It’s a great question. In reality, it is all dependent on the rental strategy you choose and the kind of investment property you’re interested in. There are pros and cons for both.
This is why we’ve created this short guide to help you determine the best rental strategy for you.
Short-term vs long-term rental properties
A short-term rental property, also known as a vacation rental, is a living space that is furnished that is available for rental for short time periods. All kinds of single-family houses can be converted into rental properties for vacations. The majority of vacation rentals are rented for a specific nightly cost. Many property owners advertise their short-term rentals on websites such as Vrbo and Airbnb.
Short-term rentals have many advantages to real estate investment, with the potential for higher earnings. The disadvantages of rental properties are the fluctuating earnings depending on the seasons as well as the time and effort needed to handle the constant doors of tenants.
A long-term rental house is a “traditional” rental property. It’s usually a non-furnished living space that is rented to tenants for a prolonged time. A majority of rental properties for long-term leases are rented on an agreement for a year; however, some are available for rent monthly. Owners of the property charge monthly rent instead of daily rates and usually list their properties on websites such as realtor.com.
Long-term rental offers many benefits for real property investors. They can provide constant cash flow from the monthly rent and less turnover. The drawbacks of long-term rental properties could be the legality of tenant screenings as well as the need to create strong lease agreements.
3 benefits of short-term rentals
Higher-income potential
Rentals for vacation rentals in places such as Nashville and Orlando are extremely lucrative and have a huge potential for income. Why? Property owners are able to be able to charge more, with a competitive rate for nightly rentals, than they could for a comparable long-term rental property.
Let’s take it apart.
Let’s say that you have a single-family residence close to the shoreline in a resort town. The typical nightly cost of similar houses in the same area will be approximately $275 for the night. The average monthly rent is approximately $2000 per month. If you choose to make it an accommodation for vacation, it will require you to lease it for just one day, or about 12 weeks each year, to earn the same amount that you would earn in the event that it was classified as a rental property for long-term rentals.
Based on Airbnb according to Airbnb, the average occupancy level is percent. If your home is occupied for 46% of the time (175 days), that means you can earn an average of $48,180. This is more than double the amount you’d earn in the event that it was classified as an investment property for long-term rentals. This does not take into account rates that increase nightly in peak seasons.
Market growing rapidly
The market for vacation rentals within the United States accounts for over $13 billion in revenue in 2022, just to name a few. This market size is projected to grow to $20 billion in 2025. A growth of 53% in market size will mean it will have plenty of need from tourists looking for vacation rental properties in the next few years.
Access to unique markets
One benefit of investing in short-term rentals is having access to market opportunities that do not work for long-term rentals. Investors are often looking for diversification in markets, and short-term rentals permit you to access certain of the largest cities or tourist spots where the rental yields for long-term rentals are low.
Vacation rentals aren’t as legally binding as they are required for long-term rentals. You can decide the time when you can let others let your home for vacation and for what length of time. You also are able to set aside some months or weeks of the year that you can use the property exclusively for your personal usage.
3 downsides of short-term rentals
Tenant turnover
It’s among the most difficult aspects to handle when purchasing an investment property that is rented out for short periods. In accordance with the area and the time of year, you may be renting to guests on a regular basis for a few days. This includes handling everything from check-in until check-out and making sure your property is clean between tenants. It can be a lot of work and exhausting.
Another possible downside for tenants to be considered is that there’s no control over tenant screening. Certain listing websites have exceptional screening procedures, while others do not. Keep these in mind before you list your vacation home.
Fluctuating income
The rental market for vacation rentals could have substantial income potential. However, it’s not a consistent source of income. Why is that? It’s seasonal. The typical vacation is around five days and is usually during the peak seasons, such as summer and holidays. It means that you will have many times when your vacation rental is unoccupied. And vacant rentals don’t generate income.
Property management fees
If you’re a rental property for vacation owner, you’ll be accountable for the entire upkeep, cleaning, and maintenance, as well as utility bills. This means hiring a lawn maintenance service and all repairs to the property, power, and water, as well as garbage, sewer, and internet. The costs associated with managing an apartment rental for vacations can be costly – even if you employ an estate management company to assist. But these are qualified tax deductions, so make sure you keep track of these.
3 benefits of long-term rentals
Regular income
That’s right! Because long-term rental properties are leased to long-term tenants for prolonged periods, this means that there is no fluctuating income. The result? Steady, steady income and cash flow.
More turnover
A majority of long-term renters sign one-year leases. That means you don’t have to worry about the burden of advertising your property and screening new tenants every couple of days, as is the case when renting a vacation home.
Furthermore, you will have total control over screening for tenants. Many property owners use a property management firm to assist with the screening process. Screening for tenants can involve analyzing the history of a tenant’s rental and income verification, as well as background checks, credit checks, and eviction checks. This gives you more control over who is renting your property and reduces the risk overall. It’s a significant advantage over holiday rentals.
3. Lower property management costs
It can be expensive to keep upkeep and reservations for short-term rentals. Long-term rentals generally cost less for the owner to manage. There are many reasons:
- You don’t need to furnish the house or pay for the cleaning every couple of days.
- Tenants with long-term leases are responsible for essential maintenance such as yardwork and utility bills.
- Because it’s rented under an extended lease, you don’t need the worry about listing charges while it’s being used.
The savings accumulate over time.
3 downsides of long-term rentals
There is a limit on the upside
Since leases for long-term rentals are fixed at a specific monthly cost, there is a limit on the income that the property is able to earn for the lease duration. The returns on investment could increase when the expenses are less than expected (less vacant space as well as less maintenance and repairs), but the cost will only decrease to a certain extent. Short-term rentals, on the contrary, have no limitation on total revenues. When there is a local celebration in the city (like the Superbowl), or the economy is doing well, short-term rental revenues can increase rapidly and exceed your expectations.
Legal fees and factors
If you manage your own rental property, there are legal costs and considerations that come with renting a long-term property. They are mostly related to the signing and enforcement of an agreement to lease. Lease agreements are subjected to laws and regulations, which differ by state. We suggest consulting an attorney who can draft lease agreements.
Imagine what could happen when living in your house. There are spills on carpets. Walls get banged up. Toilets become clogged. Tiles get chipped. Appliances are worn out and require to be replaced. Pets are prone to accidents. Your long-term tenants will live in your home. There is the possibility of anything happening. It is important to include a clause on damage in your lease to reduce the costs for you.
A lack of flexibility
In contrast to owning a complete holiday home, you won’t have the option of staying in your property for a long time at any time you’d like. In addition, depending on the state, it is possible that you won’t be able to come by without advance notice. This will give you less flexibility regarding the usage of your property and lesser control of its daily upkeep of the property.
So, what’s the best rental strategy?
There is no right or wrong option. There are advantages and disadvantages for both long-term and short-term rental properties.
Short-term rentals for a vacation can be extremely lucrative, especially if they’re located in rentals and do not mind paying for the management costs for your property. Long-term rental properties earn a steady income, but they also have higher legal costs and more flexibility.
Like every investment, it comes down to your goals and the risk you’re willing to risk.