Author: Trevor Tune
It comes as no surprise that investing in real estate can produce great returns. When home prices are rising, merely owning a home can be a worthwhile investment in itself; however, there are other ways to monetize real estate outside of price appreciation. At Clever Real Estate, a platform connecting homeowners with flat fee real estate agents, we work with many income-seeking real estate investors faced with a tough decision. Is a vacation rental or long-term rental right for me?
While this question may not seem complicated, (after all, both properties produce income for the property owner) there are characteristics of both that might fit better for certain personalities or circumstances.
To decide which is right for you, we’ve highlighted the main differences between short-term and long-term rentals along with 5 factors to consider.
What is the Difference Between Short-Term and Long-Term Rentals?
Before diving into the considerations, it’s important for readers to understand at a high level the differences between short-term and long-term rentals.
Short-term rentals, also known as vacation rentals, are furnished properties that are leased to renters looking for short-term stays. Depending on the owner, the rental’s location, and a number of other factors, these properties are rented anywhere from a few days to a few weeks.
Long-term rentals typically refer to properties that leased to tenants for three months or longer. Rather than pa y on an as-needed basis, long-term tenants enter lengthier agreements where they pay homeowner each month.
5 Factors to Consider Whether Short-term or Long-term Rental a Better Fit Financially
1. Are you risk-averse or comfortable with uncertainty?
When it comes to vacation rentals, the income an investor can expect is highly variable due to the short-term nature of the contracts between the homeowner and the lessor. With short-term rentals, many bookings might come at the last minute. For the popular short-term lodging website Airbnb, it is not uncommon for guests to book a few days in advance. While the rates can be adjusted to fluctuate with demand, the bookings are not always guaranteed.
Conversely, long-term rentals have a monthly cash flow that’s established for the length of the lease, usually 12 months. Predictability, in the form of a lease, can be more easily leveraged and used as income proof on a property – allowing the owner to refinance more easily. If you are using the property as a short-term rental, you are going to have to show how the property rents, which usually means building a history; allowing a financial institution to judge creditworthiness. This is usually a 2-year timeframe.
2. Do you have time to run a successful rental?
Short-term rentals tend to be more time-intensive both to get started and for continued management. To get a property up and running can take up to 40 hours for decorating, furnishing, and performing maintenance. Between each new stay, there are plenty of responsibilities to keep you occupied such as marketing the property, dealing with maintenance and repairs, and communicating with the guest.
While being a landlord of any type will require an investment of time, generally speaking, the time commitment is less for long-term rentals. With good tenants and properties, there are seldom issues other than the occasional late payment or repair, especially when an experienced property management company is taking care of the process.
3. Do you want a property for investment only or as a mixed-use vacation home?
Many owners of vacation rentals view their properties as a way to turn a personal enjoyment or hobby into a financially performing asset. Vacation rentals can turn dreams of a mountain getaway or beachside hut a reality when the rent collected from fellow travelers helps pay the monthly bills.
In the world of long-term rentals, don’t expect to be using your property anytime soon. If you have a tenant that treats your property as their home, you can’t ask them to leave for your convenience, even for celebrations or holidays.
4. Are you a property owner in a high-demand area?
Location and seasonality have the most extensive impact on temporary rentals. Why? Because home prices and rental contracts are based on supply and demand. With higher demand, the odds of short-term guests visiting your property will also increase along with the ability to charge higher prices for your unit. In high demand cities, like San Francisco or New York City, Airbnb rentals can be much more profitable, while cities with less demand to visit will be riskier for short-term rentals.
Long-term locations are different in this regard because long-term tenants are making a different set of core decisions. Tenants that decide to stay in the same rental for 12-months will typically view that place as their home and in a location where they prefer to live, whether that’s in a suburb, in the Midwest or the East Coast, or in a region a chilling winter.
5. Do you prefer a hands-on or hands-off approach?
For short-term rentals, owners should expect to bring a more hands-on approach to deal with the constant change of guests. With the opportunity to meet a new guest every few day, outgoing personalities who enjoy interacting with new people might find this particularly enjoyable and lead to higher ratings and more future visitors. In fact, the most successful vacation rental owners are regularly thinking of ways to improve the renter’s experience.
Contrast this with long-term rentals where prospective renters will stay for a long time. Because of this dynamic, once the lease is signed, the long-term tenant agrees that the property is adequate for their needs. As long as there are no major issues, owners don’t need to always be worrying about a great experience or frequently marketing the property. The owner knows how long to expect the renter to stay and will only worry about filling the house when the tenant plans on vacating.
The Key Ingredient to the Success of Long-Term and Short-Term Rentals
By now, you hopefully have a better understanding of which rental style is right for you. In either situation, remember that excellent property management is the key to success, and technology solutions have made property management a seamless process. Now more than ever, working with top tier property managers like Radius Realty, a property management firm that leverages technology for long-term rentals, or Hostfully, a system designed exclusively for Airbnb and vacation rentals, can increase investment returns and allow property owners to get one step closer towards financial success