Short Term Rentals vs Long Term Rentals
Which is best suited for you??
As a preface to this newsletter, I wanted to be clear on what my goals are and what these weekly posts will entail. I am using this newsletter as a way to document my journey of learning the process of real estate investing, and basically dump all the information I have learned into this funnel. I am in no way trying to act as a “guru” or mentor. I am most likely in the same boat as a lot of you reading this, and I think that brings a lot of value. Most investing blogs and videos are all about those that have done it already and are at the top. I want this to be more relatable to the average person who wants to get started, and can follow along with my wins and losses!
What’s up everyone, this week we are going to be talking about the difference between a short term rental and a long term rental. Including pros and cons of both, and which one might be right for you! Hint: it depends on your wants, needs, and risk tolerance!
Short Term vs Long Term
To start things off, I’m going to write a brief explanation of both strategies of investing. Short term rentals (STR) are defined as any stay that is 28 days or less. Typically these stays are a few days or a week at a time. You charge a daily rate for the guests, and the overall business plan is closer to running a small hotel, than a conventional rental. Long term rentals (LTR) are any stay for 28 days or longer, and these are typically rented out in 6 month to 1 year leases. Now that we’ve defined these two strategies, let’s dive deeper into the details of each.
Short Term Rental Pros
When I started my initial research of investing in real estate, it became quite clear to me that short term renting on Airbnb, VRBO and other vacation rental sites was the route I wanted to take. I am going to list a bunch of reasons why below, and dig into some of them as well.
The returns are higher
When I began comparing short term rentals to long term rentals, the first thing that popped out at me were the returns. Almost every website, podcast, and video I researched about STR’s boasted 30%,40%,50% returns on their short term rentals. And after analyzing some of these deals on my own, I to confirmed that this was possible.
You charge a daily rate
This may be one of the most attractive aspects of a STR. Instead of a tenant signing a year long lease at $1500/month, you get to charge a daily rate that is variable based on market conditions.
Example: that same apartment that rents for $1500/month could probably rent on airbnb for $100-$150/night (on the cheap side). That equates to a potential $3,000-$4,500 per month! (Occupancy rate and location plays a huge role in these returns)
You don’t have to deal with evictions
Evictions, although relatively rare, can be a huge headache in the long term rental space. Especially if it goes all the way to court.
More Flexibility
Another big positive about STR’s is that you can treat it like your own vacation rental too. Want to get away for the week? Just block off that specific week and enjoy your rental yourself!
Short Term Rental Cons
While these pros listed above may sound great, there are a few downsides that are definitely worth noting.
You aren’t locked into a long contract
This was just listed above under pros, so why is It a con? First off, many people consider a long term contract a much better option because of convenience. You found a tenant who is willing to pay you every month for one whole year. Thats a pretty nice feeling knowing you just locked in a years worth of rental income.
Wear and Tear
Because you have multiple people in and out of your rental on a weekly, or even daily bases, there will undoubtedly be more wear and tear on your property.
The Unknown
You don’t necessarily know where your next renter will come from, and some (even most) month’s you won’t rent at 100% occupancy.
Speed of Turnaround
To go along with wear and tear, the quick turnaround of guests means you need to be even quicker with cleaning your property and checking inventory before the next guests arrive!
Long Term Rental Pros
Time to make the claim for the LTR gang!
Convenience
When renting out your property long term, there is an undeniable amount of convenience that comes with it.
Less wear and tear.
you have a years worth of rental income signed in a contract.
you don’t have to worry about quick turnaround.
Vacancy
If you are proactive towards the end of your current tenants contract, you can achieve very low vacancy by having other renters lined up ready for the next years lease.
More Passive
Although being a landlord still comes with its hard work, a long term rental will still be more of a passive investment because you are only dealing with the same tenant(s) for the year.
Long Term Rental Cons
Lower Returns
As stated above in the STR pros, Long term rentals will usually have lower returns. This is the trade-off to convenience.
Long Contracts
Although this is part of the convenience factor of LTR’s, it still comes with some risk. God forbid you have a tenant(s) that is just horrible to deal with. Most of the time it’s not worth an eviction, so you’ve just got to live with that for the remainder of the contract.
Less Variability
For the most part, the comps in the area will easily tell you how much your property will rent for in the long term. Once these rates are set in a contract, they cannot change.
Contrary to STR’s, where you can up-charge your daily rate during peak seasons and holidays.
Less Flexibility
Also, if you wanted to use your rental property for a week because family is in town, you won’t be able to because you have a tenant there for a whole year! (or 6 months or 3 months but you get the point)
Overview
In review, here’s the quick “spark notes” version of the two strategies: Short term rentals will most likely reward you with a higher return and more flexibility throughout the year. However, what comes with that is a much less passive investment, with more effort towards marketing, and finding guests to rent your place. Long term rentals will probably not make you as much profit as STR’s, but the trade-off is a more passive investment, less worry about who’s going to rent your place tomorrow, and overall convenience factor that comes with it.
Which should I choose??
The strategy you choose should be based off of many factors in your life and the amount of work you are willing to do. Are you young with lots of energy and passion towards real estate/growing a business? Maybe the more active, lucrative short term rental is good for you. Or are you looking for something that is a bit more passive that you can just set up and forget about? Then maybe a long term rental better suits you. Whichever option you choose, you will have the ability to create a very successful business that can sustain you for a long time. Like I said in last week’s letter, Real Estate has multiple avenues to explore, and there is unlimited potential to find what works for you and run with it. Cheers!
I hope you all enjoyed this weeks newsletter and took something away from it that you didn’t know before. As always if you enjoyed, feel free to share this with someone you know might be interested. You can also subscribe below if you want an extra newsletter every week that shows a full “Deal of the Week” analysis where I pick a property to analyze from start to finish!
Soo interesting and filled with great nuggets! Thanks Ange!!