Short-Term Rentals Versus Long-Term Rentals: Pros & Cons
Those who purchase a rental property have the option to rent short-term or long-term. Many might opt for the long-term rental option, although this might not be the best option for everyone. In this article, we will take a close look at short-term rentals versus long-term rentals and their pros and cons to help you make the best decision when renting.
Short-Term Versus Long-Term Rentals: Understanding the Difference
A common way to invest in the world of real estate is by owning and operating rental property. In residential real estate, a rental property is classified as either being a short-term or long-term rental.
- Short-Term Rental: Rented on a daily, weekly, or monthly basis. Common examples of short-term rentals include vacation rental homes or a single-family rental home with a month-to-month lease.
- Long-Term Rental: Rented to a tenant with a 12-month lease term at a fixed annual rent. Residential leases are typically for 12 months at a time, though some landlord-tenant laws allow for leases longer than a year.
Long-Term Rentals
There are many advantages of having a long-term rental, along with disadvantages to consider as well.
Pros of Long-Term Rental Property
- A Predictable Income: Rental income is going to be consistent through the whole year when a tenant is on a 12-month lease and pays the rent promptly. Understanding how much cash is coming in each month will make it easier to budget for repairs and maintenance and to forecast the potential return on investment.
- Easy to Finance: A rental property that is occupied by a tenant on a long-term lease can be easier and more affordable to finance when an investor knows what the cash flow stream is. Attractive interest rates and financing terms can be received by real estate investors when a lender looks over a long-term rental, like having less potential risk due to high repairs and vacancy rates.
- Low Operating Expenses: Renters who are on a long-term lease take care of basic items like cleaning the home, conducting yard work, and paying for their utilities. Long-term rentals have less wear and tear, as tenants take better care of a property they think of as their home instead of a hotel.
- Lower Tenant Turnover: Tasks like marketing a property for rent, negotiating and signing a new lease, and getting the property ready for a new tenant are lower with long-term rental plans.
Cons of Long-Term Rental Property
- Raising Rent Limitations: A big drawback to having a long-term rental is having less flexibility in raising the rent. A lease agreement will normally call for a rent price to remain the same through the term of the lease. The potential for cash flow you would get from a rental property is limited by rent prices outlined in a long-term lease agreement.
- Maintenance is Difficult: Catching and repairing maintenance problems before becoming big and expensive with long-term rental properties can be more difficult. To avoid violating a tenant's rights, landlords can choose to perform property inspections on a semi-annual or quarterly basis to give proper notice before entering the property.
- Unqualified Tenant Risk: A long-term rental typically has a lease of 12 months, and prospective resident screening is important. With the best tenant screening process in place, a landlord might rent to a tenant who pays rent late, constantly complains, or damages the property. The eviction process can be time-consuming and expensive.
Short-Term Rentals
Long-term rentals can be more predictable rental income and easier to manage, though there are reasons why an investor might want to consider a short-term rental.
Pros of Short-Term Rental Property
- I spoke with Bob Jamison of Tuscana Properties for his advice: "High Income Potential: An investor with a short-term rental can adjust the rent price to meet current market rates, maximizing the amount of rental income. Depending on your local market, a short-term rental property can generate three times the amount of monthly rent compared to a long-term rental."
- Easy to Maintain: A tenant stays for a limited length of time; a short-term rental property is easier to maintain. Homes are thoroughly cleaned every time a tenant leaves, as well as inspected for needed maintenance issues before a new tenant is due to take over the lease.
- Increase in Flexibility: Investors provide a short-term rental agreement to keep options open if they consider selling.
Cons of Short-Term Rental Property
- Consistent Income is Never Guaranteed: Short-term rentals typically guarantee more rental income; there is always the risk the home will sit vacant for an extended period. When a property is rented long-term, it is easier to predict how much rental income can be collected every month.
- High Operating Expenses: Short-term rentals are more maintenance intensive, particularly when a tenant is using the rental as an alternative to staying in a hotel. Property that is rented short-term needs to be fully furnished and well-maintained and needs to be stocked with personal items like towels, sheets, toilet paper, and cooking supplies.
- Utility Expenses: A tenant living in a short-term rental expects a landlord to pay for utilities like gas, electricity, water, cable TV, and trash. Utility expenses might be added to rent, all additional bills can be too many items to manage for real estate investors.
Conclusion
There are advantages to both short-term and long-term rental properties, and the right choice for an investor might not be right for another. People who own and manage real estate will find investing in a short-term rental might be the ideal option. On the flip side, investors interested in a property that will generate a more predictable income and easier to manage will find long-term rentals to be the better choice.