The benefits of real estate investing are numerous. That’s why millions of Americans decide to go down that road. However, for someone new to the property investment business, choosing the right strategy can be daunting. That’s why we’ve put together the advantages and disadvantages of both short-term rentals and long-term rentals to help beginner investors decide on the best approach for them.
What Are Short-Term and Long-Term Rentals?
If you are new to real estate investing, you might be wondering about the meaning of short-term rentals. This is a relatively recent type of investment properties which get rented on daily or weekly basis. They have become particularly popular after the emergence of Airbnb.com in 2008 and other similar platforms afterwards. They are also known as Airbnb rentals or vacation rentals.
On the other hand, long-term rentals are investment properties which landlords rent out on monthly basis. Most tenants tend to stay in the same property for years before they decide to move to a new city or before they can afford to buy their own home. Long-term rentals are also called traditional rentals as this is the oldest type of rental properties.
Investing in Short-Term Rental Properties: The Advantages
1. Higher Return on Investment
The first and foremost benefit of buying an investment property to rent out on Airbnb or a similar platform rather than the traditional way is that this brings a higher return on investment. Data from Mashvisor, a real estate data analytics company, shows that the capitalization rate for short-term rentals exceeds the cap rate for long-term ones in the majority of big and small US housing markets. This is a very important factor as investors get into real estate to make money from properties, and the more money they can make, the better.
2. Control Over the Pricing Strategy
Vacation rentals are usually marketed on platforms which allow the host – that is, the investor – to set up a unique rental rate for every day. This allows you to customize your pricing schedule to account for the weekend and holidays as well as for the peak season and the off season. In this way you can decrease the daily rate when demand is slower to push your occupancy rate up and increase the rent when the market is hot in order to make more money. Consequently, you can maximize your rental income and return on investment easily and effectively.
3. In Demand
Airbnb rentals are very much in demand right now. Looking for a more welcoming and less pricey alternative to hotels, many business and leisure travelers decide to stay at short-term rentals, pushing the demand for them up. That’s excellent news from the point of view of real estate investors as more demand means that they can raise the nightly rate and still not compromize the occupancy rate. This, in turn, means higher return.
4. For Personal Use
The last major advantage of investing in a short-term rental as opposed to a traditional one is that you can use it for your own purposes. Because vacation rentals’ availability is marked on daily basis, you can decide when you want to stay at your second home with your friends and family and make those days unavailable for guests. In this way, you not only get to spend your holidays in a home-resembling atmosphere in your favorite location but also save money from expensive hotels.
Investing in Vacation Rentals: The Disadvantages
1. Legal Issues
The main drawback of this rental strategy is that short-term rentals are becoming illegal or at least strictly regulated in more and more markets across the US. The local authorities in many major cities such as San Francisco, San Diego, Los Angeles, New York, Boston, and others have issued regulations which basically eliminated vacation rentals for investment purposes there. Moreover, even if you invest in a location where Airbnb is legal at the moment, there is no guarantee that the situation will not change for the worse in a few months or years.
2. High Turnover
Unlike traditional rentals, vacation homes experience a very high turnover. Guests change every couple of days, which means that you have to clean, tidy up, and restock all the time. This increases your running costs and requires a lot of time and efforts. Being an Airbnb host can be equivalent to a full-time job. However, professional vacation rental management companies offer an affordable solution to this problem. They would take care of all aspects of your short-term rental business in a cost-efficient way, maintaining your income or even increasing it.
Investing in Long-Term Rentals: The Advantages
1. Stability and Predictability
The most important pro of buying a traditional rental property is that it provides a sense of stability and predictability. You have to put efforts into screening tenants well to find good ones and then you should take good care of your property, of course. But as long as you do that, you can expect your tenants to stay for a few years. This means that you will receive your rental income month after month without worrying about vacancies and turnover. This is an important consideration for real estate investors.
2. Few Legal Restrictions
The laws governing the relations between landlords and tenants vary from state to state. Some locations favor the former, while others favor the latter. Nevertheless, there are no places in the US real estate market where long-term rentals are absolutely illegal or where the regulations are so tight or restricting that they become prohibitive for investors. So long as you maintain your property, respond to your tenants’ reasonable requests and concerns, don’t discriminate against them, and pay your taxes diligently, you should be out of trouble.
3. Smaller Initial Investment
If you decide to rent out your investment property on long-term basis, you can decide whether to to furnish it or not. Furnishing an entire house or apartment from scratch requires thousands of dollars, no matter how good you might be at finding deals. You have to provide a comfortable and pleasant environment to be able to compete with other investors in the neighborhood. Nonetheless, you save yourself both money and time when you leave your property unfurnished. You don’t have this option with vacation rentals.
4. Minimal Ongoing Expenses
Similarly, long-term rentals entail lower recurrent expenses than short-term ones. As an Airbnb host, you have to replace the toiletries and water, change the sheets, and clean the property between all guests. Moreover, you have to periodically change any broken pieces of furniture and deal with more frequent damages to your property. Meanwhile, long-term tenants see your rental as their home, so in most cases they cause less damage than short-term guests.
Investing in Traditional Rental Properties: The Disadvantages
1. Difficult Rent Increase
Most states tend to protect tenants and make rent increases very hard. As a landlord, you will most probably face limitations on the frequency of changes in the rental rate as well as the actual size of the increase. This means that you might miss on an opportunity to make more money if demand in your market starts going up.
2. Bad Tenants and Eviction
Even if you apply the most scrutinizing screening process when choosing your tenants, you might still make a mistake and end up with bad tenants. However, most states put significant restrictions on the tools you have at your disposal to deal with them. When your tenants don’t pay rent, you have to give them a notice before you can take any legal action. If you suspect your renters are causing too much damage to your property, you can’t just walk in to check on the property; once again you have to notify them. Not to mention that a supposedly simple eviction process can take months in which you cannot make money from your investment property.
3. Suboptimal Return on Investment
As mentioned above, short-term rentals tend to yield higher return on investment than traditional ones. Nevertheless, this doesn’t mean that you can’t make good money with long-term rentals. As long as you select your market carefully and analyze your investment property diligently, you can make doubled-digit return with this rental strategy.
One of the best things about real estate investing is the diversity of options including the two main rental strategies. While both short-term and long-term rental properties have clear, objective pros and cons, you have to take into consideration your personal preferences and your own personality as a real estate investor before you can decide which one to pursue.
Daniela Andreevska is Marketing Director at Mashvisor, a real estate analytics tool which helps real estate investors quickly find traditional and Airbnb investment properties. A research process that’s usually 3 months now can take 15 minutes. We provide all the real estate information in easy to understand visualizations.