Whether you have a investment property, an extra room or a separated suite, many of you have asked the question of "should I rent out my space long term or short term?".
In this article I will evaluate what happens through the lens of several categories and decide whether long term rentals or short term rentals come out on top. Do remember that the risks and benefits may vary based on your location, circumstance and the local regulations.
Short Term Rentals are generally defined a rentals under 1 month, but when you are considering renting out your property on a platform such as Airbnb, generally hosting a guest for between 1 day to 1 week is the norm.
Long Term Rentals on the other hand, are generally defined as rentals over 1 month, but most landlords would be expecting an occupancy of closer to at least 1 year.
Most of the time, hosting your short term rental will require quite a bit of initial investment. You will need to make sure that you have done all your due diligence, understand the regulations, set up and design the space you want and then advertise or list your business. Alternatively, hiring a property manager to help you with these tasks will also leave a mark on your bill.
One other important cost that needs to be considered is that when you first start listing your space (on Airbnb for example), you will need to attract customers to build your reviews and presence by offering lower prices. This process could take up to a month or longer.
Generally it is much easier to prepare your space to rent out to long term tenants. It is not necessary to invest too much into furnishing as most landlords rent out their space unfurnished.
Landlords do not get to skip this step completely though, as you will have to do showings, draw up a contract and vet your potential tenants. If you are hiring an agent to do these tasks for you, do expect to pay a fee of about 1 month's rent (this fee can vary depending on your agreement).
This is an easy win for long term rentals. Unless you are only planning take a few amateur photos and list your space while you are on a 2 week vacation, it take's a lot of work to set up your short term rental before you can get your first tenant.
Short term rentals allow hosts to have more control over the price they can charge for each guest and each date. As a result, it is much easier to capitalize on the days when demand is hot (such as during the summer season) and achieve a higher revenue per day. Most vacation renters in short term stays are also willing to pay a few extra dollars for a higher quality space.
When comparing to the short term rentals, the 'bulk order discount" can been seen at play. Your potential tenants will be more price sensitive and looking to minimize their costs. Landlords are much more susceptible to the market price and rent controls prevent landlords from raising the price by too much.
In terms of earnings potential, short term rentals comes out as a clear winner. The difference in price sensitivities of renters and the "bulk order discount" effect allows short term rental hosts to charge a premium on top of what a long term rental can get. On the other side of the coin though, a short term rental that is not properly managed or in a poor location can fail to secure any customers at all.
Due to the nature of short term rentals, hosts must continuously seek out new guests to keep a consistent cash flow. Hosts are exposed to a multitude of events that are out of their control that can put a screeching halt to their income. These things can range from pandemics to regulations to issues within the property that need time to be fixed before it can be rented out again. Prices can fluctuate very quickly and in cases where a refund needs to be issued, there may not be enough time to replace that booking.
Long term tenants pay a consistent rental amount (on a monthly basis) under a (one year) rental or lease agreement and as a result landlords can reasonably count on receiving their cash flow a few months down the road. Market prices in the long term market do not change as quickly as in the short term market. Even if a tenant is about to leave, landlords can predict and plan out what they can expect from their next tenant.
In terms of income certainty, this is another easy win for long term rentals. This is not to say that this is universal. A poor tenant can cost landlords both a lot of money and a lot of time in fixing up the space while a well managed short term rental can hedge out their risks and manage their cash flows by averaging out their revenue over a longer period of time.
Assuming you are managing the property yourself, you will on a regular basis, need to keep on top of your bookings and remain available for your guests. However, this can be reduced significantly by hiring a property manager. On the other hand, some hosts will decide to spend the time to do the cleaning between bookings themselves and pocket the cleaning fee.
Long term rentals require much less effort to fill in their occupancy and only need to make sure to collect their rent (every month). Occasionally a landlord will need to deal with maintenance issues such as plumbing issues or replacing a broken washing machine.
Similarly to short term rentals, a landlord can also hire a property management company to take care of any unexpected issues and rent collection.
