Short and Long-Term Rentals: The Good & The Bad
Building wealth by investing in rental properties is a tried and true strategy for bringing in steady income streams. There are many different types of real estate investments that produce a significant return on investment, i.e., fix and flips, land purchases, commercial real estate, and many more. But few can beat the cash on cash return of a well-built portfolio of rental properties on cruise control.
Traditionally rental properties have been mostly long-term leases. However, with the ease of travel and new technologies, we have seen a boom of vacation rental properties and short-term lease options.
Travelers are increasingly enjoying private properties to rent for shorter periods from a few days to a few months, rather than stay in a hotel.
All of this has created new real estate investment opportunities, and at the same time, shifted housing markets, and created the need for new permits, laws, and regulations that should be considered if you are diversifying your rental portfolio.
When deciding between short-term or long-term rental properties, there is the good and the bad to deal with.
Long-Term Rental Properties: The Good-
There are many reasons why long-term rentals have been a go-to real estate portfolio asset for generations.
• Consistent Income
Possibly the best part of any long-term rental investment is stable cash flow. Twelve-month leases are most common for long-term contracts, and during that time, you have rent coming in every month.
There are no seasonal variations in the market to worry about, as most renters looking for a living space want something that they will be staying for more than a few weeks or months.
• Tenant's Pay the Utilities
The cost of the utilities falls upon the tenants. If they want to crank the AC all day and night, the cost of that won't touch your profits. The same rings true for internet availability, extra-long showers, and high gas bills for those who like wearing shorts in the house during the winter.
• Lower Maintenance Costs
Tenants in a long-term lease generally take care of most property maintenance. Mowing lawns, trimming trees and bushes and fixing door handles and things worn down by wear and tear fall to the tenants to take care of.
Many lease agreements will have a dollar amount specified for whether the tenant or the owner eats the bill. For example, if the repair for service comes to $200, the tenant will cover it. Anything over that and the owner might pay. If the expense is paid out of pocket by the renter, the owner might subtract the amount from the next month's rent.
• Less Advertising
Once you've leased out your rental property, you don't need to advertise it until the lease is almost up. If you have an excellent renter who enjoys living there and renews their lease, you will have no advertising costs until they decide to move on, or you want to sell it.
Long-Term Rental Properties: The Bad-
• Lower Income Potential
Even though you might have long term tenants providing a steady stream of income through your rental property, traditional terms tend to have lower profit margins than other real estate investment strategies.
Without an excellent real estate analytics system, you can find yourself in the red once all expenses are considered. So, make sure to do your due diligence before longing yourself into a long term rental investment.
• Lower Maintenance Quality
It's great that you don't need to worry about day to day upkeep for your property. That doesn't mean that your tenants will keep the property up to the condition that you like.
Anyone living in your home for more than six months will put some wear and tear on the house. When you sell the house or sign a new lease, you might have more repairs and touch-ups than expected.
Short-Term Rental Properties: The Good-
Short term property investment has become a booming subsection of the real estate industry. Airbnb has over 150 million users worldwide, and projections for hotels maintaining dominance is looking doubtful. There are some critical differences between the two rental types and why short-term options are such an attractive investment.
• Adjustable Pricing
Your occupancy rates are going to climb a lot compared to a traditional rental. Guests will be staying from a few days to a few weeks during various seasons and holidays.
Want to increase your stay length? Offer a discount for travelers who stay a week instead of 3 days. Off-season coming up? You have the choice to lower rents and keep guests coming.
Maintaining awareness of local housing and hotel pricing can easily give you an upper hand, bringing in business that would otherwise not be an option for you as an investor or the guests who need a break on their tightly budgeted vacation.
• Better Maintenance
Short-term rental guests expect their stay to be like a hotel. After the earlier guest has left, you'll need to clean and maintain your property to a higher standard.
• Personal Use
You own the space, use it when you want! If you would like to take a vacation of your own, block out your available dates for your property and use it as you see fit. This option is not available when you have a long-term renter staying in your home.
Short-Term Rental Properties: The Bad-
• Management Costs Go Up
Your short-term rental will take more effort to keep at a standard you guest will expect, and unless you plan on living next door to do the work yourself, you'll probably want a property manager on your team.
The property manager you hire will charge you more to maintain your property. For a traditional rental investment, a PMC might charge between eight and twelve percent of your projected rent. Short-term property service will run you on average, twenty-five percent, or more.
• Slow Periods
If you are not continually advertising once a tenant has come and gone, you have no more rent. Technology has made this more manageable, but many services that promote well will expectedly eat into profits.
• You're Paying the Bills
With the high occupancy turnover expected, you won't have tenants be attached to the utility bills. If you want to provide your guest with luxuries like highspeed internet, that's on you. And the essentials? That's all on you too.
The plus side to this is you can pass this cost back to the guests with the flexible pricing perk mentioned before.
As with any real estate investment, nothing beats experience. All of the subtle nuances and types of situations you will have to deal with can't all be listed here. Your planning and preparation are keys to your success, and each investment opportunity has a role in your financial well-being.
Ask yourself why you need a rental portfolio and what purpose it fits for you. Is it to generate a steady stream of income to supplement what you have? Is it to provide your primary source of income, and if that's the case, do you have enough cushion to weather any unforeseen expenses?
If you still have doubts, get a free trial of our rental property analyzer to check your deal for profitability and safe time and effort.