With the advent of platforms such as Airbnb bringing much popularity to short term rentals, it may feel as though long term vacation rentals have taken a bit of a back burner position. As an investor, would you choose between longer-term tenants or higher turnover? Both long term vacation rentals and short term vacation properties have unique benefits, as well as disadvantages. Read on to find out more about each type of vacation rental property, so that you can start formulating the best strategy for your portfolio.
Timeframes Of Short Term Vs. Long Term Vacation Rentals
A property that is rented anywhere between one evening up to one month is often considered a short term rental. In contrast, a property rented for one month or longer is usually considered a long term vacation rental. The difference between short-term vacation rentals and long terms vacation rentals can be boiled down to time and not attributed to property type. An investor may position a vacation rental for short term or long term based on which strategy would maximize cash flow in their specific market or even based on personal preference. The next few sections will discuss some differences between the two strategies to elucidate some of these considerations.
Long Term Vs Short Term Vacation Rental Properties: The Pros And Cons
If you have invested in a property that you think you can position well as a vacation rental, you may be wondering how to decide on the benefits of long term vs short term vacation rental properties. Read on to find out about the unique sets of advantages and disadvantages that are often associated with the two different vacation rental strategies.
Benefits Of Short Term Rentals
Short term rentals give their owners flexibility and greater control over their property and many other benefits. Take a look at some of the main advantages that short term rentals offer their owners:
- Personal vacation use: Many investors like to make personal use of their vacation rental property and rent it out to others when it is not in use. When a property is listed on the short term rental market, it is much easier for the owner to block off the dates they would like to use the property.
- Less wear and tear: Short term rentals tend to be occupied around weekends and busy tourism seasons, but not throughout the entire year. Because of this, it tends to take relatively longer to build up noticeable wear and tear on the property.
- Easier maintenance: Similar to the less frequent wear and tear of short term rentals, these properties are often easier to maintain. Short term rentals are cleaned and prepared for new occupants more regularly, which translated to better-maintained properties. This helps to prevent any long term damage to the property. If any maintenance problems arise, a short term rental owner has easier access to the property without disturbing residences.
- More overall rental income: Owners are typically able to charge a higher nightly rate for short term rentals, compared to long term vacation rentals. Although occupancy can fluctuate, making rental income less consistent, short term rentals tend to provide more rental income long term.
- Price Adjustment: Short term rentals offer their owners the ability to adjust the price of rent more often than owners of long term rentals can. Short term rental homeowners can change the price of rent in between occupants as they see fit. If there is a higher demand for their rental in the summer season, they can raise their rent and produce more income. They are not limited to year-long lease terms that long term rental homeowners experience.
Short term rentals are not without potential downsides. Because rental income is a direct result of booking short-term guests throughout the year, short term rental owners will find that they need to put in more effort to market their home. This could include messaging back and forth between interested guests, updating listing sites, or offering promotional discounts. Also, many rental owners will choose to manage tenant turnover on their own to help lower costs. Finally, mosts guests will expect their short term rental to be nicely furnished when going on vacation. This will require owners to update or replace furnishings as needed, which is a cost that should be considered.
Cons of Short Term Rentals
Short term rentals can provide owners with several benefits, including profit potential and personal use, but there are a few cons to consider before adopting this investment strategy. Short term rental owners may run into the following challenges:
- Competitive Markets: Short term rentals are often operated in competitive real estate markets to minimize vacancies and maximize profits. However, you will be competing with other rental owners and even hotels in the area. This means you need to think about what gives your property an edge and market it appropriately to travelers.
- Maintenance and Repairs: Unfortunately, renting out your property to new tenants each week could result in increased wear and tear. You may have to complete more maintenance than normal to keep the property clean and well taken care of when operating it as a short term rental. This can increase your overall operating costs.
- Off Season Vacancies: Depending on the market, you may deal with consistent vacancies during the offseason. It is crucial to factor this into your annual costs and set your rental prices accordingly. Many short term rental owners will lower rental rates and set deals during the offseason to attract tenants.
- Property Management: Short term rentals inherently require more involvement in terms of property management. You will be responsible for coordinating guest check-ins, cleaners, and maintenance workers. If you do not live in the area, this can require a lot of planning. While there are many qualified property managers out there that can help with this responsibility, this will be an additional cost to consider.
Benefits Of Long Term Rentals
There is no doubt that short term rentals have many appealing qualities. However, investors should take a look at what long term rental properties can offer them as well. Long term rentals are viewed as more stable and consistent investments, and for good reason. Take a look at the benefits of investing in these properties:
- Consistent cash flow: Because a longer-term tenant pays a consistent rental fee on a weekly or monthly basis, landlords can count on more consistent cash returns, when compared to the fluctuations of a short term rental.
- Utility bills paid: If you have tenants occupying your long term vacation rentals for a month or longer, then oftentimes, utility bills can be passed on to the guest. This can create significant cost savings in certain seasons, such as during the summer or winter.
- Less Turnover: When the rental term is relatively longer throughout the year compared to short term rentals, this means you have fewer people coming in and out of your property. This means having to do less paperwork, less cleaning, and less vetting of potential tenants. Overall, this minimizes the need for day-to-day management.
