Short Term Rentals Versus Long Term Rentals - What Is Best?
Updated: Feb 4
First of all, before we dive any deeper into this topic, it's critical to remember just how great a real estate investment is. It has a steady annual growth rate and it can be turned into a revenue-generating asset through rentals.
You can have tenants paying down your mortgage while you reap the benefits of all the gains on it. You can eventually sell properties for large sums of money for other real estate investments, and incrementally grow your assets and overall investment portfolio.
That sounds great, right? Now let's consider some of the realities of the situation. It can require a lot of maintenance to upkeep the properties and there are times where the economy can go a different direction either hurting your property values or hurting the possibility of renting them out at the rates you want to, effectively putting your real estate investment empire on hold.
Let's get back to the topic at hand and discuss the question of which is better when it comes to short term vs. long term rentals.
Short Term Rental Benefits And Potential Issues
The number one benefit of renting in the short term is that you are able to potentially make a lot more money due to the fact that your rates are broken down to a month, a week or even a couple of days. Based on factors such as how nice your property is and the location that it is in, the rates can shift in your favour as you charge one to a couple of hundred dollars per night.
Technology has also made it easier, more now than ever to connect you to short term renters, tourists, and vacationers with your property. Bookings can be done remotely without you needing to ever actually meet the renter, then it makes it nearly a passive income business with high returns.
To ease the extra clean up and maintenance that can be required with short term renters, you can hire a team who will clean after every stay and another team to actually manage the property (handle any requests by the renter, or even meet them the first day and provide access and a quick tour)
This might seem counterintuitive in the goal to make those big bucks, but in reality, it will reduce your stress levels and be well worth that investment, as it becomes, at the very least, passive to you!
Some of these platforms to put your property up are AirBnB, VRBO.com and Booking.com to name a few. There are so many out there though, and they provide a slew of great services that can help you get your place rented all the time. For some sites such as Airbnb, you can even add a surcharge for cleaning, and charge for other requests, such as late checkout, or more than a certain number of people per booking, to help alleviate some of the accumulated costs that you might incur.
This mix of technology and short term rentals can look very beneficial, but keep in mind the downside to all of this. This strategy only works if you are renting at full capacity. That means you need to calculate exactly how many days per month need to be booked to show a better benchmark, than simply renting it long term.
There's also the possibility of cancellations, even with these booking sites offering strict cancellation policies, it can still hinder your revenue stream, especially if there are people booking, then cancelling, but maybe it's too late for someone else to book. That's loss revenue and opportunity cost bundled into one problem.
The opposite can happen, where you are fully booked, back to back, and you aren’t a hotel, so guests might arrive earlier than the previous guests left, with no time to clean, or some other scheduling conflict thrown into the mix.
The other major and final issue that can come from short term rental, is simply the constant wear and tear of your property. You are having people in your rental coming in on holiday or a short term rental and leaving. That means there is a constant flow, and maybe sometimes too much usage of amenities, so your upkeep might end up being higher.
Long Term Rental Benefits And Potential Issues
Right off the bat, you will probably get a much lower rate than if you were to rent out your property on a daily basis. Yet this offers a nice consistency where you don’t have to worry about finding the next renter, and can have that fixed rental income each month.
Those that will rent it out as a long term rental, will also probably treat the property more respectfully because there might be a security deposit involved or a general sense that this isn't a holiday for them necessarily.
This will also lower your maintenance costs, as you can handle the operational aspect during tenant transitions, and easily collect rent on a monthly basis. You won't need a management company or a cleaning crew (in the beginning) and you will be able to have peace of mind, as you have a vetted long term renter in your property, who wants to treat their home nicely.
Besides the lower rate though, another major issue that can arise is the fact that everything is great when a renter pays their rent on time, but if they stop paying rent, and have been there for a significant period of time (this varies state by state), then they can potentially have squatters rights, which makes it difficult for you to evict them off your property.
The other issue is that not only will you charge less rent on average, but the amount that you can increase every year could also be potentially capped to a fixed rate or a market rate. With a short term rental, the sky is the limit because of how you are operating your property.
So Which One Wins?
To be honest, it all depends on numerous different factors and it might be a good idea to try out both, as one might work better with your lifestyle and business than the other. You can try to maximize profits with a short term rental, see that it isn't for you, and switch over to longer-term rentals for that consistency.
Where you are located also matters a lot as well. If your property is in a hot tourist spot then you might want to consider shorter-term rentals, but if it is seasonal, you may be out of luck during the offseason, balancing out the potential revenue generated.
In the end, the best option is a bit of both, and it's really about growing the number of properties that you have so that you can be flexible and spread your rental strategy amongst the different properties. This can also help alleviate some of the issues that may arise with having a management company and a cleaning staff on hand because you can easily spread out their expenses amongst all of your properties.
Whatever route you end up taking, at least these are the nice types of problems to have, where it comes down to how you manage your investment rental properties.