Long-Term vs. Short-Term Rentals: What You Need to Know
The top real estate investing gurus have mixed opinions on which real estate investing strategy offers the best possible return for your investment: long-term or short-term rentals.
Over the last decade, short-term rentals have become an increasingly popular alternative to the traditional, long-term buy-and-hold strategy that many investors hold dear. With the rise of digital platforms like Airbnb, VRBO, and HomeAway, short-term rentals can offer big profits when managed correctly.
But despite a handful of advantages that short-term rentals can offer, they are not without substantial risk. Moreover, there is a reason why long-term rentals have stood the test of time.
Focusing your money on long-term rentals is a more tactful approach to sustainable returns. Here’s a take on the pros and cons of both short-term and long-term rental models and why Doorvest backs a long-term approach to real estate investing.
What You Need to Know: Short-Term Rentals
There is a reason why short-term rentals (STR) have become much more prevalent in the last decade amongst real estate investors. At the end of 2021, the average annual revenue per full-time short-term rental unit hit an all-time high.
Industry revenue is projected to increase to $113.9 billion by 2027, which is a significant jump from the estimated $17.6 billion for 2022.
Nevertheless, many experts feel the underlying root of the current short-term rental market growth is pent-up travel and tourism spending coming off the recent COVID-19 pandemic. In fact, if inflationary pressures continue to be relevant, household budgets could retreat from discretionary spending in these areas once more.
The broader questions are: What makes short-term rentals appealing, and what are some challenges with this investing model?
For starters, short-term rentals do have the potential to charge higher rents which could lead to better monthly cash flow and higher profits. One of the reasons why STRs may also have greater income potential is that you have a larger resident pool to draw business from.
Additionally, short-term rentals offer a lot of flexibility with how the property is managed. For example, if you want to use the property as your personal vacation home at times throughout the year, you can simply black out those dates as ineligible for bookings.
Short-term rentals certainly have some advantages over long-term rentals; however, they also have several major drawbacks. While earnings potential could be greater for STRs, income can be extremely volatile. That is because turnover is exceptionally high, which can make cash flow extremely volatile month-to-month.
Similarly, short-term rental performance is often heavily dependent on the location they reside in. Your monthly earnings could be erratic if you are not in a high-traffic vacation hotspot or tourist destination.
Income volatility can be extremely problematic when you finance your short-term rental. The bottom line is that your lender doesn’t care how your cash flow fluctuates monthly; they still expect you to pay your monthly mortgage payment on time.
Additionally, many key areas where STRs are prevalent have strict short-term rental guidelines related to how you rent your property, which properties are eligible to be rented, and how you can manage them. While short-term rentals offer flexibility in some areas, they can be restrictive in others.
Pros of Short-Term Rentals
Access to a broader pool of residents
Used as a vacation home / personal use
Possibility of more income
Cons of Short-Term Rentals
Monthly cash flow can be volatile
Short-term rental restrictions in key areas
Location, location, location!
What You Need to Know: Long-Term Rentals
There are several reasons why new and seasoned real estate investors prefer long-term rentals over other types of real estate investments. Long-term rentals are loved because they offer greater consistency in performance and predictability of income compared to short-term rentals.
The long-term rental model has also been around for significantly longer and will always be a necessity for those who cannot afford a home or do not want to own one. Consumer behavior toward homeownership has also shifted over the years, especially among younger generations. Evidence indicates that Millennials are renting longer, for reasons other than affordability.
Nevertheless, there are other advantages long-term rentals provide. First, you have significantly less turnover with long-term rentals because you have formal lease agreements. This lowers costs due to vacancy and enables better predictability of cash flow. Note that pre-pandemic, the average Airbnb had an occupancy rate of less than 50%.
You also often get better resident quality with long-term rentals because you have more control over the selection process. As an investor, you can perform necessary due diligence before renting to a prospective resident, which isn’t really available with an STR model.
Furthermore, renters usually are required to take care of the basic maintenance of their long-term rental – resulting in less time, money, and effort required on your end. Comparatively, short-term rentals often have more turnover, which usually translates to more wear and tear. You also must make sure your property is clean and staged for the next resident.
Despite the many advantages long-term rentals can offer, some investors prefer other investing strategies. Many real estate investors prefer more flexibility with how they can use or manage their investment property, which you can’t always get when you are locked into a long-term rental agreement.
One other drawback of long-term rentals is that there can be a lag between market changes and permissible rent adjustment periods. You may be able to adjust your rents toward current market trends right away with a STR, but you may have to wait until it's time to renew your resident’s lease with a long-term rental.
Pros of Long-Term Rentals
Less turnover with longer leases
Renters take care of basic maintenance
Better tenant quality and selection
Predictable income stream
Cons of Long-Term Rentals
A lag between market changes and rent adjustment periods
Less flexibility month-to-month
Doorvest’s Approach to Real Estate Investing
Long-term rentals are an important arrow in any real estate investor's quiver, which is why Doorvest has always supported a long-term rental approach to real estate investing.
Due to their consistency and performance, as well as the added control you have over the management of your investment, long-term rentals have a distinct advantage over a short-term rental model.
Granted, there are some advantages to implementing a short-term rental investing strategy, however, the risks far exceed the rewards. Alternatively, long-term rentals can be a better tool to build foundational wealth through real estate.
Doorvest’s mission is to empower investors to build wealth through rental properties. By offering services in high-growth, long-term rental markets such as Atlanta, Houston, Columbus, and more, any investor can reap the advantages of a long-term rental real estate strategy.
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