Real estate investors have the option to rent their property for a short or long-term period. Many choose to market a long term rental, however, not all properties are suitable for it.
In this article we will discuss the difference between a long-term and a short-term rental along with their advantages and disadvantages. We hope to provide investors with more information so they’re able to come up with the best rental strategy.
Differentiating Short-term Rentals from Long-term Rentals
- Long-term rental: Typically offered to tenants with 12 months rent duration. A fixed rental due is assigned. Single-family homes or residential units have a rental agreement that is renewable after a 1-year or 12-months stay. Some leases may set a 2-year period depending on the landlord and tenants occupying the rental property.
- Short-term rental: Commonly offered to renters on a daily, weekly or monthly rental period. Vacation rentals and spare bedroom units are often rented for a short-term duration.
Long-term rentals have benefits and drawbacks. Here are some things to think about:
Benefits of Long-term Rentals
1. Predictable Income
One of the top advantages of renting out your property for the long term is the predictable income. When a tenant signs a 12-month lease, you’re guaranteed a solid income for that period.
As long as the rent is promptly paid, you’re able to predict the cash you’ll be receiving every month. A landlord can then proceed to make rental home improvements through repair and maintenance. Home renovation projects can also be planned and completed.
2. Easy financing
Lenders are more likely to offer the investors better interest rates and financing terms when they open a long-term rental. Vacancy risks are lower, therefore, financing is easier to find knowing that the rental cash flow is steady and predictable.
3. Less operating expenses
When it comes to property maintenance, tenants are motivated to take better care of the home if they’re occupying it for a long period. They will usually tidy up the unit, maintain the yard, and be in charge of paying their utility bills.
Rentals with long-term tenants often have less wear and tear. Long-term tenants consider this property to be their home, therefore they are more mindful of property upkeep.
4. Less tenant turnover
Property owners save time with administrative functions like putting up property advertisements, lease signing, and rental unit preparation.
5. Less property management fees
In general, long-term rentals have lower property management fees compared to short-term rentals. It requires more work to prepare short-term rentals as tenants are constantly arriving and leaving.
Drawbacks of Long-term Rentals
1. More difficult to change the rent
Given that a long-term rental lease is signed over a year’s period at least, there is less opportunity to change the rent. Normally, fixed rental fees are stated in the lease agreement.
2. Maintenance can be a challenge
Since a renter is occupying the unit over a long-term period, it can be more difficult to enter in order to perform property maintenance. This can lead to overlooked signs of damage.
A landlord can always include a quarterly or semi-annual property inspection in the rental agreement. As long as proper notice is given, a landlord can enter the unit for property maintenance.
3. The risk of accepting a bad tenant
Property owners have little to no room to make mistakes when choosing a renter. Given that a particular tenant will be occupying the rental unit over a 12-month period, proper screening must be carried out. If not, eviction may be necessary, which can require significant time and money.
Short-term rentals have their own set of benefits and drawbacks. Let’s take a look.
Benefits of Short-term Rentals
1. Potentially high gross income
Investors can easily do a rent price adjustment in response to current market demand. This can lead to higher earnings in contrast to long-term rentals.
2. Ease of property maintenance
A shorter rental duration allows the property owner more time to perform maintenance tasks. The unit can be scheduled for cleaning and repair after each renter leaves.
3. A higher degree of flexibility
If the economy is in a downturn, investors can rent out their property until market conditions are better for selling their real estate. The temporary setup of renting the unit fits the investors’ objective.
Drawbacks of Short-term Rentals
1. Unstable rental income
Earnings from a rental income are inconsistent. The possibility of receiving a high rental profit is possible but vacancies can also occur.
Thus, the rent income from a short-term rental is unpredictable.
2. High cost of operation
Maintaining a short-term rental requires more energy and effort from the property owner. Given that they’re furnished, supplies must be constantly monitored and replaced.
3. Utility charges
Rental investors have additional tasks to think about since they’re responsible for paying the utility bills. This can cover gas, water, electricity, cable TV, and internet service.
Both short-term and long-term rentals have their own set of pros and cons, and McCaw Property Management can help make owning either as stress free as possible.
Contact us today to learn more about how we can help you maximize the return on your investment property.