Are you thinking of renting your property but are undecided about which one would be a better strategy: short-term vs. long-term rentals? Each has its pros and cons, and in this post, we’ll run you by them so you can make a smarter decision before jumping into the home renting business.
First of all, this blog is all about short-term renting. So it goes without saying that we’re absolutely convinced vacation rentals are more profitable.
There are multiple reasons for it, which we’ll discuss over the course of this post.
But we can tell you that from our experience, STRs bring in more rental income — in the long run.
On the other hand, long-term rentals can give you the consistency of cash flow and a reduction of expenses that you may want in a business. Ultimately, various factors will affect your rental’s ROI: its location, the local market conditions, Airbnb regulations, your management skills, and the types of customers you get.
As mentioned earlier, each strategy has its unique advantages and disadvantages. Let’s discuss short-term rentals first.’
Short-term rentals are properties you rent by the day or week. In some cases, they can be extended to longer durations like a few months.
They can be residential or vacation homes, condominiums, apartments, cabins, tiny houses, or any unique dwelling. And you can list them on online booking platforms like Airbnb, Vrbo, and a host of other online travel agencies.
Most of the time, STRs cater to tourists and business travelers. But they’re also popular with families and friends going on vacations, digital nomads, traveling nurses, and just about anyone needing a place to stay for a short while.
There are quite a few advantages to short-term renting. Here are a few of them.
Short-term rentals can make a lot more money than traditional long-term rentals or LTRs, especially if they’re in the right market. Studies show that the same rental property that would bring in $1,000 a month if it was rented for a whole year can bring in as much as $3,000 a month if it was rented for only a week or two. So you could make up to $24,000 more a year from the same property!
One advantage of short-term over long-term rentals is that you can easily adjust the rent based on current market rates and the amenity upgrades you make.
You can also set a minimum length of stay for your peak season so you can make the most money. Depending on the demand and conditions of your market, an STR could bring in 2-3 times as much rent each month as a long-term rental.
With short-term renting, you can also get a few tax breaks. Because your property isn’t rented out for the long term, you might be able to write off some of the overhead costs. Check with your local government to see what the STR rules are in your area.
You can start a short-term rental with less money out of your own pocket. That’s if you do rental arbitrage, where you rent an apartment and then sub-lease it. The income you get from your guests could then pay for your rent. So with Airbnbs, even if you had to design and furnish them, it won’t cost as much as putting 15% or 25% down for purchasing a house.
When it comes to customers’ (or tenants, or guests, or clients — however you want to call them) inability to pay, you hardly get that from short-term renting. Every month, you get a different guest so you don’t have to worry about that one single customer or tenant losing their job and the ability to pay you.
You won’t worry about having to evict anyone because they only stay at your property for a short time. And you’ll likely have more than one customer every week or month.
Additionally, with STRs, the online booking platforms will take the full payment from your guests. Your customers are all paid up even before they arrive at your property.
With an LTR, though, even if you and your tenant sign a lease that says they’ll pay you X amount every month, there’s a chance they could go into financial hardship. And as a result, they could lose their ability to pay you. You’d have to go through a lengthy, tiresome and sometimes costly legal process of eviction.
One risk with STRs that you don’t have with LTRs, though, is that it’s in the tourism and hospitality industries. If the economy takes a downturn and people avoid traveling for a while, it’s more likely your business would be hurt more than traditional rentals.
The ability to use your property as a personal or family getaway is a huge benefit! Especially if you love to go on vacations and your property’s located in a destination that you love to visit.
And if, for some reason, you need to sell it in the months ahead, you’re free to do so. It won’t be tied down to a year-long or 18-month-long lease. Short-term rentals allow property owners a lot more flexibility than long-term rentals.
A short-term rental will benefit from the frequent turnovers you and your cleaners will do. Turnovers will not only result in excellent sanitation, but they’ll also let you know if something needs to be repaired or improved. So your property stays in top condition all the time.
All the a bove advantages come with some costs, though. Here are the cons of short-term renting:
If you own an Airbnb, you’d have to pay for all the cleaning, amenities, utility bills, Airbnb fees, local and state taxes, and property management – if you don’t manage it yourself. Even though these costs can be added to the rates you charge, all the bills when added together can be quite a handful.
Running short-term rental properties is basically like running a hotel. You have bookings each month and turnovers every few days. You organize your calendar to avoid double bookings and adjust your rates to optimize revenues. You arrange key exchanges (if not using smart locks), make sure the check-in and check-out are smooth, and do your best to meet your guests’ needs – each and every time. All the while responding to quest questions and requests during their stay.
Even after they leave, you have to monitor guests’ reviews and reply to them if necessary. If you don’t have the right tools, it can be complex and painstaking.
And since you’ll be dealing with more people, there’s a higher chance you’ll encounter guests that are very difficult to please. If this happens and you aren’t able to fix their issues, it could lead to a bad review that can hurt your reputation.
As your business grows, you’ll also find that it’ll be necessary to hire a team for things to work excellently: your cleaners, handymen, and co-hosts if you have any.
Eventually, you’ll have to repair broken appliances, replace worn carpets, and upgrade some furniture. Just like those at a hotel, furnishings do have limited life spans and need to be replaced. And that means you have to shell out more money.
Aside from that, you may need to do upgrades from time to time. To impress your guests and to keep them coming back, you’ll want to keep your property in excellent shape all the time – or you might get some bad reviews. This may include adding luxe amenities or keeping up with smart technologies to make sure your guests have a comfortable and memorable stay. And these things can be expensive.
