Both long term and short term rentals offer very good opportunities for growing wealth and developing your rental portfolio for the future.
Whether investing in long terms vs short-term rentals you will need to invest both time and money to get the best possible return on your investment. As a real estate investor, your ultimate goal is to create a cash-flowing property and build equity in an appreciating asset.
In order to do this, you need to choose an investment style that is suitable for both you and your property. You must ask yourself exactly how much time you’re willing to put in, then you need to consider the advantages and disadvantages of both long-term and short-term investments.
In this article, we’re going to take a look at what both long-term and short-term investments entail so that you can make an informed decision to choose the investment style that is going to be most profitable for you to help you achieve your ambitious future financial goals.
A long-term rental is a property with permanent tenants looking to create a home. Generally, leases are for 12 months, however, you might choose a month-to-month lease or a shorter lease such as six months.
This longer lease term means that, once you’ve found a tenant, there will be little work for you to do beyond that of routine inspections and maintenance. Your property will have fewer vacancy periods and you’ll have to spend less time and money advertising.
You won’t need to regularly go through prospective tenants, and rental applications or manage tenant screenings, and as such, there is less risk involved. If you find a particularly good tenant you might even rent it to them for multiple years without having to worry about damage to your property or late rent payments.
Other advantages include things like reduced overheads. For example, you won’t need to pay the utility bills yourself. These will all be covered by the tenant. And there are no cleaning fees.
And finally, because your tenants are looking to create a home, they are much more likely to actually want to look after the property. Overall, this means that there’ll be less maintenance involved, and your property will require less money on upkeep.
Short-term rentals are for tourists and holidaymakers. Generally, they are located in popular tourist destinations such as city centers, or near beaches. Using a vacation home as a short-term rental allows you to rent out the property for part of the year and occupy it for other parts.
As you’re not tied to one tenant if you do have bad or disrespectful ones. You can feel confident in the knowledge that they are not going to stay for long. And therefore, you’re mitigating the risk that would otherwise come with a long-term tenant. These risks might include causing damage to the property or tenants not paying rent on time.
Because you’re not tied to a tenant by a legal lease contract. If you do choose to sell the property. You don’t have to worry about the tenant moving out or the lease ends.
As you are only renting the property out on a short-term basis. This allows you to block out times where you and your family can use the house yourself. This factor often makes this an appealing strategy as these short-term rentals are generally located in tourist areas where there is a particular draw for a holiday experience.
One of the key benefits of short-term rentals is the possibility of increased income. As you are renting on a short-term basis. You may be able to charge up to three times the market rates. For example, a two-bedroom house might rent for $1,200 a month. As an Airbnb, you might rent it for $100 a night. This if you managed to rent it out all 30 days of that month is $3,000 which is nearly three times the amount of rent that you would expect to get from a long-term tenancy.
And finally, because you are necessarily going to be in and out of the property more often, you are going to be able to do more regular checks for maintenance and repairs. This will allow you to keep the property in better condition so that the maintenance costs don’t escalate at any point in time.
It’s important to take all of the idiosyncrasies into account when deciding what style of rental you want to do.
Short-term rentals need to be in a location people want to go to. This could be near a conference hall so that you can rent to business executives, in the middle of downtown New York, where there’ll be high demand and high market rates, or near a popular beach destination or tourist attraction.
Long-term rentals are less location important, though of course you still want a rental that is going to be in an area where the property will appreciate, with plenty of job opportunities for your tenants, and good amenities.
With long-term rentals, there is also the potential for bad tenants and if they cause damage to the property or fail to pay rent on time you could be forced to pursue an eviction, a time-consuming and expensive process.
For short-term rentals, you have the risk of high vacancy periods if the property is not located in an area with as much demand as you first thought you may struggle to fill it. And, as we’ve seen over the last year, unexpected events such as a global pandemic can have a massive impact on short-term rental demand.
Often, for long-term rentals, once you’ve moved your tenant in there isn’t a lot that needs to be done beyond routine inspections and general admin tasks such as bookkeeping. However, you might have tenants who cause more issues and need more attention.
For short-term rentals though, you’re going to need to employ a company to clean the property after every tenancy. You will need to supply a furnished apartment, communicate with guests regularly, manage a listings profile and bookings on sites like Airbnb, and do all the same admin as long-term rentals.
When it comes to tax time you will need to have up-to-date books for both long-term and short-term rentals. Thankfully, there are plenty of solutions on the market that allow you to manage this without too much difficulty so that you can take full advantage of the tax benefits of being a landlord. For example, to manage your income and expenses for both long and short-term rentals, you can employ property management software, such as Landlord Studio.
Landlord Studio is a cloud-based rental accounting system, which allows you to do everything from keeping accurate up to date books, to digitizing receipts with your phone camera and connecting each of your bank accounts to view and reconcile transactions. You can manage your tenant screening, track tenancies, automate tenant communications, and even collect rent online through the app.
Both styles though offer very good opportunities for growing wealth and developing your rental portfolio for the future. Many landlords and real estate investors choose to have both styles in their portfolios. This allows them to maximize cash flow for their portfolio while minimizing the risks that might be caused by higher vacancy periods.
Whichever investment strategy you decide to go with, whether it be long-term or short-term rentals, make sure you understand the advantages and disadvantages of both, and all of the influencing factors which make both styles of investment attractive for real estate investors.
Additionally, you need to make sure you do the basics well. This means things like writing great listings, and also properly managing your rental accounting in order to save yourself time and money in the long run. Without the basics, your real estate investments could quickly get out of hand and you could find yourself losing money rather than making it.