In recent years, there’s been a substantial increase in the number of real estate investors that rent their properties as short-term or vacation rentals. With the rise of sites like Airbnb and VRBO, short-term rentals are more accessible to all property owners, including those that want to manage their property themselves.
This increased accessibility raises interesting questions for buy-and-hold investors about the best strategy for their properties. Long-term rentals – rentals that generally have a one-year Lease term – and short-term rentals – which can be rented nightly, weekly, or even monthly – each have some distinct advantages and disadvantages.
Short-Term vs. Long-Term Rentals
To help you determine what’s right for you and your property, we’ll review some of the key differences between short-term and long-term rentals and important factors for investors and property managers to keep in mind when deciding on a strategy.
Advantages of Long-Term Rentals
Long-term rentals, the traditional go-to for buy-and-hold investors, have some distinct advantages that continue to make this an appealing option for investors. Here are a few that Landlords should focus on:
- Consistency and predictability. When you have a long-term Tenant, you receive consistent income throughout the year. Additionally, even before entering into a Lease, you can pretty accurately predict the amount of income you’ll get for the year as well as your annual expenses. This makes it easier to plan and budget, while also providing the peace of mind that comes from a steady, predictable cash flow.
- Fewer operating expenses. When you have a long-term Tenant, the Tenant generally pays for monthly expenses like utilities, internet, and pest control. In addition, the Tenant will handle cleaning and yard maintenance.
- Fewer property management responsibilities. Long-term Landlords have to get rental units ready for new Tenants, find and screen Applicants, and enter into a Lease Agreement. However, after this initial work, Tenants are in place, and the Landlord only needs to worry about handling maintenance and repair needs.
- Collection of a security deposit. Most Landlords collect a security deposit when Tenants sign a long-term Lease. This means that the Landlord can avoid having to pay to repair damage caused by Tenants beyond normal wear and tear.
- Thorough Tenant Screening Procedures. Before signing a Lease, Landlords can go through a complete Tenant Screening Process, including a credit report, ResidentScore, criminal history background report, income verification, and checking references. This means that Landlords only hand over possession of their rental unit to qualified Tenants.
Disadvantages of Long-Term Rentals
There are really two main disadvantages that come with long-term rentals.
- Less flexibility. Long-term rentals mean less flexibility in terms of how much rent you can charge and how you can use a rental property. Landlords are not able to adjust rental prices upwards during the Lease term if there are changes in demand or market values. Additionally, Landlords don’t have the flexibility to use, sell or move into the property during the Lease term.
- It’s more difficult to keep up with maintenance. While maintenance of long-term properties is easier, it can also be harder to stay on top of maintenance needs. Landlords are not regularly in the property, so it can be difficult to identify and stay on top of small maintenance issues.
It’s worth noting that some investors consider the fact that you’re stuck with one Tenant for a long period to be a disadvantage of long-term rentals. However, the fact that Landlords get the opportunity to thoroughly screen Applicants before selecting a Tenant means that this can be an advantage, rather than a disadvantage, for long-term Landlords.
Advantages of Short-Term Rentals
The key advantage of short-term rentals is the potential to earn more income, but here are a few benefits to keep in mind.
- Supply and demand pricing. When you manage a short-term rental, you can adjust prices whenever you want. This means you can increase rent on weekends, during busy seasons, or to respond to market trends. Because of this, in the right market and location, a short-term rental can bring in as much as 2-3 times the monthly rent of a long-term rental.
- More consistent maintenance. Landlords and property managers are regularly in and out of short-term rentals. As a result, you’re able to inspect the property and make needed repairs regularly. This ensures that your property stays in good condition and enables Landlords to stay on top of maintenance and, hopefully, avoid emergency repairs or problems.
- Increased flexibility. Short-term rentals give Landlords lots of flexibility. You’re able to use the property whenever you want to, raise the rent, change policies, or even decide to move into it long-term.
Disadvantages of Short-Term Rentals
Short-term rentals mean more risks and more work for Landlords. Here are some important drawbacks to this strategy that you should consider.
- Income is not guaranteed. Short-term rentals carry the risk of vacancies and inconsistent monthly income. While the Landlord’s monthly expenses remain consistent, monthly income is not guaranteed. This means that Landlords need to have plenty of cash to cover periods of vacancies and be prepared for fluctuations in rental income. In addition, it’s important to do lots of research about the short-term rental market in your area to ensure that this is a wise option.
- Higher operating expenses. Short-term rentals also mean more operating costs for Landlords who have to pay for things that long-term Tenants generally cover – for example, utilities, internet, cable, and pest control. In addition, Landlords have to furnish the unit and keep it stocked with linens, towels, and kitchen and bathroom supplies.
- More property maintenance demands. Short-term rentals also mean more time managing the property. Landlords have to regularly advertise, communicate with Tenants, and prepare the property for Tenants. In addition, they’re responsible for cleaning, yard work, and addressing ongoing wear and tear.
- Complex local laws and regulations. One key thing to consider before starting with a short-term rental is what local regulations might impact your business. Some municipalities and HOAs have occupancy limits or bans on vacation rentals. It’s vital to research and understand any applicable restrictions before getting started with a short-term rental.
- Less Tenant Screening. While you’ll only have Tenants for a short period, you’re still giving them possession of your rental unit without the opportunity to do the comprehensive Tenant Screening that is standard for long-term rentals. This means less control over who is in your property and an increased risk of Landlord headaches.
Get the Tools You Need to Manage Your Property
It’s really a personal decision, and each Landlord has to determine which strategy is the best fit for their situation and rental unit. Once you’ve determined which strategy you’re going to use, we can help you manage your unit. Visit ezLandlordforms.com for Tenant Screening, state-specific Lease Agreements, Vacation Rental Contracts, and Vacation Rental Instruction Forms.
Emily Koelsch, ezLandlordForms Contributing Writer
Emily Koelsch is a freelance writer and blogger, who primarily writes about business, real estate, and technology.