An investor who buys a rental property has the choice of renting for the short or long-term. Many investors opt for offering a long-term rental, although that may not be the best option for everyone.
In this article, we’ll discuss short-term rental vs. long-term rental, and the pros and cons of each, to help investors decide which rental strategy may make the best choice for their goals.
- Long-term rental property is normally occupied by a tenant with a 12-month lease.
- Advantages of a long-term rental include more predictable rental income, lower tenant turnover, and ease of financing.
- Drawbacks to a long-term rental are limitations to raising the rent, difficulty of performing routine maintenance, and the risk of renting to the wrong tenant.
- Short-term rental property is typically rented on a daily, weekly, or month-to-month basis.
- Advantages of a short-term rental include higher potential gross rental income, increased flexibility, and better maintenance.
- Drawbacks to a short-term rental are lack of consistent rental income, higher operating expenses, and local laws limiting or prohibiting short-term rentals.
Short-term versus long-term rentals
Owning and operating rental property – such as single-family rentals or multifamily buildings – are the most common ways to invest in real estate. In residential real estate, rental property is often classified as being either a short-term or long-term rental:
- Short-term rental: Typically rented on a daily, weekly, or monthly basis. Examples of short-term residential rentals include vacation rental homes, a house hacker who rents out a spare bedroom, and a single-family rental home with a tenant on a month-to-month lease.
- Long-term rental: Generally rented to a tenant with a 12-month lease term at a fixed annual rent. Most residential leases are for 12 months at a time, although some local landlord-tenant laws may allow for leases longer than 1 year.
There are several distinct advantages to having a long-term rental, along with some disadvantages to consider as well:
Pros of long-term rental property
More predictable income: Rental income is consistent throughout the entire year when a tenant is on a 12-month lease and pays the rent timely. Knowing how much cash is coming in each month makes it easier to budget for maintenance and repairs, and to more accurately forecast the potential return on investment.
Easier to finance: Rental property occupied by a tenant on a long-term lease may also be easier and more affordable to finance when an investor knows what the cash flow stream is. Real estate investors may receive more attractive interest rates and financing terms when a lender views a long-term rental as having less potential risk due to vacancy and higher repairs.
Lower operating expenses: Renters on a long-term lease generally take care of basic items such as cleaning the home, doing yard work, and paying for their own utilities. Long-term rentals also generally have less wear and tear, because tenants tend to take better care of a property that they think of as their home instead of a hotel room.
Less tenant turnover: Administrative tasks such as marketing a property for rent, negotiating and signing a new lease, and making the property ready for a net tenant are much lower with a long-term rental. In fact, some single-family rental owners may find a good tenant that renews the lease year after year.
Economical property management: Professional property management fees for a long-term rental property generally range between 8%-10% per month. On the other hand, management fees on a short-term rental can be as high as 30% of the rent collected, simply because there is more work involved due to tenants moving in and out throughout the month.
Cons of long-term rental property
Limitations to raising the rent: One of the biggest drawbacks to having a long-term rental is less flexibility in raising the rent. Lease agreements normally call for the rent price to remain the same through the term of the lease. That means the potential cash flow from a rental property is limited by the rent price outlined in the long-term lease agreement.
Maintenance may be more difficult: It can be harder to catch and repair minor problems before they become big and expensive with a long-term rental property. To avoid violating a tenant’s rights, a landlord may choose to perform property inspections on a quarterly or semi-annual basis, and to give proper notice before entering the property. On the other hand, a short-term rental can be inspected and any needed repairs made each time a tenant leaves.
Risk of an unqualified tenant: Because a long-term rental usually has a lease of 12 months, screening prospective tenants is critical. Even with the best tenant screening process in place, every now and then a landlord may rent to a tenant who constantly complains, pays the rent late, or damages the property. Evicting a tenant on a long-term lease can be time consuming and expensive. By comparison, a short-term lease can generally be terminated much more quickly and easily.
While long-term rentals may have more predictable rental income and be easier to manage, there are also some reasons why an investor may wish to consider offering a short-term rental:
Pros of short-term rental property
Higher gross income potential: An investor with a short-term rental can easily adjust the rent price to meet the current market rate, helping to maximize the amount of gross rental income. Depending on local market demand and conditions, a short-term rental property may generate 2-3 times the amount of monthly rent compared to a long-term rental.
Easier to keep maintained: Because a tenant only stays for a limited length of time, a short-term rental property can be easier to maintain. Homes can be thoroughly cleaned each time a tenant leaves, and inspected for any needed maintenance issues before a new tenant arrives.
Increased flexibility: Some investors offer a short-term rental agreement to keep their options open if they are thinking about selling. For example, while another real estate investor may like the idea of having a tenant in place, a buyer looking for a primary residence doesn’t want to have a home rented to a tenant.
Cons of short-term rental property
Consistent income is not guaranteed: While short-term rentals may hold the promise of generating more gross rental income, there’s always the risk the home will sit vacant for an extended period of time. On the other hand, when a property is rented long-term it’s much easier to predict how much rental income will be collected each month.
Higher operating expenses: Short-term rentals can be more maintenance intensive, especially if a tenant is using the rental as an alternative to a hotel room. Property rented short-term typically needs to be fully furnished and well maintained, and may need to be consistently stocked with personal items such as sheets, towels, toilet paper, and cooking supplies.
Utility expenses: A tenant in a short-term rental usually expects a landlord to pay for utilities such as electricity, gas, water, trash, and even cable TV and internet service. While utility expenses may be added into the rent, all of these additional bills can end up being too many items to manage for some real estate investors.
Local laws regulating short-term rentals: Many municipalities have stricter rules for short-term rentals than for property leased to a tenant for a long-term. Depending on the city or the HOA, occupancy may be limited to a maximum period of time, and owners may be required to collect an occupancy tax for short-term rentals, similar to a hotel room tax.
There are distinct advantages to both short-term and long-term rental property, and the right choice for one investor may be completely wrong for another. People who like to actively own and manage real estate may find investing in a short-term rental the ideal option. On the other hand, investors looking for a property that generates more predictable rental income and is easier to manage may find a long-term rental to be the best choice.