Investing in rental property is one of the best ways to take advantage of long-term asset appreciation, recurring income, and tax breaks. However, many real estate investors have a hard time deciding between short-term and long-term rentals. Which is the better fit for you, your property, and your market?
In this article, we’re exploring short-term rentals vs. long-term rentals. We’ll explain the differences, weigh the pros and cons, and give you the information you need to make a wise investment decision.
This is everything you need to know about short-term vs. long-term rentals.
Rental Durations Compared
Real estate investors typically consider rental properties with leases of one year or longer to be long-term rentals. Any rental term shorter than one year could be considered short-term. However, this is more of a general guideline than a hard and fast rule. Plenty of long-term rentals offer leases as short as six months (although this shorter term likely comes with a higher rental rate than a 12-month lease).
Further complicating the question of duration, local cities, counties, and states may define short-term or long-term rentals by their own specific durations. For example, if a city is looking to restrict vacation rentals, they may make vacation rentals synonymous with short-term rentals, and set the defining duration at “rental terms of less than one month.”
Definition of a Short-Term Rental
A short-term rental is a furnished housing unit that is rented for a short period of time, on a daily, weekly, or month-to-month basis. As discussed, a “short period of time” typically means any period of less than a year. But it’s also common for short-term rental properties to be rented for just a single night, as is the case with many vacation rental properties.
Short-term rentals are able to command higher nightly rates than comparable long-term rentals. However, this advantage may be offset by the increased tenant turnover and added wear and tear.
Short-term rentals are often advertised through online platforms, such as Airbnb, VRBO, Expedia, or Booking.com.
Definition of a Long-Term Rental
A long-term rental is any housing unit that is rented for a long period of time, traditionally on a one-year lease agreement. It is common for long-term rentals to begin with a one-year lease and then offer more flexible lease renewal options, perhaps in durations of three, six, or nine months. It is also possible for a long-term lease to revert to a month-to-month lease after the initial one-year lease period. However, rental owners likely charge higher monthly rates for lease terms of less than one year.
Compared to short-term rentals, long-term rentals require less active management because the resident turnover is lower. Long-term rentals also have lower maintenance and replacement costs because they are most often offered unfurnished, leaving the responsibility for furnishing to the tenants.
Pros and Cons of Short-Term Rentals
Here are the greatest benefits of short-term rentals:
- Potential for higher income. With higher nightly rates, investors can potentially see higher rental income from short-term rentals, even if the property sits vacant several nights per month.
- Flexibility. When the property is not occupied, you can use it for other purposes. For example, if you buy a second home as an investment property, you could enjoy the property as your personal vacation home for several weeks each year while renting it on a short-term basis for the rest of the year. Or you could use the space to host family events. You could even rent the space for other purposes, like photo or video shoots. Just be sure to check your local regulations before accessing the space for any non-rental use.
- Market adaptability. With short-term rentals, you can quickly pivot to meet market changes. For example, if rates are rising, you can immediately raise your rates rather than wait for a one-year lease to end before you can adjust.
- Defects can be found quickly. With new guests regularly staying in the unit, defects with the property or furnishings may be brought to your attention more quickly than if a single long-term tenant were to simply ignore an issue.
Here are the potential disadvantages of short-term rentals:
- Higher turnover. Having new guests regularly stay at the property can potentially increase your exposure to a less responsible guest who might damage the property or furnishings. Theft may also be a concern with un-screened short-term renters coming and going.
- Requires more active management. The nature of short-term rentals requires the property owner to regularly have the unit cleaned and restocked. The owner might handle these tasks themselves or might pay to have a property manager service the unit.
- Seasonal fluctuations. Many short-term rental markets see an influx of visitors in the spring and summer while seeing lower demand in the fall and winter. These seasonal fluctuations can affect both your vacancy rates and your rental income.
- Regulatory/legal challenges. Some local jurisdictions are increasing regulations on short-term rentals, particularly on Airbnb-style vacation rentals. Check for city, county, and state regulations before investing in short-term rentals. You should also stay up-to-date on any proposed legislation that could affect your rental
Pros and Cons of Long-Term Rentals
Here are the greatest benefits of long-term rentals:
- Steady income. With a long-term rental, you can count on a set amount of income each month for the next year (barring an unexpected event like a tenant failing to pay rent). This makes planning and budgeting easier.
- Requires less active management. Long-term rental management can be comparatively passive. Aside from periodic lease renewals and maintenance requests, there is little to be done on any given unit day-to-day.
- Long-term tenant relationships. Long-term renters will likely be around for at least a year, giving you a chance to know them better and trust them over time.
- Less frequent vacancies. With short-term rentals, the unit could potentially be vacant every few days. With a long-term rental unit, you could potentially go years between vacancies.
Here are the potential cons of a long-term rental property:
- Inability to increase rent mid-lease. The rental rate is locked in for the lease term, so even if rents are climbing by the week, you are unable to raise the rent to match market conditions until the lease expires.
- Potential for longer vacant periods. It may take longer to find a long-term tenant than it would take to find a short-term guest.
- Defects may go unreported. Long-term renters might be hesitant to “bother” you with a minor maintenance issue. Or they might be unaware of an issue because they follow the same routines every day. For example, if your long-term residents never use the guest shower, they may be unaware of a leak. This can lead to unreported maintenance issues that can become bigger problems.
- Challenges with difficult tenants. Unlike short-term guests who quickly move on, long-term tenants settle in. This means you could be stuck with a difficult renter for months.
5 Factors to Consider When Deciding Between Short and Long-Term Rentals
The pros and cons aren’t the only factors to consider. Before you decide on a short-term rental vs. a long-term rental, give some thought to these five critical considerations.
- Location. Short-term rentals perform better in some markets than in others. Tourist towns, vacation hot spots, and city centers may offer a high demand for short-term rentals while suburban and rural areas may be more suitable for long-term rentals.
- Your investment goals. If you’re looking to maximize cash flows, a well-situated short-term rental may serve you well. But if you’re looking to create stable passive income from real estate, a long-term rental might be preferable.
- Your desired level of involvement. If you plan to manage the rental yourself, carefully consider your availability. Will you have the time, energy, and willingness to market a short-term unit continually, while also cleaning and restocking the unit after each guest? Or would a lower-maintenance long-term tenant be a better fit for you? Of course, you can hire a property manager to handle the day-to-day operations in either case. Just know that property management fees will be higher for a short-term rental vs. a long-term rental.
- Local market conditions. Take a little time to research the rental rates and vacancy rates for long-term vs. short-term rentals in your market. Which option can net you higher returns?
- Local regulations. What are the rental regulations in your local market? Do they limit your income potential or otherwise indicate that one duration would be more advantageous than the other?
For information on additional rental property considerations, please read our article on 10 things to consider when buying a rental property.
Invest Alongside Gatsby Investment
As a real estate investment company, Gatsby Investment understands the complexities of different investment types and appreciates how difficult it can be to decide between a short-term rental and a long-term rental in competitive markets. We have an entire team of analysts who evaluate potential real estate deals to find those with the best return potential for our investors.
If you’re looking to take the guesswork out of real estate investing, consider investing in one of Gatsby’s hand-selected real estate investment opportunities. You can invest as little as $25,000 to own a share of a unique real estate development project. And, because the project is professionally managed by our experienced team, your returns are completely passive!
This is real estate investing made simple. Learn more about Gatsby and remove the uncertainty from your real estate investment strategy.