Real estate investors who are considering entering the rental property business may find themselves asking whether long term or short term rental is the better strategy. Before getting into details, it’s important to note that the difference between long term and short term rentals is distinguished by time, not by property type.
Long term rentals are generally rented to a tenant with a 12-month lease term at a fixed annual rent. Short term rentals on the other hand, are typically rented on a daily, weekly, or monthly basis.
Both strategies have their advantages and disadvantages. In this article, we’ll go over the pros and cons of each to help you decide which one is best for you.
Pros and Cons of Long Term Rentals
Benefits of Long Term Rentals
Long term rentals are viewed as more stable and consistent investments, and for good reason. Take a look at some of the benefits long term rentals provide:
- Consistent cash flow
- Utility bills paid
- Cheaper management
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 flow, when compared to the fluctuations of a short term rental.
Utility Bills Paid
Utility bills can be passed on to tenants occupying your long term rentals for a month or longer. This can create significant cost savings in certain seasons, such as during the summer or winter.
Cheaper Management
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.
Disadvantages 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:
- Lower profit margins
- Finding the right tenant
- Landlord regulations
Lower Profit Margins
Generally, long term units tend to have lower profit margins making them an excellent source of passive income. However, in popular vacation destinations, such as the Emerald Coast, they may not generate the same income as a short term rental.
Find the Right Tenant
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.
Landlord Regulations
As a property owner, there are certain laws and regulations you must follow to rent out a property. Many states, including Florida, 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.
Pros and Cons of Short Term Rentals
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
- More overall rental income
- Less wear and tear
- Easier maintenance
- Flexibility with price adjustments
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.
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 translates to better-maintained properties.
Price Adjustments
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 owners 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.
Disadvantages 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
- Maintenance and repairs
- Property management
Competitive Markets
Short term rentals often operate 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.
Property Management
Short term rentals inherently require more involvement in terms of property management for things such as, 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.
Like most investment decisions, there’s no perfect answer for everyone. It all depends on how much income consistency you want, how much time you want to spend on your investments, and how you feel about the other benefits and drawbacks of each type of rental property. Choosing between a short term or long term vacation rental strategy can be tricky, but ultimately the choice is yours to make.