Short-Term vs. Long-Term Rentals: Pros and Cons

Deciding between short-term and long-term rentals can be a crucial consideration for real estate investors seeking to maximize their returns. Investors should consider their financial goals, risk tolerance, and the level of involvement they are willing to commit when determining which real estate investment strategy is better in the battle of short-term vs. long-term rentals.

Short-term rentals may offer higher income potential but come with more volatility and operational demands, while long-term rentals provide a more passive income stream with fewer management responsibilities. Continue reading to learn the pros and cons of short-term rentals and long-term rentals.

What is a Short-Term Rental?

A short-term rental refers to the practice of renting out a property, such as a house, apartment or room, for a relatively brief period, typically ranging from a few nights to several weeks. Short-term rentals have gained popularity with the rise of online platforms like Airbnb, HomeAway and VRBO. These platforms directly connect property owners or hosts with potential guests, potentially increasing rental opportunities and revenue.

Short-term rentals offer the potential for higher income, especially during high seasons or at popular holiday destinations. However, as an owner, you'll also need to spend more on property cleaning, preparation and maintenance.

What is a Long-Term Rental?

A long-term rental refers to the practice of renting out a property, such as a house, apartment or room, for an extended period, typically involving leases that last several months or more. Unlike short-term rentals, which cater to temporary stays, long-term rentals are intended for more extended and stable housing arrangements.

What is considered a long-term rental? While any month or more rental may be classified as a long-term rental, the most common long-term rental structure is an annual rental, with renewal options after each 12 to 24 months. Long-term rentals offer stability for tenants and owners. However, long-term rentals can lead to additional wear and tear on the property and difficulty raising rental prices in proportion to rising market costs.

Are Long-Term or Short-Term Rentals More Profitable?

In comparing the profitability of short-term rentals vs. long-term rentals, many factors can influence the profitability of a particular property. Both risk vacancies, which can cut into profit margins, but otherwise, profitability depends on the property type, location and specific market. Generally, short-term rentals have higher income potential but require more management and cleaning costs and risk higher vacancy rates.

For example, a luxury vacation home in a beach resort could rent for $1,000 a night during the high season (June through August, plus spring and winter breaks). Assuming 60% occupancy during those 4 months, the rental income for the property could be $96,000. $1000/night * 120 days *.6 (60%) = $72,000 before expenses such as management, cleaning and maintenance.

If, instead, you plan to rent the property as a long-term rental with an average monthly rate of $3,500, the total income would be $42,000. However, you would have lower cleaning costs and less time required to manage the property. In addition, consider allowable tax deductions and recordkeeping requirements for each type of income.

As each property and location is unique, to determine which is more profitable, you need to compare short- and long-term rental prices for comparable properties in the area. With those figures, look at average occupancy rates in the area and weigh maintenance, cleaning and management costs to determine which makes more sense.

Comparing a Short-Term Rental vs. a Long-Term Rental

If you're considering whether to rent a property short-term or long-term, here are a few key considerations.

Rental Income Potential

• Short-term rental: Short-term rentals, such as those on platforms like Airbnb, can often generate higher rental income per night or week, especially in popular tourist destinations or areas with high demand during peak seasons.
• Long-term rental: Long-term rentals generally offer more stable and consistent rental income over an extended period. While the rental rates may be lower on a per-night basis, long-term tenants provide a reliable source of income.

Occupancy and Rental Demand

• Short-term rental: Short-term rentals may experience fluctuating occupancy rates, depending on seasonal demand, local events or tourism trends. It's important to assess the demand and occupancy patterns in the specific location to determine the potential income and vacancy risks.
• Long-term rental: Long-term rentals typically have more stable occupancy rates, as tenants sign leases for extended periods. The demand for long-term housing is generally driven by factors like population growth, job opportunities and housing needs.

Property Management and Maintenance

• Short-term rental: Managing a short-term rental property often requires more active involvement, including guest communication, turnover cleaning and addressing guest needs. This process may require additional time, effort and potentially hiring professional property management services.
• Long-term rental: Long-term rentals typically involve less frequent turnover, as tenants stay for extended periods. While landlords still need to address maintenance issues and tenant requests, the management requirements are generally less intensive. However, maintenance and property wear-and-tear are generally higher in long-term rentals.

Flexibility and Personal Use

• Short-term rental: Investing in a short-term rental property can offer the flexibility to use the property for personal purposes during periods when it's not rented out. Property owners can block off specific dates or adjust availability based on personal preferences.
• Long-term rental: With long-term rentals, the property is committed to tenant occupancy for the duration of the lease. Landlords have less flexibility to use the property for personal purposes until the lease term expires.

Regulatory Considerations

• Short-term rental: Operating a short-term rental property, especially on platforms like Airbnb, may be subject to specific regulations, permits or restrictions imposed by local authorities, homeowner associations or short-term rental regulations. Compliance with applicable laws and regulations is crucial and may limit short-term rental opportunities in certain areas.
• Long-term rental: Long-term rental properties are typically subject to landlord-tenant laws and regulations, which vary by jurisdiction. Landlords must comply with legal requirements related to lease agreements, tenant rights and eviction procedures.

Should You Invest in Short-Term Rentals vs. Long-Term Rentals?

Whether short-term rentals vs. long-term rentals offer greater financial opportunities and stability will depend on the specific market and property. Both long- and short-term rentals can offer excellent potential returns with the right setting.

Market research on comparable properties and vacancies and understanding local supply and demand will help investors locate the greatest potential in a specific area. The owner's time for management or budget to hire managers can influence the best rental structure. While building a rental portfolio, investors can consider a mix of long-term and short-term rentals for different risk profiles and returns.

Just getting started? Find a guide to purchasing your first rental property here, then find the best short-term rental insurance. Or get Benzinga's complete guide to real estate investing.

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