New rental property investors have more options now than ever before when putting together their investment strategy.
This change is largely thanks to the rise of short-term listing sites such as Airbnb. In the past, long-term property rentals were the only realistic and scalable option available to most landlords. But now, many more landlords can consider competing with local hotels for the higher rental rates that the short-term housing market often provides. (A rental unit that’s offered for less than a month is generally considered a short-term or vacation rental.)
Whether a short-term or long-term rental strategy is best for you depends on a variety of factors that you should consider carefully as you develop your residential rental property investment strategy. While a short-term rental strategy can be a lucrative route for some landlords, it often requires specific market conditions to be successful and places different demands on the landlord and the property itself compared to a long-term rental strategy.
Let’s take a closer look at the potential risks and rewards of long-term vs. short-term rental strategies and how to determine which approach is best for you.
Everyone knows that the location of a property is always an essential factor in all things real estate. That being said, it’s all the more important in the short-term rental housing market. This factor alone can often determine whether a short-term rental strategy is feasible for a given rental unit.
Cities with very tight rental markets and expensive hotels that draw many visitors for business or vacation are prime short-term rental markets. Many tourists have come to prefer the experience of a well-furnished, nicely decorated private apartment or house over a hotel experience that’s likely to be both more generic and pricey. This can leave smaller landlords well-positioned to compete successfully with local hotels.
Additionally, the closer your property is to amenities that visitors want, the more likely you are to find success with a short-term rental strategy. These amenities can include cultural attractions like local museums, theaters, and parks, as well as hot entertainment districts with distinctive shopping and dining options. It may also include hotspots that attract frequent visitors, like a convention center, sports arena, university or hospital, while proximity to public transportation is also often a must-have.
Although the potential profitability of short-term rentals may sound appealing, it is important to note and consider that many of the hottest cities for short-term rentals have also become the earliest to regulate this activity, in an effort to keep rental housing more affordable for long-term city residents and to protect the traditional hotel business. This has led to local laws restricting short-term rentals by, for example, limiting the number of days per year a unit can be offered on a short-term basis. Some municipalities also require listing services to collect taxes on their behalf.
Due to continuously changing laws and regulations, it’s important to check existing local laws in your area and be aware that the regulatory environment can change. Even factors such as the number of international investors and local investors can have different short-term and long-term regulatory effects, so it’s crucial to do your research and consider a more stable and proven out city / county if you choose to go the short-term route.
Even if you determine that your rental property could be a good candidate for short-term tenants and your local laws allow for it, there are still other factors to take into consideration. Operating a short-term rental unit requires many different responsibilities than managing long-term rentals. You almost have to treat short-term rentals as a business, while long-term rentals more times than not require less day-to-day management.
If you keep in mind that short-term rental units are often competing with hotel rooms, many of the practical differences compared to long-term residential leasing become clear. Your property is no longer just real estate; it’s also hospitality. You’ll need to manage everything from marketing to housekeeping to logistics. Due to the constant inflow of different short-term stayers, vetting these individuals and making sure that the quality and state of your unit is kept in consistent and top shape from one person to another will require constant upkeep and attention if your unit is in an area with high demand.
Here are some of the areas where managing short vs. long-term rental property differs the most:
Tenant turnover creates high demand for a landlord’s time, including the need to clean and market the property, make repairs, respond to inquiries, and more. With a long-term lease, this happens much less often. Short-term listing services require very frequent and rapid marketing and communication. Poor management of communication is likely to lead to poor reviews, which can impact your bottom line. Since you’re competing for all of the other short-term rentals in your area, you’ll need to make sure that your unit stands out in terms of service, amenities, and experience.
Your property’s vacancy rate is likely to be higher with a short-term rental unit. To reduce vacancies, you will likely need to more actively manage your listing, reducing pricing in the off-season and offering special deals to entice renters when needed. Seasonality is much more of an effect on short-term rentals, as long-term rentals in most cases have a six months to one year lock-in. If there are any sudden changes to your location, this may either increase or decrease the demand for your short-term rental.