- Easier to manage: The less frequent turnover rate of long term rentals contributes to the benefit of an easier to manage the property. Landlords of long term rentals spend less time worrying about their next tenant and source of income, which allows them to relax and step back from the management side of their properties compared to the more demanding management required from short term rentals.
- Cheaper management: If a landlord decides to hire a property management company to handle day-to-day operations of either short or long term rentals, the cost will be significantly lower for long term rentals. Long term rentals require less effort to fill occupancies, so the property management fees will be much lower than those of short term rentals. Fewer tenants throughout the year result in fewer management requests, saving money for long term rental owners in the long run as far as property management companies are considered.
Investing in and managing long term rentals can be associated with a unique set of challenges that are worth noting. First, the stability in cash flow is offset by a generally lower earning potential than short term rentals. This is because it is usually not feasible to charge premium rates for long term stays, while travelers or often more inclined to pay higher rates if they are only staying for the weekend. Also, especially during an off-season, it may be more difficult to find a longer-term tenants; owners should plan for longer vacancy periods. Finally, because guests will stay in the property for longer periods, personal use of the property can become limited at times.
Cons of Long Term Rentals
Investors have consistently favored long term rentals for their passive income potential. However, there are always cons to think about before purchasing a rental property. Here are some factors to consider before buying a long term rental property:
- Landlord Regulations: As a property owner, there are certain laws and regulations you must follow to rent out a property. For example, many states have laws requiring landlords to give advance notice before entering a property, even for maintenance purposes. There are also laws regulating the application and eviction processes. It is crucial to understand your area’s regulations before renting out a property to avoid any potential legal issues.
- Lower Profit Margins: When looking at short vs long term rentals, long term units tend to have lower profit margins. Long term rentals are still an excellent source of passive income. However, they may not generate the same income as a short-term rental in a popular vacation destination.
- Tenant Applications: A typical lease term is one year when looking at long term rentals. This makes it highly important that you find the right tenants for your property. Make sure you review tenant applications for previous evictions or any red flags noted by past landlords.
- No Personal Property Use: The most obvious drawback when comparing short and long term rentals is that long term properties are not suitable vacation homes. Long term rentals will typically be rented out consistently, whereas short term owners can reserve time to visit these properties as desired.
Short Term vs. Long Term Tax Implications
One of the biggest areas for confusion when looking at short vs. long-term rentals relates to the different tax obligations associated with each. The first thing to know is that if you rent out a property for less than 14 days during a calendar year you will not be taxed on the rental income. However, many short-term rental property owners exceed that timeframe. The good news is that short-term rental owners can generally deduct the costs of furniture, decor, and basic maintenance such as painting costs. Short term owner can also deduct losses incurred for operating the property if they meet certain requirements — for example, if the average stay is less than seven days.
Long-term rental properties are more commonly associated with tax benefits. This is because of interest rate deductions, depreciation, and other perks built in for property owners. Though that is not to say that short-term property owners can not enjoy some of the same benefits when tax season comes around. Essentially, take time to review the tax obligations no matter how long you rent out your vacation property. This can help you avoid a hefty bill when tax season rolls around. Further, take time to discuss any concerns with a qualified tax professional.
Restrictions On Short Term Rentals
Before you decide to move forward with a short-term rental, make sure you’re actually allowed to do so. Markets that attract tourism often place restrictions and limitations on short-term rentals. Because they’d be so profitable, many landlords would be tempted to enter the short-term rental market. However, this could erode the supply of affordable housing for local residents. Some municipalities might ban short-term rental sites such as Airbnb.com, or require an expensive license or registration fee. It’s always best to mind your due diligence and research local rental rules before deciding between short-term vs. long-term.
Marketing Long Term Vs Short Term Rentals
In terms of short-term rentals, websites like Airbnb and VRBO will be your best friend. These websites cater specifically to travelers in need of short-term accommodations. To keep your listing competitive, make your pictures pop and your headlines direct. For example, take well lit photos of the property in good condition and market it as a “charming bungalow for two” or a similarly descriptive name. Details and pictures will go a long way for prospective renters looking for a vacation stay.
Deciding Between Airbnb Vs Long Term Rentals
Vacation rental platforms such as Airbnb and VRBO have quickly boosted the popularity of short term rentals in recent years, but investors should not automatically count out a long term vacation rental investment. A vacation rental property posted on Airbnb offers owners the ability to change pricing, receive public guest reviews, and list the property for free. One of the added benefits of short term rentals is the ability to meet new people all the time if you choose to be the type of owner that greets new guests.
A long term vacation rental investment strategy may be a better fit for individuals who prefer to have the same tenants over a longer period of time, thus having to deal with less tenant turnover. A longer-term tenant may even help bring in a more steady and stable cash flow as well, although a vacancy may be a little more difficult to fill relative to a short term rental such as an Airbnb. Most importantly, investors should heavily consider the vacation market in which they are located and research which strategy would be the most conducive to bringing in a sizeable rental income over the course of the year.
Before becoming too concerned about some of the disadvantages associated with either short term or long term vacation rentals outlined above, you should first and foremost celebrate the fact that you have successfully invested in a property that is in a market well-positioned for vacation tenants. Choosing between a short term or long term vacation rental strategy can be tricky, but ultimately the choice is yours to make.