Unfortunately with STRs, bookings aren’t always guaranteed. With long-term rentals, you have a lease with your tenant that tells you how much payment you can expect to get every month. With STRs, the rates can vary each day or season.
Sometimes you get this much, and sometimes you only get this much – there’s seasonality. Guests could cancel their reservation for one reason or another. So at the beginning of each month, quarter or year, you won’t exactly know how much income you’re gonna get. High occupancy isn’t guaranteed each month.
Local laws can also be a problem with STRs. Aside from paying the booking platforms their commissions, you also have to give your city and state their own share through taxes and licenses or permits. And when it comes to regulations, every state, city, and even HOA has its own rules that you’ll need to comply with – however lenient or not. That’s just how it is.
If your property is located in an area that’s saturated with Airbnbs, it can get challenging to get lots of bookings. There’s more supply than demand. But in the long-term market, it’s usually the opposite. There are often more people looking to rent apartments and houses than there is supply.
And with lots of online booking channels nowadays, your property – and your marketing efforts – have to be above par in order to get a significant piece of the proverbial pie.
You may find long-term renting more suitable for your property, business goals, and management style if:
Long-term rentals are properties that you lease out for an extended period of time, typically for at least 6 months up to a year at a fixed rate. You could go for longer terms, like 18 or 24 months. It’s up to you and your tenant. Or you could just decide to renew yearly.
The property is usually unfurnished, and your tenants will be responsible for sanitation and overall upkeep. They’ll also shoulder all the utilities.
LTRs have their own set of pros and cons and here are some of them. Let’s start with the pros.
With long-term rentals, it’ll take less time to manage whether you hire a property manager or do it yourself. You only have one tenant, you don’t have to deal with a lot of users. They stay with you for at least a year so there’s no need for frequent turnovers, regular cleaning, and no need to even advertise the property as much. There’s hardly any communication you need to do with your tenant.
Long-term renters will take care of your place like it’s their own. At least the good ones will. They’ll take care of the yard, pay for utilities, and change the light bulbs and air filters. They won’t wake you up in the middle of the night asking for extra blankets. Usually, they won’t bother you unless there’s a need for a major repair.
So long-term rentals can truly provide that passive income you may want from an investment property.
If you choose to rent to long-term tenants, you will save on routine management fees such as cleaning services, booking channel commissions, and subscription fees to property management software if you choose to use one.
If you do get professional property managers to oversee things for you, management fees for long-term rentals are usually just between 8% and 10% of the rent. On the other hand, fees for STRs can be as high as 30% of the rent because there’s more work to do due to frequent turnovers.
Another great thing about LTRs is that you don’t have to worry about furniture. Tenants will be bringing most of their stuff in, and the only things you might consider providing – if you choose to do so, out of the generosity of your heart and pocket – are basic appliances like a stove and a fridge.
You can expect the same amount of payment to come in each month, it doesn’t fluctuate. That makes it easy for you to plan for maintenance and repairs, if any, and estimate how much you could profit from your investment. As long as you have a good tenant that always pays on time, your paycheck is guaranteed each month. There’s no seasonality.
Read also: What to Include in Your Property for Airbnb Long-term Stays
Now the cons of long-term rentals would be just the opposite of the pros of short-term renting.
One of the biggest limitations with long-term rentals is that you don’t have the freedom to adjust the rent based on current market demands. That means your income will be limited to what’s written in the lease. That would result in a lower profit margin than a short-term or monthly lease would bring in.
As a rule of thumb, long-term landlords can only raise the rent by a small amount each year. A lot of locations have rental caps where landlords can only adjust the rent incrementally.
So you wouldn’t be able to raise your rate until the contract is over, and your tenant considers renewing it. Or until you open the property up to another renter.
Because a long-term rental usually has a 12-month lease, it’s critical to get only the right tenants. And it’s quite an effort to find them. You’ll need to interview them and check references before writing the contract. And even if you have the best tenant screening process in place, you might still get a tenant who’s always complaining, pays the rent late, or damages the property.
And if they stop paying and starts overstaying, you’re pretty much out of luck. You’d have to go through the eviction process. That could be difficult and cost you a lot of money.
If your property is a vacation rental located in the woods or by the beach, and you wanted to use it for the weekend or a holiday, you wouldn’t be able to ask your tenant to leave because they live there.
If you decide to rent your property long-term, its condition and general upkeep would essentially depend on your tenants – and their standards of maintenance. So if their standards are vastly different from yours, you’ll just have to accept it.
Additionally, you won’t be able to do maintenance and security checks as often as you want. Tenants’ privacy needs to be respected, so you’ll have to give them advanced notice to not cause any inconvenience.
It really depends on the factors listed above, and your personal situation. Because what may be a pro to someone might be a con to you.
As mentioned above, short-term rentals need more time and effort to manage, but the extra money they bring in is worth it. Especially if you’re in the right market and you’re using the right tools and software.
But if you want a very passive investment and a stable income, then long-term might be the better option for you.
So there’s no single strategy that works for everyone. Pick the one that fits your own set of needs, wants, and goals.
Ready to learn how we built and operate a $2M/year short-term rental business, operate properties throughout the USA remotely, and acquired 70+ properties without owning any in just 2 years? Attend our free online master class to learn how you can do the same. Click here.
