If you’re looking to get into the rental game, you must choose between purchasing a property for long-term rentals and offering short-term rentals.
The long-term strategy is the more traditional approach. Short-term rentals are newer territory for many investors, but the short-term rental market is hot right now. Airbnb alone boasts about 150 million users and 640,000 hosts — and that’s just a single site! When you add in VRBO, Home Away and others, you’ll see that there are a lot of possibilities for income in the short-term rental market.
Long-term renting and short-term renting each have their challenges and advantages. Which one is right for you depends on your goals, the area where you’ll invest and your resources as an investor. If you’re trying to decide whether to get into short-term renting, consider these five things.
1. Rate of Return
The rental rates you’ll get from a short-term rental are sometimes higher than what you can command for a long-term one. For example, one landlord in Los Angeles went from receiving $1400 a month on a long-term rental to over $4500 a month for short-term rentals.
While making more than triple the amount of money each month sounds ideal, there are some drawbacks to short-term rentals as far as rate of return. One big drawback is that some homeowners’ associations (HOAs) are putting the brakes on short-term rentals and writing bylaws that prohibit short-term leases.
2. Link to Tourism
Another issue to consider with short-term rentals versus long-term is that you are going to depend on tourism. That means that your ability to lease the property may depend upon the season. If there is a downturn in the economy, you also may notice a decline in rentals as people stay home and spend less money.
That said, you can always shift your property to a long-term rental if this occurs. So, look for a place that you can lease to travelers that’s also affordable enough to convert to a long-term lease if needed.
3. The Vacation Home Strategy
About half of those who purchased a vacation home did so with the idea that they would rent it out to others at least some of the time. Renting out for part of the year allows you to defray the costs of the property. You can still reserve the property for the weeks you’d like to vacation, but on the weeks you aren’t there, rent it out and make a little extra on the property.
This makes short-term rental more viable for the casual investor – you bought the vacation home to enjoy with your family, and not necessarily to boost your income with a high ROI.
4. Higher Fees
One thing to look at when deciding if a short-term rental investment is right for you is the higher fees you’ll pay. Yes, you’ll make more renting for a week rather than a year, but you’ll also pay fees to the company you rent through.
You may also have to pay a property manager higher fees and a cleaning company each time people leave. The more active management needs can take a toll on the time and funds an investor is willing to surrender to a given property.
5. Unreliable Income
Depending upon where you purchase your rental property, there may be months where your property doesn’t get leased at all, creating a cash flow issue.
If your property is in a popular year-round destination, though, you won’t have to worry about this.
Some of the most-booked cities for short-term rentals include Tokyo, Paris, New York City, London, Rome, Orlando and Sydney. If you are open to purchasing an investment property anywhere, these are markets to consider for your purchase.
When deciding to purchase a rental property that you plan to rent out as a vacation home, consider if you’ll still make a profit if it leases only 30 percent of the year, during peak season. If not, then this might not be the best investment for you, particularly if you’re a beginning investor.
Dipping Your Toes in the Short-Term Rental Water
If you’re unsure about investing in short-term rental property, one way to try it out is to lease out a room in your home or a small guest house on your property. This will allow you to get a feel for how sites such as Airbnb and VRBO work and learn how to rent a property profitably.
Perhaps you have an apartment over your detached garage or an extra bedroom in your house that you could rent out during events in your area. This would bring in a little extra income that you could save for investing in your first rental property and help you get an idea of the level of work involved in short-term renting.
Choosing Between Short-Term and Long-Term Investments
As you can see, there are both pros and cons to renting out your properties short-term. The potential income tends to be much higher than for long-term leases, but the fees and time the home goes unrented may eat into those profits. The smartest strategy is probably to have both long-term and short-term properties until you figure out which one works best in each area.