If you’re a residential rental real estate investor, chances are that the premium nightly rates that you see on short-term rental listing sites such as Airbnb make you wonder whether or not a short-term rental strategy (less than one month) could be a more profitable path than that of a traditional landlord with long-term tenants.
Property investors of all stripes deal with this question. Maybe you’ve worked in long-term property rental so far and are considering trying out short-term rentals. Or perhaps you’re considering getting into rental property investing and are just trying to learn more about the different investment strategies.
Either way, it’s important to understand what’s different about short-term property rentals before you dive in. Read on for more on the risks and rewards of short-term rentals, plus insight into the market conditions and skills required to be a successful residential rental property investor.
Benefits of Short-Term Property Rentals
To begin, let’s review some of the advantages of short-term rentals. These include:
Higher rental rates
Typically, the shorter the stay, the higher the nightly rate is for any rental unit. Compare the nightly cost of a hotel stay to a long-term apartment lease.
Of course, a higher level of service generally goes into showing visitors hospitality and meeting all of their needs than is required for acting as a traditional landlord to long-term residents of your area, who will usually furnish and decorate their own home. Still, once a short-term unit is furnished, if market conditions are right, the higher nightly fees may make a short-term rental unit highly profitable.
Flexibility with tenants
Short-term rentals are flexible in two ways thanks to their higher tenant turnover.
First, you have a much shorter relationship with renters, so if bad tenants occupy your rental property, you won’t have to deal with them for a long period of time.
Also, with short-term rentals, you can set “blackout dates” and use the unit yourself or let family and friends use it if you choose. This may be especially desirable if your rental property is in a hot tourist market or vacation destination that you want to enjoy yourself.
Peak season rental boosts
Short-term rentals also offer greater flexibility in terms of pricing and marketing to seize specific opportunities.
If there is a special event bringing many visitors to your area or if there is a reliable peak season for tourists in your city, then a short-term rental will allow you to go after premium rental rates when opportunities arise. If you have a very entrepreneurial spirit, this investment strategy may appeal to you.
Risks of A Short-Term Rental Strategy
A short-term rental strategy can be riskier in some ways compared to the traditional annual lease or even month-to-month leasing to longer-term tenants. Additionally, short-term rentals are generally far more demanding of a landlord’s time. The challenges of short term rentals include:
Long-term tenants are more likely to pay their own utilities, but short-term rentals almost always include utilities in the rental fee. This means you’re on the hook for basic service charges even when your unit isn’t occupied, and when you do have renters, they won’t have any incentive not to be conservative with any electric, gas, or water use.
Short-term tenants also generally expect wifi to be provided with their accommodation and you may want to offer other subscription entertainment services as well to be competitive in your market.
The unit must also be furnished, which can include dishes, linens, and towels – all of which will require regular replacement. Most short-term rental units also come with basic household supplies like dish soap, hand soap, shampoo, toilet paper, etc., which all need to be consistently replenished.
Less cash flow stability
While you may be able to charge premium rates during peak tourist season, what about the off-season?
Short-term rentals often have higher vacancy rates than long-term rental properties, which can mean irregular cash flow. Obviously, this depends on the location, but in general, shorter rental periods mean less predictable income.
In other words, you have the chance to compete for premium rental fees when opportunities arise – but you’ll also have to hustle to keep revenue flowing in slower seasons.
Many local governments have already enforced strict regulations and various laws on the short-term rental market in some of the hottest locations.
For example, there may be an ordinance limiting the number of days per year a property can be rented on a short-term basis or a ban short-term rentals unless the owner occupies the unit as their primary residence at the same time.
As property owners in competitive markets start catering to wealthier business travelers and tourists, long-term residents of a neighborhood or even a whole metro area can be squeezed in the process, with fewer long-term rental units becoming available. This often exacerbates an existing affordable housing crisis in the community.
Learn about any local laws and regulations – including occupancy tax and licensing obligations – and what compliance involves. Additionally, keep in mind that the regulatory environment can change at any time.
The higher turnover rate, a greater range of furnishings and services required, and the element of hospitality involved in short-term property rental all add up to more work.
You’ll be held to a much more exacting standard as well, as anything a guest doesn’t like will probably show up in an online review (and these can make or break your business). Tenants are more likely to see short-term rental units as similar to a hotel, rather than a residential unit, and will expect a higher level of customer service as a result.
Cleaning and maintenance needs between tenants can range from scrubbing to washing laundry and changing bed sheets to repairs — and it all must be finished before your next guest arrives.
You’ll need to stay up to date on certain short-term renting trends and demands while making updates to stay competitive. You’ll also have to communicate frequently with potential guests making specific inquiries and requested on your unit.
The Bottom Line
You might want to consider short-term property rental if your property is in a highly desirable market, your city’s laws and regulations are not prohibitive, and your unit has the potential to yield higher returns compared to long-term renting.
Even if you check off all of the above, you’ll want to carefully weigh whether the profit you’re likely to generate from your short-term rental will be worth the time investment. Also bear in mind that there are relatively few property management companies willing to manage short-term rental units, so finding good support may be difficult.
For most rental property investors looking for passive income, a long-term rental strategy is a better bet. The income may be more modest on a nightly basis, but it’s generally much steadier, with a lower vacancy rate, greater predictability, and lower workload.
You can further optimize all of these factors by working with a professional property management company, for greater stability, returns and peace of mind over the long term to make your income truly passive.