People considering their first investment property are often drawn to the idea of a vacation home they can use for themselves while reaping the benefits of intermittent short-term renting. Who can blame them? A vacation home that pays for itself and earns you money on the side sounds like a dream. Equally attractive could be the prospect of flipping houses. The idea of buying a place cheap and selling it at a huge profit is a DIY lover’s dream.
The reality, however, is that – while lucrative – these short-term strategies require a lot of work and time commitment. That’s why so many property investors end up choosing long-term rentals. A long-term rental property is a reliable way to increase your cash flow and protect your assets against inflation. If you find a decent neighborhood, you’ll have a steady passive income for years to come. Here are 6 of the core benefits to long-term rentals:
1. Fewer restrictions
In response to pressure from hotels and community groups alike, many local governments are passing more and more restrictions on short-term rentals. For example, in New York City and San Francisco, laws now require owners to be full-time residents to rent out space to short-term renters. These cities also have a cap of 90 days per property for rentals and require a thorough registration process.
Additionally, unless you have the cash to buy a house outright, you’ll probably need to get an FHA loan to purchase property to flip. That means you have to wait at least 90 days to sell it again – and if the value of the property has doubled, there is even more red tape to get through to prevent property-flipping scams. Long term rentals simply aren’t affected by as many regulations. The process of establishing a rental property is simple in comparison.
2. No seasonal fluctuations
While short-term rentals cycle through periods of high and low demand, long-term rentals generally remain unaffected by the season. If you buy property in an area with high demand and plenty of opportunity for growth, you can ensure a consistent cash flow from the rental income that’s unaffected by seasonal ups and downs.
Assuming that you have long term tenants occupying your home, you’ll be receiving income year-round, while income from short-term or vacation rentals are much more affected by seasonality and demand. In other words, if you’re looking for a ‘set it and forget it’ approach to property investment, long-term rentals are a much more promising avenue.
3. Protection from market fluctuations
People are less likely to take a vacation when they’re pinching pennies, but renters will need a place to live regardless of how the economy is doing. Since long-term rent is typically fixed for the year, there are fewer surprises about how much income you’ll make in the coming months. With short term rentals, you’ll constantly be resetting the rates to draw customers to avoid losing money to the competition.
People aren’t usually looking to buy homes when they’re worried about money. But even when the stock market is down, homes will still be valued at their appraisal rates, which has more to do with the local market than the national one. Purchasing property in growing areas means your assets are protected and can even increase when stock values are falling.
4. Reliable property value
Because investors buy short-term investment properties with the intention to rent them out at double or triple the rate of rent divided daily, these properties are often bought and sold at an inflated value. That means you’ll owe a lot of money on a property that may only be occupied for a third of the year. It may also mean selling the property at a significant loss if factors outside your control affect the draw of the destination.
On the other hand, if you purchase long-term investments in areas where people want to live, your property value will rise steadily for years, and you could sell it fairly easily should you want to. The longer you hold on to it, the more it is likely to be worth in the future, so the prospect can end up being much more lucrative in the long run.
5. Better tenant screening
In many short-term rental situations, you never even meet the person who will be staying at your property. Renting out a property long term allows you to be much more discerning without losing any income. If you buy your rental property in the right neighborhood, the demand for a place to stay means you can be as selective as you want.
Of course, there’s no overstating how much peace of mind this affords you. A problematic tenant can be a financial and logistical nightmare, so feeling confident about your residents is incredibly important.
6. Cheaper overhead
Short-term rentals need to be fully furnished and guests expect a certain level of quality from the amenities. They will also demand more of your time to handle bookings, listings, and communicating with potential guests – or more money spent on someone to do this work for you. You’ll also have to pay a lot more fees, including credit card processing fees and listing fees.
Similarly, flipping a house requires additional money for materials and labor, plus extra taxes on your income and closing costs when it’s time to sell. On paper, it looks like you’ll be making a lot of money, but by the time you’ve finished, you may come to realize that a lot of the income being spent on taxes and fees.
Long-term rental properties solve all of these problems. You generally don’t have to worry about furniture or utilities as most units are expected to be unfurnished and the rental income will be enough to cover the mortgage, taxes, and insurance with plenty leftover for your profit.
The Bottom Line
Short-term rental investments attract many property investors with the promise of high cash flow, but the strategy has a number of hidden costs – from higher overhead to greater competition and regulation.
For many property investors, long-term rentals are the more preferable solution, especially when you can also partner with best-in-class property management companies. Partnering with a property management company not only allows you to reap the benefit of long-term rentals but also helps you to make your income truly passive.