Like other types of investments, real estate can come in many different shapes and sizes. But for residential real estate, it comes down to choosing between short-term or long-term rentals. Short-term rentals are often considered to be properties that are rented for 90 days or less, while long-term rentals will usually have tenants that are on a lease for six months or longer.

The decision to invest in short-term or long-term rental properties will depend on the individual. It’s not unlike investing in mutual funds, which are often considered to be safer investments that grow more slowly than individual securities with a higher risk/reward balance. Before you decide to invest in short-term or long-term rental properties, you need to understand the pros and cons of each one.

Advantages of Long-Term Rentals

Here are some of the advantages of long-term rental properties:

• Predictable Income – As long as you have reliable tenants, longer lease terms will make sure you get more consistent and predictable cash flow, Seasonal variations won’t affect your monthly maintenance budget as much.
• Less Operating Costs – The tenant of a long-term rental property will provide his or her own furnishings and will pay for utilities, cable, and internet. Long-term tenants are more likely to treat the property like a home, keep it clean, make some basic repairs, and do regular yard maintenance.
• Less Advertising – The low turnover rate of long-term rentals will mean that the property owners will spend less time and money in advertising the unit. You’re also more likely to find a responsible tenant who wants to renew the lease on a yearly basis.
• Security Deposit – Security deposits are a standard practice for covering the cost of damages. And because the money is given back to tenants who take care of the property, renters usually don’t mind paying it.
• More Affordable Management – Lower operating costs and stable tenancy means that long-term rentals don’t need as much hands-on management. If a property owner decides to outsource property management, the monthly costs are a lot lower than it would be for short-term rentals. This is because there are fewer inspections, cleanings, and maintenance requests from revolving occupants.

There are some clear advantages to investing in long-term rental properties. It will often mean that tenants will sign an annual lease, but they can be rented on a month-to-month basis as well.

Disadvantages of Long-Term Rentals

While long-term rentals have their advantages, they do have their drawbacks. Some of them can include:

• Less Flexibility – Even with a thorough background check, you could have a long-term renter who doesn’t pay the rent on time or decides to trash the property. If you need to evict someone, the legal process can vary from one jurisdiction to another. The terms of the lease may also make it more of a challenge to sell the property or make adjustments to the rental price point so you can take advantage of favorable market conditions.
• Less Transparency – Landlords need to abide by strict privacy laws, so it may be harder to assess and repair damages on a regular basis. Make sure you give any tenant proper notice if you want to inspect the property before the lease expires.
• Less Profit Margin – Because you’re not always able to adjust pricing based on current demand, your profit margins may be lower than short-term rental properties.

Landlords ultimately have to balance their desire for long-term stability against the expectation that longer leases will come with a discount being offered to the tenant.

Advantages of Short-Term Rentals

Some of the advantages of short-term rental properties include:

• Higher Income Potential – Because they have higher daily rates, short-term rental properties will often have a higher income potential. Investors can maximize their returns by adjusting their prices according to local market demand and amenities. According to AirDNA, the amount of average revenue for short-term rentals has consistently risen since 2020 (which outpaced any gains before the pandemic). Even in smaller towns and rural areas, the revenue potential for these properties has increased by 55%.
• Flexibility – Because people are staying for a shorter period of time, you won’t be stuck with a bad tenant for too long. It’s easier to charge more, so you can keep up with competitors during the tourist season. Selling the property is also less complicated, because you don’t have long-term tenants.
• More Control – While some long-term tenants may take good care of the property, not all of them do. It’s easier to perform regular inspections on short-term rentals, so you can see if there’s any damage or maintenance issues that need to be taken care of. There will also be less wear and tear on the property, so it will be easier to maintain.

Another advantage of a short-term rental property is that you can have a vacation home that you can use whenever you want to. Making time for family and friends is also easy, because you’ll have complete control of the booking calendar.

Disadvantages of Short-Term Rentals

While short-term rentals have their advantages, they also have their drawbacks. Some of them can include the following:

• Lower Occupancy Rates – Every market has an off season, and even the most popular vacation spots won’t have a 100% occupancy rate. AirBnb listings in the United States have a 48% occupancy rate on average, though top performers can have a 65-75% occupancy rate.
• Aggressive Marketing – Short-term rentals must be able to compete with other listings on popular apps (such as AirBnb and Vrbo), as well as with local hotels. You’ll have to spend more money on advertising and take the time to write property descriptions to get more bookings.
• More Maintenance and Expenses – Creating the perfect vacation spot to demand top dollar will require you to spend more time cleaning and restocking certain items (such as shampoo and toilet paper). You will also have to offer other hotel-like amenities.

Another drawback to short-term rentals is that there may be a tendency for guests to treat them like “party houses,” which can cause significant damage to the property. Even if investors are able to recoup their damage costs by forfeiting the security deposit, it can still take time and energy to complete the repairs.

Other Factors That Can Affect Your Decision

You might be tempted to turn your second property or vacation home into a short-term rental because you’re attracted to the profit margins, but your choice will most likely be influenced by certain characteristics and circumstances with regard to the property. Some of them can include the following.

Location

Location can be a huge factor in determining whether your property is good for a short-term or long-term rental, but not all short-term stays are used by out-of-towners for vacation purposes. They may book a short-term rental for the following reasons:

• Medical procedures.
• Homebuyers that are in between buying and selling a house.
• Homeowners renovating a house.
• “Staycations” of local residents.

Even if a property isn’t in a popular tourist destination, it can still make a good short-term rental.

Local Laws

City ordinances, zoning laws, and HOA rules can make certain properties ineligible for short-term rentals. If it is allowed, a lot of cities will require property owners to register, get a license, or obtain a permit before they can take paying guests on their property. And ignoring these rules can lead to code violations, which may result in certain penalties. Local laws can vary, so make sure you’re familiar with them before you list your property.

Tax Implications

Depending on how long you rent a space, there may be some tax rules that are slightly different for short-term rentals. The 14-day rule, if it applies to your situation, allows owners to rent a room or property for fourteen days or less without paying any taxes. If you rent it for longer, you must report it as income on your tax return.

The types of tax deductions you can claim may also vary with each type of rental. Before you put up a listing, make sure you understand all the tax implications. And be sure to speak to a tax expert if you have any questions.

Budgeting

While a short-term rental may bring in a larger profit, it may also require more maintenance. This can include upkeep, cleaning, and supplies so you can keep up with hotels and other short-term rentals. A long-term rental property will also require some type of maintenance budget, but you will have to reserve money for the following items if you have a short-term rental:

• Cleaning services.
• Utilities.
• Streaming services and other types of TV entertainment.
• Furnishings.
• Utensils and other types of kitchen equipment.
• Toiletries.
• Insurance for property damage and other liabilities.

When you’re operating a long-term rental property, many of these expenses are the tenant’s responsibility. So, before you decide to turn your property into a short-term rental, make sure the increased profits are enough to cover these extra expenses.

If you want to know more about how real estate investing can help you to grow your portfolio and your net worth, be sure to reach out to Trevor Shakiba at Shakiba Capital.