Once you made a decision to invest in the rental property you have another important choice to make. Will you prefer short-term or long-term renting? It is quite different business strategies and you should carefully weigh the pros and cons. Short term rentals usually last for a week or two and are paid on the daily basis. In long-term rentals, tenants can stay for a couple of years and have to pay monthly. There are crucial differences between these two, including tax benefits, arrangements with utilities, marketing approaches, and management issues. Let’s compare vacation rental vs residential rental.
Long Term Rental
Long term rental is a time-honored investment. It was a source of additional income and a sound real estate investment for centuries. However, for a couple of decades, it went out of fashion due to the New Deal policies introduced under Roosevelt. Government-sponsored enterprises like Fannie Mae and Freddie Mac expanded the secondary mortgage markets. That increased the supply of money accessible for mortgage lending and multiplied the money available for new home purchases. This policy made mortgages cheap and accessible to the general population. Moreover, after Roosevelt, each new presidential administration introduced some form of tax cuts for homeowners. As a result, the number of homeowners skyrocketed and the population of renters scaled back.
But the times have changed. The subprime mortgage crisis, changing demographics, tectonic shift in the labor markets and new types of employment created a fashion for renting.
Nowadays more U.S. households are renting than at any point in 50 years according to Pew Research and Census Bureau. The number of households renting their home rose by almost 7% since 2006, which is 43 million. Historically, certain demographic groups, such as young adults, non-whites, and people without a college degree are more prone to rent. The numbers only keep growing, rental rates among these group increased tremendously over the past decade. Additionally, groups that traditionally stick to homeownership like white middle-aged adults also switching to renting. This is especially true for the large urban center that was revitalized and gentrified. Active and ambitious people leaving their sleepy suburbs for the vibrant life of the city. A strong upward trend in the number of renters suggests that now is a great time to buy a rental property.
Advantages
Stability. The property owner has a guaranteed income every month. Once the lease agreement was signed the landlord does not have to worry about marketing and advertising for at least another year. It is also a lot easier to plan expenses, balance the budget and plan new investments.
Safety. The landlord and tenant sign a serious legally binding document. If a tenant fails to comply with the terms, it will result in a bad credit score and will be shown in the background checks. Security deposit is another safeguarding mechanism from delinquent tenants. The landlord has a guarantee that any possible damage to the property will be reimbursed.
Utilities are tenants responsibility. Various utilities such as electricity or water are charged based on the meter readings. Tenant is conscious of the spending. Various other costs, such as cleaning, maintenance, and security commonly assigned to the tenant as well.
Disadvantages
Lack of flexibility. The real estate market is changing rapidly. Once unpopular and disenfranchised area can suddenly become new gentrified destinations. However, the landlord cannot raise price or renegotiate terms, since the standard rental agreement is rock solid in this regard. Selling occupied property is also quite challenging.
Exhausting search process. Before renting out the property for the long period of time landlord has to make sure that the candidate is a good fit. Gathering references, background information and credit reports can take a long time.
Expensive marketing. Long term rentals are susceptible to low turnout and vacancies. And if you have your property vacant even for a couple of months – you are losing money. Landlords contract with property managers and brokerages for a reason. It is demanding to advertise and manage the property on your own.
Short term rental
Short term rental is a relatively new practice and industry. It is mainly vacation rentals.
In the pre-internet era, this niche was dominated by hotels. Business executives on assignment, international and out-of-state tourists didn’t know any better. Hotels were widely advertised, had an established brand, and could guarantee the high quality of services. This industry was regulated and effectively managed. In contrast, short-term rentals were considered a shady arrangement. The sphere was purely regulated, there was no platform that would ensure even minimal accountability. Landlords did not have an effective mechanism of outreach.
But the introduction of the internet changed everything. This new medium reshaped the traditional vacation rental relationships. VRBO ( Vacation Rental by Owners) was founded in 1995 and became the pioneer in this field. The industry gained momentum in 2007, after a series of mergers and acquisitions. The following year Airbnb was founded. Despite the legal controversies by 2017 prominent companies managed to establish clear guidelines, industry standards, and accountable business practices.
Today, the vacation rental is a $100B market with a 21% US market share in it. Now let’s assess the major pros and cons of holiday rentals.
Advantages
Flexibility. The owner or property manager have wiggle room in terms of price and conditions. In high season, fees can be significantly raised, while in the low season landlord can provide a substantial discount. Property owners can also stop renting out any time to perform necessary maintenance or construction, or simply use it for themselves.
Higher rental income. Generally, short-term rent rates are higher than long-term rental rates. If the owner finds an effective way to reduce vacancies, vacation rentals can generate a much higher return on investment.
Simple procedures. Short term lease is pretty straightforward. You do not need to collect references or go through complicated background checks. In addition, you do not need to renovate the premise or instant new locks and order keys.
Disadvantages
Complicated management. Short-term rentals require much more effort form the owner. Tenants are frequently changing, and the landlord has to be constantly on duty. It is a fulltime job. The landlord is responsible for administration, cleaning, welcoming newly arrived.
Wear and tear. Vacation rentals tend to age fact. Occasional visitors are much more negligent and reckless than permanent tenants. In addition to traditional maintenance expenses landlord have to pay for regular cleanings, paint fixes, repair of electronic devices etc.
Unstable income. Even though the rates are much higher for a short-term lease, there is no guarantee that your property will be permanently occupied. Vacation rentals are very seasonal. During peak season you may have a constant stream of tenants, while in low season you could hardly attract anybody. Planning a coherent budget is almost impossible.
Conclusion and Discussion
I can’t give you advice on which rental strategy you should choose. It all depends on the context. If you have a property in a popular tourist destination, next to a beach or natural preserve, renting out short term would make a perfect sense. The list does not end there, plenty of people might need a residence for a short-term: corporate executives on a business trip, parents visiting their kid in college, big family gathering, weddings, etc. Vacation rentals became a viable alternative to hotels and motels. If you have property in a decent area with good transportation options it can become a short-term rental. However, you need to thoroughly research the area: demographic, businesses, tourists, out-of-state visitors. Check the local hotels, how reasonable are the prices? Can you compete? You need to realize what kind of tenants you want to attract and market your property accordingly. It is a gamble with very high stakes. In contrast, long-term rental is a reliable and steady source of income. It does not guarantee a huge return on investment, but it is a sure bet. Once the lease is signed, you will have a permanent source of income.
