How to Know if Long-Term or Short-Term Rental Properties Are Right For You
The post-Covid real estate market is uniquely strong for sellers, but when the economy normalizes again you will want to be prepared with strong rental properties.
Not every real estate investor wants to become involved in the rental property market, but there is a lot of satisfaction in having an investment that can pay for itself along the way to a final big sale. One path to improving your return on investment is to consider renting your properties.. A home or unit can be rented for a few days or a week at a time or for a 3, 6, or even 12 month window via a lease. If you are new to this, there are a lot of variables to consider.
Where do you start?
Making money in real estate happens in multiple ways, and it isn’t all about flipping houses for profit. You can use real estate investments as a tool to generate cash flow along the way. There are two primary routes you can take here as a real estate investor: Short-term and long-term rentals. Each comes with its own set of positives and negatives.
Why go with short-term rentals?
- They bring in more money than long-term rentals, since you are catering more to the vacation crowd and can charge day and week rates that are more comparable to hotels.
- Tax breaks are generally more advantageous to short-term rental owners. For example, you can claim many more deductions for cleaning and maintenance with a short-term unit since it needs such services much more often.
- You get to meet a lot more new people! Whether you are renting a beach house or a condo near Disney World, you will come across people from all around the country and even the world. Who knows? You may hit it off with someone and make a new friend for life!
- Short-term rental properties allow for greater flexibility as you can choose how much, or little, you rent. If renting your place in San Diego for two weeks every month nets you your goal, you don’t have to rent it out the other two weeks.
- As an investor, you need to be particularly mindful of your properties’ ROIs. A big part of this is the cap rate for a given home or unit. The capitalization rate is the ratio of a property’s net operating income to its purchase or sale price. Short-term rentals tend to have better cap rates, as you are able to generate more income in a given year as a percentage of property value. By this same logic, short-term rentals will also generally yield better cash-on-cash return, which compares income to the money an investor is putting into a property.
- While keeping high occupancy rates can be a major factor with long-term rental profitability, it isn’t nearly as big of an issue with short-term renting. It doesn’t matter if you have 50% occupancy when you can still easily cover your costs and maintain a profit margin by charging rates that are competitive with local 3-and-4 star hotels.
Why might you choose long-term rentals?
- Without the constant turnover of vacationers, there is less work in maintaining the property. This can be a huge plus when you consider how much time and money is needed to keep a place clean, all of its appliances functional, handling any plumbing and electric problems that crop up over the years, and all of the outdoor upkeep that’s needed.
- If you invest in a property that is unfurnished, you may not need to lay out another five or ten thousand dollars to furnish it. Many long-term renters of single family homes and even condos or apartments expect to furnish their place on their own. Short-term renters not only need full furnishings, but they also need nice furnishings, which can mean reupholstering or even buying replacement pieces every so many years.
- While you can make more money with short term rentals over the course of a year, it is often highly seasonal and therefore less consistent. Long-term rentals give you a little peace of mind in knowing you have the regular $1,000, $2000 or whatever the rental fee might be coming in every month. Many real estate investors who choose to go the long-term route with properties do so with the express goal of covering the mortgage on the property, with a little extra on top to cover maintenance.
- In general, long-term renting leaves less little expenses for you to worry about on a monthly basis. The renter can pay for the utilities, internet, lawn care and other monthly expenses out of their own pocket if you choose.
- Less marketing! With a long-term rental, you only need to run one cycle of marketing after the current tenants leave. This might be once every 6 months, once a year, or even every few years. Less marketing means both less of your time posting and responding to potential tenants as well as less cost if you are in an especially competitive area and need to spend money to get noticed.
- Homeowners Associations can be difficult to deal with regarding short term units. They are much more forgiving with long-term rental properties on the whole.
- You can charge a security deposit, and sometimes can even get away with asking for first plus last month’s rent.
So now that you know some of the advantages and disadvantages of both short and long-term rental investment properties, you can make a more informed decision. There are other important variables for you to consider, as well:
- You can consider utilizing turnkey real estate companies that can guide you to find properties that are considered rental-ready.
- You need to make sure the properties you invest in have overall strong qualities that will help you find the best-paying renters, including location in a strong real estate market, being in good condition, and being a positive cash flow property, among other factors.
- Know what potential problems you might encounter if you are considering renting out properties you own over long distances.
- Look into all of you various options, like single family homes or even using AirBnB.
Making money in real estate is an exciting, challenging occupation. While some experienced real estate investors recommend one over the other, it can be a good strategy to try a mix of both short and long-term properties in your portfolio for a while to find out what you prefer.