Long-term rental housing is much more likely to have the tenant responsible for most, if not all of the utility bills. Short-term rentals generally include utilities (water, sewer, gas, electric, plus wifi, and cable TV or streaming services). With these costs included in the rental rate, short-term tenants are less likely to restrict their usage. A short-term tenant might keep the tv on all night or keep the lights on even when they’re not in the home.
Most long-term apartments are unfurnished. With a short-term rental, you will need to provide basic furnishings, including furniture but likely also basic kitchen essentials, sheets and towels, soap, shampoo, and more.
You’ll also need to decorate the home with some attention to style, and update furnishings and decorations over time to keep things looking new as well as on-trend.
Tenant attitudes & behavior
Your tenants will likely have different attitudes toward both you and your rental property depending on whether they are short-term or long-term renters.
Good longer-term renters tend to be more invested in the condition of the property since they consider it their own home while they’re residents. This means they are probably more likely to notice and alert you on issues like small plumbing or roof leaks, running toilets, etc. before they become major problems. Additionally, a long-term tenant is more likely to treat the home with more care, balancing the fact that they want to maintain a positive relationship with their landlord, as well as not wanting to cause additional inconveniences on themselves. A short-term tenant is less likely to notice or care about these issues since they are not as attached to the property and often just occupy a home for a single day to a couple of days.
Short-term renters are also less invested in relationships with you and neighbors, meaning they may be more likely to cause annoyances in the form of messes, noise, etc. This can add time to your cleaning schedule and cause friction between you and other nearby property owners or renters, especially if your unit is one of the only short-term rentals in your community.
Short-term tenants are likely to be out-of-town visitors unfamiliar with the area with more questions and needs compared to long-term tenants calling a rental unit home. You may be their only or primary local contact for a variety of questions from how to get around to what to see during their stay.
Short-term renters may also expect a higher level of service, similar to the treatment they might receive from the staff at a hotel. A successful short-term rental real estate investor will ideally enjoy and excel at customer service and communication or may need to hire someone to do this on their behalf if they own multiple short-term properties, as deficiencies in this aspect of the job are likely to lead to poor online reviews, which can be a demand-killer.
Long-term tenants can allow for more stability, but little flexibility. If you screen poorly, you can be stuck with bad tenants for a long time. Long-term lease agreements mean you can’t increase the rent suddenly if rental market conditions change (especially if your municipality offers more tenant protections).
In the best cases, though, a thorough vetting process that only needs to be done once in a while means that long-term rentals have good tenants that stay put and offer reasonable and predictable cash flow to the residential rental property investor.
Because short-term rental units require a much more hands-on approach, they’re generally much harder to manage from a distance. This strategy likely requires the landlord to live nearby to care for the property and respond to renters’ needs. Although both the short-term and long-term rental investors can hire someone to do this on their behalf, the difference is that long-term rentals provide a consistent income. If there is volatility in the demand for your short-term rental, you might find that there are some months when the management fee for your short-term rental outweighs what you profited from your property.
Longer-term rentals are generally less time-intensive on a regular basis than short-term rentals. However, unexpected needs do arise that can be time-consuming and also require immediate local attention. For investors interested in buying rental property outside of where they live, partnering with a property management company can not only make this possible but also make your income completely passive.
The Bottom Line
You should consider a short-term rental strategy if:
- Your rental property is located in a vacation destination or in a hot neighborhood
- You live nearby
- You enjoy customer service & hospitality
- You have the time to devote to your rental business
- Your local laws allow for a successful short-term business model
- You want flexibility in the use of the property
- You can tolerate a less predictable cash flow and seasonal fluctuations
- You are motivated to go after specific opportunities to increase your rental income, such as marketing your property around special events and seasonal market conditions
You would probably do best with a long-term rental strategy if:
- Your rental property is in a more typical residential market (not a vacation destination, not a super-hot neighborhood of interest to visitors)
- You don’t plan to use the property yourself and don’t need flexibility
- You prefer a slower but steadier cash flow model