Short-Term Rental vs. Long-Term Rental: Which is a Better Investment?
Rental property investments can fall into multiple categories. Most of the time, we are talking about residential rentals here on the PropertyLark Blog. However, we often get asked about the pros and cons of short-term vacation rentals. Both can make you a lot of money. Which path is best for you will depend on a variety of factors. So, let’s compare the investment planning for a short-term rental vs. long-term rental, so you can decide which way you want to go with your rental properties.
Here are several factors you should consider when deciding between a short-term vacation rental or a long-term residential rental:
This is often the most important factor, and they always say the three most important words in real estate are “location, location, location.” This is especially true in rental property ownership. If you own a house in a suburban area, college town, urban sprawl or rural market, you are more likely to utilize it as a long-term rental. You want tenants in there for longer lease periods and you want minimal vacancy. This is how you’ll make the most money over time.
However, if you own a house or condo in a desirable destination that attracts a lot of vacation visitors, seasonal tourists or drive-through traffic, then a short-term rental may be a better opportunity. You can get more bang for your buck with shorter rental periods (days, weeks, or maybe a month at a time) at higher prices. Your property may not be occupied as often and the best profit periods may be seasonal. Yet, when all is said and done it can be much more lucrative if the location is desirable.
How much time and money you want to spend managing the property may also factor into your decision between a short-term rental vs. long-term rental. This is true even if you are hiring a property management company to handle the day-to-day activities. In general, residential rentals are easier to manage. The property doesn’t have to be advertised as often. Rent is collected monthly. Tenants are in there for longer periods of time. You don’t have to worry about frequent cleaning and turnover. The income is also more consistent.
Short-term rentals of vacation properties definitely will take more time and effort to manage effectively. You have people renting out the house for shorter periods of time, so there is more turnover. At the same time, you usually don’t have to worry about the damage that long-term tenants can do. Most well-managed vacation rentals just need to be cleaned and restocked between each guests, with minor maintenance as needed. Long-term rentals generally require new paint, carpet and significant repairs in between tenants.
With any buy and hold real estate investment, you have to consider the costs of ownership. You are holding this property for awhile, so there are always expenses like insurance, property taxes and upkeep. With short-term rentals, you are paying for the utilities. With long-term rentals, your tenants are paying for the utilities. This is the primary difference in ownership costs. Both will require some advertising to keep occupied. Long-term rentals (hopefully) won’t need to be marketed as often in between tenants, while vacation rentals constantly have to be advertised and managed through paid service sites like AirBnB or Vrbo. The good news is these sites make it so much easier to manage a short-term rental than it was in the past.
Setting a price for a long-term rental is a strategic process. You have to find the right price point to attract tenants who will hopefully stay there for a long time. You can raise the rent a little every once in awhile, but you don’t want to scare away your good tenants. To earn healthy profit from a long-term rental, it takes time (hence “long-term” in the description).
Short-term rentals, on the other hand, allow you to adjust pricing much more often like a hotel. Your weekend pricing is going to be higher than weekdays. Your rates will be more expensive during a peak travel season than during slower times of year. You can develop a sophisticated variable pricing model that allows you to maximize profit, even if the property isn’t occupied all the time. Plus, you can also set aside time for your own personal use if you want.
Both short-term rentals and long-term rentals can be very profitable. Which path you choose is up to you, and hopefully the factors above will help you make a more educated decision. The important thing to remember is to create a strong investment plan and manage the property well. This is how you become successful as a buy and hold rental property owner.
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