What do you think of when you hear the term "investment property"?
Most people, and even seasoned real estate investors, will usually think of long-term rentals as single-family properties that are rented out by private landlords with maybe two other rental properties to their name.
Homes that are rented long-term will either have the same tenants living in them or new tenants coming and going from the property, which depending on the situation, either makes them the perfect investment for a reliable cash flow or a time-consuming venture full of highs and lows.
But long-term renting is not the only investment future property investors can use to expand their portfolio and generate sustainable passive income.
If you're looking to generate positive cash flow faster and without any of the hassles of being a landlord, short-term rentals are the perfect alternative to managing traditional long-term rental properties — but that doesn't mean they are easy to work with!
Here's all you need to know about the difference between long-term and short-term rentals, including the tax differences and the benefits and potential risks of both.
The Top Benefits of Long-Term Rentals
The main difference between long-term and short-term rentals is, of course, the length of time you'll be renting out your property for: A long-term rental is designed for tenants rather than short-term guests, meaning that you can expect the property to be occupied for at least 6 months, 12 months, or even many years.
Short-term vacation rentals, on the other hand, are properties designed for short-term stays, usually marketed as holiday accommodations for the weekend or a week, though it's not uncommon to come across Airbnbs that accept long-term guests under certain conditions.
Long-term rentals make for the most popular tried-and-tested investment strategy among real estate professionals, so it won't be hard to find plenty of information about the investing and management process online. As the most common route for new investors, long-term rental properties come with many benefits for owners looking to maximize their rental income with fewer vacancies and reliable long-term tenants.
Here are some of the biggest advantages of investing in a long-term rental:
Long-term rentals are known for being relatively easy to manage, as you can choose to deal with tenant screenings, listings, and maintenance by yourself or enlist the help of an affordable property manager to take care of the finer details.
Finding an agency or property manager to oversee the management of tenants, maintenance, monthly rent collection, and everything else to do with your listing is in fact a lot cheaper and easier than managing a vacation rental.
Depending on how much time you have to keep up with all the daily needs of your property, managing everything by yourself can also be a lot less complex than maintaining and marketing a short-term rental!
Of course, that doesn't mean that it's all going to be a walk in the park, but you won't be advertising your property as often or need to get your rental property ready for new tenants as frequently as you would with a vacation rental, leaving you with a lot more time to focus on your business.
Another great benefit of investing in long-term rentals is the opportunity for consistent, reliable income throughout the year. This allows you to budget and save for future projects.
As long as you're implementing a proper tenant screening process, tenant turnover is going to be reasonably low over the years, meaning that you'll be guaranteed a consistent source of income each month to pay off your mortgage and generate a moderate profit margin.
You won't need to worry about changing your rental fees according to season and demand, or having months with negative cash flow due to off-season vacancies, giving you peace of mind.
Being a landlord is far from an easy, hands-off job, but while being a long-term rental owner comes with a lot of responsibilities, you won't have as much on your plate as the owner of a short-term rental property.
You'll have your tenants sign a contract and know how long they are expected to be staying at the property, what responsibilities are theirs and which ones are yours, and what your expectations for them will be in terms of cleaning and maintaining the home.
While you'll still have to arrange the odd plumbing job every once in a while, your contract will give you plenty of peace of mind when it comes to last-minute tasks and unexpected responsibilities, meaning that you will likely end up with more time and fewer responsibilities than a short-term rental investor!
In addition to fewer headaches and responsibilities, landlords are also going to face fewer expenses when managing their rental property, from cleaning fees to upgrade costs.
In fact, working with a property manager for longer periods will usually end up a lot less expensive than booking a cleaning company at odd times and or calling a tradesperson for last-minute maintenance tasks.
On top of that, less turnover, less marketing, and less ongoing maintenance mean that you won't be spending as much for listing your property even if you are managing everything yourself.
The Risks of Long-Term Rentals
But while investing in and owning a long-term rental can be a much simpler job than dealing with the multi-faceted challenges of vacation rentals, there are still plenty of disadvantages and risks you'll have to keep in mind before you decide to become a full-time landlord.
We've all heard the horror stories about irresponsible tenants who end up turning your property upside down, long legal battles after rent defaults, and market fluctuations that leave your home and wallet dry as the real estate industry takes a dive.
Here are the key drawbacks of investing in long-term rentals you should keep in mind before you start the journey:
Long-term rentals offer much lower profit margins compared to vacation rentals, leaving you less potential and budget to grow your business and expand your portfolio with more properties.
While renting out a property for residential purposes is still considered a great way to start earning passive income, you'll soon find that most of your money is used for maintenance, renovations, property management fees, and paying off your mortgage and outstanding taxes.
Low profits can also break your business if you happen to have extensive vacancy periods in between tenants or end up with a rent default, so make sure you're prepared for paying for some extras out of pocket!
Expensive vacancy periods
Long-term rentals are also known for the high risk of extensive vacancy periods, which can happen at any time even if you've been doing everything by the books.
