Short-term Vs. Long-term Rentals – A Complete Guide for Real Estate Investors
Investing in real estate is always a smart business move. When buying a property to rent it out, most of the time, it will pay back for itself, depending on location, time of the year, and conditions. In general, investing in a rental property is lucrative most of the time, but should the owner rent long or short term?
That's when all questions and doubts emerge because as you may already know, the real estate business can be quite changeable.
Besides the prices fluctuations, this market also varies on long-term vs. short-term rentals. In the following text, we are going to review these two options and analyze the pros and cons of each side. Hopefully, investors will find it helpful when making decisions while looking for real estate financing and reaching their goals. GoKapital is always on successful business people’s side and offers business loans and equipment financing to make your dream come true.
- Long-term rentals are occupied by tenants with a year lease.
- The positive sides of long-term rentals include steady and predictable income, easy financing, and lower tenant turnover.
- The downsides of long-term rentals include the possibility of choosing the wrong guest. There is also no way of increasing the rent after signing the year lease, and the investor can't perform regular property maintenance while guests are staying.
- Short-term rentals can be daily, weekly, and month-to-month arrangements.
- The positive sides of short-term rentals include regular property maintenance, higher rental income, and enhanced flexibility.
- The downsides of short-term rentals include unstable income and local laws prohibitions or limitations of short-term stays.
Short-Term Vs. Long-Term Rentals
Whether an investor decides to buy a single-family rental unit or a multi-family condominium, there are only two renting options, short-term rental or long-term rental.
- Short-term rentals are usually entire vacation homes, a spare bedroom in an apartment, one-person suites, or accommodated attic areas that can be rented daily, weekly, or month-to-month.
- Long-term rentals include a fix-price annual lease, but some local laws allow longer leases. These properties are usually more spacious and adequate for prolonged stays rather than only a weekend.
There are quite a few advantages, as well as disadvantages to investing in a long-term rental, and we'll observe them all closely.
Pros of a Long-term Rental Property
It's easier to forecast the investment return when the investor knows exactly how much money they're getting each month from the tenant. The 12-month lease allows for better expenses planning, including maintenance and repair. Almost all leases include the exact rent date, so it's even more trouble-free for the investor to plan accordingly.
When a lender sees a long-term lease, it makes it safer for them to grant a financial loan to the investor because the action is almost risk-free.
Lower Operating Expenses
Tenants who live in a rental home for a year are more considerate with cleaning and basic repairs. Less wear and tear means lower operating expenses for the investor. Long-term renters treat the property as their home, so the owners have fewer headaches after the lease ends.
Less Tenant Turnover
Long-term rentals are great because the owner has fewer marketing expenses, doesn't have to prepare for new tenants all the time, and doesn't have to spend time negotiating and signing papers.
Property management fees for long-term rental are between 8%-10% while for short-term rental up to 30%.
Cons of a Long-term Rental Property
Can't Raise the Rent
According to the year agreement, the landlord is not allowed to raise the rent until a new lease is signed.
Can't Make Good Judgement of a Tenant
The landlord never knows what could happen throughout the year and whether the tenant will pay rent on time, damage the property, or complain day and night.
The landlord is not allowed to show up and do repairs unless the renter approves. Tiny repairs can turn into large issues after a while, and cost the landlord a lot of money.
While long-term rentals offer stable income and easy financing, some investors might find short-term rentals more appealing to their standards.
Pros of Short-Term Rental Property
Higher Income Potential
An owner with a short-term rental has an opportunity to swiftly adapt the rates to the current market, increasing the chances of higher income.
Easier for Regular Repairs
Short-term renters stay for a few days or a week, making these properties more available for the landlord to do regular maintenance, thus, avoiding expensive repairs.
In the case of investors looking to sell their properties, there's a possibility for signing short-term contracts, having their homes available in case a buyer shows up.
Cons of a Short-term Rental Property
No Steady Income Guarantee
While short-term rentals may generate more income in two weeks than a long-term rental in a month, there's no guarantee that the property will be rented continuously.
Higher Operating Expenses
Short-term rentals are often alternative to hotel accommodation, which means they need to be fully equipped and supplied with basic bathroom and kitchen items.
Local Laws and Regulations
Depending on the city, local laws and regulations can limit short-term rentals and even apply higher occupancy taxes, similar to the hotel room taxes.
While paying a higher daily rate, the tenant also expects the landlord to cover all utility bills, including electricity, water, gas, cable, and internet.
Is Short-term Rental More Profitable Than Long-term Rental?
Investors looking for a stable monthly income may find short-term rentals risky and unpredictable. On the other hand, sometimes short-term rental landlords generate higher gross income on a weekend than they would make monthly with a 12-month lease.
However, both short-term and long-term rentals have their advantages and disadvantages. At the end of the day, it depends on the investor's goals and funding, as well as the renting option they're going to choose.
When it comes to financing a potential property, investors can always seek assistance at a reliable private lending company, such as GoKapital, and get instant financing approval depending on their leases and contracts.