Investing in a rental property is one of the best ways to generate income and build wealth. When buying a rental property, you need to decide whether you’ll lease the home on a short-term or long-term basis. These two options are very different in terms of marketing and management, so it’s not a decision to take lightly. Exploring the pros and cons of both can help you make an informed choice.
Pros of Short-Term Rentals
Short-term rentals have exploded in popularity in the last few years. Owning and operating a short-term rental property can be especially lucrative if you live in a popular tourist destination. Here are some of the key advantages of short-term leases:
Higher Rates
Per night, you can charge a much higher rate for a short-term rental than you can for a long-term lease. When the units are properly managed, property owners tend to make higher profits on short-term vacation rentals. If maximizing your profit is your goal, a short-term rental may be the way to go.
Easier Maintenance Checks
Because guests are always coming and going in a short-term rental, you have frequent opportunities to go inside and check for maintenance issues. Catching and repairing small problems before they turn into major headaches is one of the greatest benefits of operating a short-term rental.
Potential for Personal Use
A short-term rental property offers you a lot of flexibility. You could use the property yourself for a vacation or let family or friends stay there if they come to visit. All you have to do is block off those dates so other guests can’t book them.
Cons of Short-Term Rentals
Short-term rentals are highly flexible and profitable, but there are also some challenges to managing a vacation property. The following are some downsides to keep in mind:
Time-Consuming Management
Managing a short-term rental is much more time-consuming and hands-on than managing a long-term lease. You constantly have to market your property to find new guests, and you have to clean and inspect the unit between every visitor. You’ll also have to communicate more with your tenants because every guest may have questions, concerns, or requests.
Heavy Competition
In some areas, the market has become over-saturated with short-term rentals. Investors know how lucrative these properties can be, so a large number of houses and apartments in popular tourist destinations have already been converted to vacation rentals. You also have to compete with local hotels, so you need to have a great marketing strategy to keep attracting guests.
Risk of Long Vacancies
You’re never guaranteed guests in a short-term vacation property, so it can be a risky investment. Many popular tourist destinations have an on-season and an off-season. If you’re going to purchase a short-term rental, you should make sure you can financially withstand long vacancies.
Need to Furnish the Unit
Unlike long-term rentals, vacation properties need to be furnished. Additionally, they should be furnished with quality, aesthetically pleasing items to generate more interest in the unit. This is an extra up-front expense that you need to be prepared for when investing in a short-term rental.
Pros of Long-Term Leases
Renting to long-term tenants may not be as profitable as managing a short-term rental, but it has plenty of its own benefits. Here are some of the best advantages of owning a long-term rental:
Consistency
Renting to one tenant for a year or longer offers you much more consistency than renting out a unit for one or two nights at a time. You can get to know your tenant and build a positive professional relationship with them, which makes them more likely to treat the unit with respect. The income from a long-term lease is much more consistent as well. You know exactly how much you’ll be paid every month, so managing your finances is easier.
Thorough Tenant Screening
When renting to a long-term tenant, you’re able to screen them more thoroughly before signing a lease. Although this creates extra work for you, it also means that you’re facing less risk. You can’t conduct a background check or credit check on every vacationer that stays in your short-term rental, so there’s a greater potential for property damage, rowdy behavior, or other problems.
Utilities Paid By Tenant
Some landlords pay the utilities themselves, but many long-term tenants pay their own utilities. This cuts down on your monthly expenses, which can help to counteract the lower rate you charge when renting to a long-term tenant versus a short-term one.
Easier to Finance
Because the income from a long-term rental is more predictable, you may find it easier to get financing. Lenders may hesitate to offer you a mortgage for a short-term vacation property because you can’t guarantee a consistent income. Even if you can receive financing for a vacation property, you may get a lower interest rate and better terms on a long-term rental home.
Cons of Long-Term Leases
Long-term leases have their downsides, too. Before signing a year lease with a tenant, you should take the following disadvantages into consideration:
Lower Profits
Overall, the potential for profit with a long-term rental is less than with a short-term rental. In the right market, you can charge hundreds of dollars per night on a vacation home. A monthly rental rate simply cannot compete. You also have less flexibility with changing the rate, especially if your tenant is locked into a year-long lease.
Risk of Problematic Tenants
Although you should screen your tenants before they sign a lease, there’s always a risk that a tenant will miss their rent payments, trash the unit, or create problems with neighbors. Regulations vary from state to state, but in most places, the law tends to favor tenants over landlords. Dealing with a difficult tenant can be an incredibly stressful experience, and you might not be able to get rid of them until the lease expires.
Less Frequent Maintenance Checks
When you have a long-term tenant, you don’t have many opportunities to enter the unit and check for maintenance issues. It can be unsettling not to have eyes on your property. Some tenants will be proactive in reporting problems, but some won’t reach out until something major breaks.
Which Option Is Right for Your Property?
Managing a short-term rental is a completely different experience from managing a long-term lease. If you live in a popular tourist destination that isn’t completely over-saturated with vacation properties, you could make a great income from a short-term rental. However, you should be prepared to dedicate a lot of time to marketing the property, responding to inquiries from guests, and cleaning and inspecting the unit between visitors.
If you prefer a more steady and laid-back experience, a long-term rental is probably a better option. Owning a long-term rental is still a major commitment, but it doesn’t require as much hands-on work as a vacation home. What’s most important with a long-term unit is that you find a respectful, trustworthy tenant with a solid renting history.
Every real estate investor has different goals and priorities. To decide between a short-term and long-term rental, consider whether you value profit, consistency, or flexibility most. You can always consult with a real estate agent or financial advisor who’s familiar with the market in your area, too.