Investing in rental property is a time-honored solution. Despite all of the restrictive regulations, it remains one of the most reliable and effective investment tools. However, there are two distinct strategies and frankly two different industries: long-term rentals and vacation rentals. In order to receive the highest return on the investment one need to decide which investment strategy to pursue.
Long-term renting does not need any further explanations. It is a business practice that was carried out for centuries. There are plenty of competitive advantages to this strategy.
First of all, long-term renting is much more secure than a vacation rental. It is equipped with an intricate system of checks and balances. Landlord and tenant sign an enforceable legal contract, that define rights and responsibilities of each party. Various screening procedures filter out renters with a questionable background and insufficient credit. Any potential damage or accelerated wear and tear is covered with security deposit.
Second, it provides a stable source of income. Once the lease agreement is signed the investor can count on the constant stream of cash. Since lease agreements are at least year-long, a landlord can forget about spending on marketing and advertising for this period of time. It is also a lot easier to plan a consistent budget and arrange new investment with a steady income.
Third, the majority of expenses associated with cleaning, maintenance, and utilities are paid by the tenant. Major renovations still have to be done by the landlord, but it is only a minor fraction of expenditures assign to the tenant.
This business practice also has certain drawbacks. The most apparent one is the lack of flexibility. Even if the market has changed, and the median rental price has increased landlord cannot renegotiate the terms. Property manager couldn’t remodel a home, sell it, or use it for other purpose while it is still occupied. Long-term rental agreements protect landlords, but they are also rock-solid regarding tenants rights.
Another major disadvantage is costly process of finding new renters. Even if the property is located in the hot neighborhood, it still takes time to reach out and market the property. The possible expenses may include fees to numerous listing website, commision to brokerage etc. Additionally, landlord need to allocate money, time and effort to properly screen all of the prospective tenants. Rentberry automates all these standards rental tasks and let the landlord perform them online.
This investment strategy is also not new. However, nowadays the industry of vacation rentals is booming due to numerous online service like HomeAway and Airbnb that completely reshaped the market. It is increasingly easy to rent out the vacation property.
Among the advantages is much higher income. Tourists and travelers are willing to pay for relatively expensive vacation rentals, taking into account that a hotel room would cost them much more. In certain areas vacation rentals are effectively competing with hotels, hostels, and resort, offering high quality of services at a reasonable price. This strategy also permits a greater flexibility. The landlord can regulate the price, increase it during the peak season and decrease during the low turnout.
Additionally, it is possible to pause the renting at any given time to perform necessary construction or use the property for a different purpose.
Vacation renting does not have all of the formalities of the long-term renting. The procedure is simple and straightforward. It does not require complicated screening methods. The landlord is also not required to install new locks or renovate the premise after every new tenant.
Nevertheless, there are plenty of risks associated with vacation rentals. Tenants of vacation rentals tend to be reckless and negligent regarding property. This accelerates wear and tear of the premise. There is no security deposit to reimburse the landlord for minor damages like stains and little holes in the carpet. It does not seem to be a big problem, but these little flaws accumulate over time. Vacation rentals are much harder to manage, it requires a full-time employee. Somebody needs to meet and greet every new tenant, handout the keys and clean the place afterward. Finally, there is no guarantee that the property will be permanently occupied. Therefore, there is no guarantee of the stable income.
The return on the investment from buying a vacation rental depends on multiple factors. Apartments in the city center and in close proximity to major roads and public transportation will attract renter year-round. Vacation homes near beaches and national preserves are subject to strong seasonal fluctuations. It might be profitable only in summer.
The key to the good investment in rental property is location, neighborhood and the quality of the property. This is true regardless of the chosen strategy. A careful investor should, first of all, understand the target audience, what kind of renters he wants to attract. If the primary target is executives on a business trip, an investor should look for a place around big convention centers, financial district etc. In contrast, if the goal is long-term renting for a family investor should look for neighborhoods with good schools, parks, and low crime rate. Buy-to-let is a business, and it should operate as a business.
One cannot simply buy a random property, and then try to squeeze out an income out of it. Before buying the rental property, one have to perform a thorough research. The key questions to ask are Who and Why will rent the property of interest. .