renters on a long-term lease generally take care of basic items such as cleaning the home, doing yard work, and paying for their own utilities. Long-term rentals also generally have less wear and tear, because tenants tend to take better care of a property that they think of as their home instead of a hotel room.
Less responsibility for managing tenants and their stays
Long-term rentals require less attention, so managing the property requires less time and effort, whether you self-manage or hire a property management firm. In addition, the less frequent resident turnover means lower fees associated with management, less advertising to keep the unit occupied, and all-around less work associated with the property.
Long-Term Rental Cons
Limitations to raising the rent
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 throughout 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.
Risk of an unqualified tenant
Screening prospective tenants is critical. Even with the best tenant screening process in place, every now and then a landlord may rent to a tenant who constantly complains, pays the rent late, or damages the property. Evicting a tenant on a long-term lease can be time-consuming and expensive.
Potential for more wear and tear on the property over the longer lease term
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 and to give proper notice before entering the property.
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. The right choice for one investor may be completely wrong for another. 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. Speak with a real estate professional today to strategize the best game plan that aligns with your goals.