Your previous tenant might end up defaulting on your contract and leaving the property unexpectedly, and their held deposit is unlikely to help you cover all the costs associated with long vacancy periods. You might even have to evict a bad tenant and have no choice but to put off relisting the home until the situation is resolved.
No property management tips can save you when it comes to long and unexpected vacancies, so make sure you're prepared for dealing with a month or more of no rental income!
Wear and tear
The longer tenants stay at the property, the more chance there will be of extensive wear and tear, from appliance issues to bathroom leaks, wall damage, and other minor or major property issues.
You can't expect a family to live in the house for a year or more and not show any signs of having settled in, so when the end of their contract comes around and you have to clean and renovate the property for a fresh batch of tenants, you'll have to be prepared for sizable wear and tear.
When you manage vacation rentals, on the other hand, you won't have to deal with extensive repairs and even minor fixes as often, as your guests won't spend all their time at the property or use all the appliances as extensively!
Finally, there's a pretty big chance you'll come across a bad tenant at some point down the line, even if you have been screening potential tenants thoroughly.
Long-term rental owners can lose a lot of their income when faced with defaults, extensive damage, or even illegal activities carried out by their tenants at the property, as well as spend a lot of their precious time putting out fires!
If you don't think you have what it takes to deal with periods of low profits, you'll want to reduce any chance of bad tenants.
The Biggest Benefits of Short-Term Rentals
So, what about short-term rentals?
Could investing in a short-term rental property be a better investment for those new real estate professionals looking to generate more income and grow their business faster?
Here are the biggest benefits of investing in the short-term rental market:
The main draw of owning and managing a short-term rental is the high-income potential it can bring, as you are free to increase your rates throughout the year depending on demand, adjusting your prices more often than a long-term rental owner could, even in the same month!
On top of that, nightly fees for short-term rentals are already much higher than even long-term vacation rentals, a type of property that stands as a cross between the two options, allowing guests/tenants to stay in the home for months on end.
Short-term rentals are also a lot easier to maintain, as you won't experience as much wear and tear as long-term rental properties, with guests only staying for a few days and not using the space as much as a long-term tenant would.
Of course, you'll still have to make sure the house is in tip-top shape in between guests leaving and new guests coming in, but as long as you find good property management and a good cleaning company to deal with minor issues, you won't be spending as much time fixing and upgrading!
Short-term rentals are also more versatile than long-term rentals, allowing you to use the property for personal use anytime you want, whether it's turning it into your primary residence or a vacation home for your family.
This means that if your short-term renting investment doesn't pan out or perform as you need it to, you can always use your real estate without losing money, even if you need to turn your short-term vacation rental into a personal residence during the off-season.
Generous tax breaks
Finally, short-term rentals are known for being one of the most tax-beneficial investments you can ever make, as you might be eligible for generous deductions and even property expense write-offs.
Aside from standard expense deductions and bonus depreciation, you could also be eligible for a full income tax write-off, as if you offer your property for short-term renters for only 14 days or less during the year, you won't need to pay income tax on that rental income!
The Risks of Short-Term Rentals
Still, short-term rentals are not without their drawbacks, and they are usually considered a lot more complex to manage than a standard long-term rental property or a hybrid vacation rental that's rented out for longer periods.
So before you dive into our tips and insights on everything short-term rental, make sure you're fully prepared for the risks you might face along the way.
Off-season vacancy periods
No matter how good your marketing and management is, you might experience a slow off-season at least once in your short-term rental career, bringing in a lower monthly income than you usually would and facing months without consistent paychecks.
The high income you make during the peak season will usually offset financial issues, as long as you're managing your money right!
Many investors are looking at short-term rentals as the key strategy to scale their business and portfolio, so before you invest in your first short-term rental, make sure you're prepared to deal with fierce and growing competition.
The best word of advice to avoid oversaturating the market with similar offers is to focus your investments in an up-and-coming area that's popular enough to attract guests but not too popular in the short-term rental market to carve out your piece of the pie.
Complex and more costly management
Managing short-term rentals as a remote landlord is also a lot more expensive than hiring a property management team for the long term, and if you want to deal with management responsibilities yourself (including booking guests, cleaning, and marketing) you'll have to learn a lot of new skills to make it work.
The good news? Management software like Vrbo and Airbnb have made the job that much easier!
Why you should avoid markets without short-term rental regulations
As a last word of advice, make sure you are picking your market right, whether you're going for long-term renting or for short-term rental properties.
More and more urban centers have come out with strict short-term rental regulations in recent years, looking to stop more short-term rental owners from setting up shop in some areas and actively making Airbnb businesses illegal.
On the other hand, some areas don’t have any regulations on short-term vacation rentals. meaning that investors will have a hard time figuring out their legal rights and tax requirements.
If you have decided to dive into the world of short-term rental investing, make sure to avoid markets without short-term rental regulations and cities with anti-short-term rental laws — there are plenty of locations with thriving, vacation rental-friendly markets!
Head over to our podcast to learn more about how to find the perfect market for your business goals.