Short-Term vs. Long-Term Rental Properties: What’s the Better Investment?

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Here’s a thought-provoking question: which rental strategy is best for your investment property? The answer isn’t clear-cut; there are pros and cons to both short-term and long-term rentals. We’ve created a brief guide to help you understand the differences and decide which aligns with your goals.

Short-term rentals, also known as vacation rentals, are fully furnished accommodations available for brief stays. They can range from condos to detached homes and are typically rented at a fixed nightly rate. Platforms like Vrbo and Airbnb are popular for listing short-term rentals. While they can be lucrative, they require effort to manage the constant influx of tenants and income can vary with seasons.

Long-term rentals are more traditional and usually unfurnished spaces rented out for extended periods. Most have one-year leases, but some offer month-to-month options. Owners charge monthly rent instead of nightly rates and typically list properties on websites like Realtor. Long-term rentals provide a consistent cash flow and less tenant turnover, but come with challenges such as tenant screening and lease agreement formation.

Quick comparison:

Short-Term Rentals:

  • Higher income potential
  • Rapidly growing market
  • Access to unique markets
  • Requires more management effort

Long-Term Rentals:

  • Longer lease agreements
  • Lower turnover
  • Fewer operating costs

Now, let’s explore the pros and cons of short-term and long-term rental properties in more detail. Here are three key advantages of short-term rentals:

  1. Greater Income Potential: Short-term rentals, especially in popular tourist destinations like Nashville or Orlando, can offer higher earning potential. Owners can charge competitive nightly rates that often exceed those of long-term rentals. For example, owning a beachfront home in a tourist town with an average nightly rate of $350 for similar properties. If used as a vacation rental, this property would only need to be rented out for about 60 days (8 weeks) a year to generate the same income as if rented long-term at an average monthly rate of $2,500. According to Airbnb, vacation rentals have an average annual occupancy rate of 60%. So, if your property is occupied for 180 days (60% of the year), you could earn $54,000 – more than double the amount you’d make from a long-term rental.
  2. Growing Market: The vacation rental market in the US is booming. In 2022, it generated over $13B in revenue, projected to reach $20B by 2025. With a growth rate of +53%, the demand for vacation rentals is expected to persist for years.
  3. Access to Unique Markets: Short-term rentals provide access to markets that may not be as profitable for long-term rentals. Investors looking to diversify their portfolios can tap into larger cities or tourist hotspots where long-term rental yields might be low. Unlike long-term rentals, vacation rental owners have more control over their property. They can manage who rents the property and for how long, and even block out certain periods of the year for personal use.

However, short-term rentals also have drawbacks:

  1. Tenant Turnover: Managing a short-term rental property can be challenging due to frequent tenant changes. Depending on the property’s location and time of year, you may find yourself leasing to new guests every few days. This requires an efficient management system for check-ins, check-outs, and thorough cleaning between tenants.
  2. Unstable Income: While short-term rentals may offer higher income potential, the income is not consistent. Vacations usually last around five days, mostly during peak seasons. This means there will be periods when your property remains vacant and doesn’t generate income.
  3. Property Management Expenses: As a vacation rental owner, you are responsible for cleaning, maintenance, utilities, and more. Even with the assistance of a property management company, these costs can add up. However, these expenses are tax-deductible.

Now, let’s consider long-term rentals and their advantages:

  1. Stable Income: Long-term rental properties provide a steady income as they are leased for extended periods. You don’t have to worry about the seasonal fluctuations that affect vacation rentals.
  2. Lower Tenant Turnover: Long-term tenants typically sign lease agreements for at least a year, reducing the need for constant turnover and tenant vetting associated with vacation rentals.
  3. Reduced Property Management Costs: Maintaining long-term rentals is generally less expensive for owners. You don’t need to furnish the property or pay for frequent cleaning. Tenants are usually responsible for basic maintenance and utilities.

However, long-term rentals also have downsides:

  1. Income Limitations: Fixed monthly rental costs impose a cap on potential income for long-term rentals.
  2. Legal Concerns & Costs: Managing your own long-term rental property involves various legal fees and considerations associated with long-term leases.
  3. Lack of Flexibility: Unlike short-term rentals, you don’t have the freedom to stay in your long-term rental whenever you wish. Depending on regulations, you may need to provide advance notice before visiting.

In conclusion, short-term and long-term rentals each have their own benefits and drawbacks. Short-term rentals can be lucrative but come with higher management fees, while long-term rentals offer consistent income with more legal implications and less flexibility. The best strategy depends on your goals and risk tolerance.

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Navigating the real estate market can be overwhelming, but you don’t have to do it alone. Our platform empowers you to fractionally invest in vacation rentals, earn rental revenue, and build equity effortlessly. Explore our property selection and start your real estate investment journey now. Please note that the views expressed in this article are for educational purposes only and should not be considered as specific advice or recommendations for any individual or investment product. These opinions may change without prior notice. Refer to Foothold’s disclaimers for more information.

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