LONG-TERM VS SHORT-TERM RENTALOct 30, 2023
LONG-TERM VS SHORT-TERM RENTAL
It seems as if rental properties are more popular than ever. As of 2023, an estimated 34 percent of households in the U.S. are renters. It’s an incredibly lucrative real estate investment for investors.
Property owners, or even a property management company, can decide whether to rent a property for the short-term or long-term. Both types of lease agreements offer unique benefits as well as potential disadvantages.
If you’re looking to rent a property, short vs long-term rental is just one of the many decisions you’ll have to make. By writing this post, I hope to help you decide on the best rental strategy for your property.
LONG-TERM VS SHORT-TERM RENTAL
A lot of investors may opt for long-term rental, but it’s not always the best option. Whether to go with long-term or short-term rental depends on the property. By learning more about the differences between the two, as well as the pros and cons, I hope to help you make the right investment decision for your unique situation.
WHAT IS A LONG-TERM RENTAL?
A long-term rental property is usually rented to a tenant for an extended time, at a set annual rent. For residential leases, most long-term rentals are for 12 months, although some circumstances allow for longer leases. Single-family homes tend to work better as long-term rentals.
PROS OF LONG-TERM RENTAL
Investing in long-term rental properties is a great way to have a more predictable cash flow. With long-term tenants, rental income is more consistent, as long as the tenant pays their rent on time.
Predictable rental income makes it easier to budget for upkeep and repairs compared to short-term rentals. Plus, you can more accurately predict the potential return on your investment.
EASIER TO FINANCE
Investing in a long-term rental can also be easier to finance. Since the cash flow is more predictable with long-term renters, real estate investors can often get better interest rates and financing terms. Lenders tend to view long-term rentals as less of a risk due to lower chances of vacancy and repair costs.
LESS TENANT TURNOVER
With a long-term rental property, there are usually fewer administrative tasks to worry about. Administrative tasks for a rental property include marketing, signing a new lease, and preparing the property for a new tenant.
LOWER OPERATING COSTS
With a long-term rental, the renters are usually responsible for basic upkeep like cleaning, yard work, and utilities. Long-term rentals also usually have less wear and tear, because long-term tenants tend to take better care of a place they treat as their home, rather than a temporary place to stay.
CONS OF LONG-TERM RENTAL
With a long-term rental, rental owners have less flexibility when it comes to rent prices. With a long-term lease agreement, the rent price usually stays the same for the extent of the lease. This can limit potential cash flow, especially in a fluctuating economy.
MORE DIFFICULT MAINTENANCE
Maintenance tends to be more difficult with a long-term rental property because minor problems are harder to catch. Landlords can conduct quarterly or semi-annual property inspections, but they have to provide appropriate notice beforehand. Whereas with a short-term rental, the property can be inspected more often.
WHAT IS A SHORT-TERM RENTAL?
A short-term rental property is usually rented to a tenant on a weekly, monthly, or even daily basis. Common short-term residential rentals include vacation homes and single-family homes that are rented to a tenant on a month-to-month basis. Condos and apartments are usually the best types of properties for short-term rentals, although single-family homes are a popular option for short-term vacation rentals.
PROS OF SHORT-TERM RENTAL
HIGHER INCOME POTENTIAL
With a short-term rental property, it’s much easier to adjust the rent price based on the current market rate. This allows you to maximize the potential gross rental income. A short-term rental property can potentially bring in 2-3 times more monthly income than a long-term rental.
Short-term rental properties are also usually easier to maintain because they’re typically inspected more often. This makes it easier to stay ahead of potential maintenance problems and prevent greater repair costs.
Many investors opt for short-term rental agreements to allow for greater flexibility if they’re thinking about selling the property. With a long-term rental, investors are forced to wait until the lease is up and potentially face more problems that have to be addressed before the property can be listed for sale.
CONS OF SHORT-TERM RENTAL
LACK OF GUARANTEED CONSISTENT INCOME
With a short-term rental comes the risk of a property potentially sitting vacant for a while. This means there’s no guarantee of rental income compared to the predictability of long-term rentals.
HIGHER OPERATING COSTS
Short-term rentals tend to require more maintenance because they’re usually leased fully furnished and often need to remain stocked with standard home items as well as personal items.
With a short-term rental, the landlord typically pays for utilities like electricity, water, gas, trash, and even TV and internet services. These costs can be factored into the rental price, but the overall cost can add up.
LOCAL LAWS, REGULATIONS, AND RESTRICTIONS
Depending on the location of your rental property, you may encounter laws, regulations, or restrictions that affect your ideal management of the rental. For example, some cities or neighborhood HOAs limit how long a property can be occupied by renters. In some places, property owners have to collect an occupancy tax for short-term rentals.
ARE LONG-TERM OR SHORT-TERM RENTALS MORE PROFITABLE?
In short, there’s no right or wrong answer to this question. As outlined in this post, there are pros and cons to both types of rental properties. Deciding whether to choose a long-term or short-term lease depends on your personal and financial goals, as well as your comfort level.
It’s important to consider the risks and rewards of both types of rentals. Do you value higher income potential over low-risk, steady income? Do you prefer less maintenance or are you less concerned about the time and cost of property management?
Both options come with their own potential challenges and rewards. It’s important to be aware of both before deciding which type of rental property best suits you.
THERE ARE ADVANTAGES AND CHALLENGES TO BOTH LONG-TERM AND SHORT-TERM RENTALS.
Taking into account everything you learned in this post, which type of rental do you think would work best for you? I’d love to hear your thoughts on rentals and short-term vs long-term leases. Leave a comment below!
PS - all the photos in this blog were AI generated using Canva. What do you think?
To learn even more about investing in a rental property and ways to maximize your potential income, schedule a consultation. While you’re at it, check out my post on home renovation tips to discover ways you can create a more welcoming space.
Then, head over to the blog for tons of info on interior design, property ownership, and much more.