This is another win for long term rentals. To maintain a high quality short term rental, significant time and effort must be continuously put it. If you opt towards hiring a property manager, they would charge much more for short term rentals than long term rentals. Do be aware that problematic long term tenant can be more troublesome than guests who just stay for a few nights.
There is no doubt about all the expenses that exist when hosting a short term rental. These will also depend on what you supply for your guests. This includes items such as cleaning, utilities, internet, paperwork, toiletries and whatever other consumables you provide for the guests.
The bright side to inuring these expenses are that they can be written off to offset your income on when you do your taxes. Items such as gas for your car and a portion of shared interest and utilities can potentially be turn into tax benefits.
The expenses are generally kept at a minimal here, but can vary depending on your agreement with the tenant. Some landlords choose to provide utilities and internet while others don't. One major expense that must be considered are turnover costs such agent feeds to find a new tenant and idle time.
Long term rentals gets the win here due to lower recurring daily expenses. This can also be reaffirmed when you are hiring a property manager, who will be taking quite a bigger cut of the revenue from a short term rental. With appropriate budgeting though, the higher costs of running a short term rental can be easily made up from the higher daily rental rates being charged.
You have probably heard of all the horror stories about the nightmare Airbnb guest, but let me tell you that this is a very unlikely scenario and the risk of this happening can be mitigated greatly by properly vetting all your guests and through setting strict and stern rules. Most guests of short term rentals will be very respectful about your place and the review system (on Airbnb) helps reinforce that and is a great tool that all hosts should using.
There will be occasions however, when you get a messy guest. But since they are only staying for a short period of time, it is much easier to clean up and small problems can be immediately dealt with before becoming a major problem.
Although the vetting process is more stringent with long term rentals, the background checks are more focused on financial viability of your potential tenants. The application process will not be able to detect how messy a tenant is and there isn't a large history of reviews you can look up. In addition, tenants do not have the incentive to fix a broken sink, for example, as they do not own the home. Neglecting these small problems can turn into very expensive problems after a long period of time.
If you encounter a very problematic tenant, most rental laws offer tenants a lot of protections and this could pose great difficulty for you even if opt for the eviction process. On the other hand, if you secure a high quality tenant, you can be worry free about any problems happening. Most landlords will be wise to keep a high quality tenant at a lower rate than trying to find a new tenant who will pay more.
Due to the risks and costs associated with dealing with a problematic long term tenants, this is an easy win for short term rentals. As a short term rental, tenant quality is very much within the control of the owner. Tools such as reviews and just asking the right questions can mitigate that risk greatly. Even in the worst case scenario, you do not have to deal with that guest for too long.
Short term rentals do indeed have more foot traffic, but the fact is that the occupancy is concentrated on weekends and tourist seasons rather than all throughout the year. Most tourists who come to visit are also out and about exploring the local attractions rather than poking around at home.
On top of that, hosts should be performing higher quality maintenance and upkeep between each guest to make sure everything is flawless and functioning properly. As mentioned in the Tenant Quality section above, due to the the maintenance after every turnover, problematic issues can be detected and dealt with immediately.
Long term tenants will be utilizing the space a lot more often, especially if it is being shared between multiple people. With the current work from home trend, we will likely be seeing this a lot more too.
Landlords will also have more difficulty in enforcing rules that comply with the tenant laws. It is not uncommon for landlords to find that there are more than the number of registered occupants living in the space they had originally rented out.
Without owning the property, renters also do not have the incentive to fix any wear and tear and tent to neglect small issues rather than bring it up to the landlord. This is further exasperated by the privacy policies where it is difficult to have more frequent inspections. This results in small neglected issues accumulating into much larger issues over time.
Short term rentals takes the cake in terms of wear and tear, which may be a surprise to people who haven't entered the short term rentals market and have only heard about the horror stories on the news. The difference in utilization rates and regular maintenance between the two rentals will make a noticeable difference in the long run. But I cannot stress enough that a high quality long term tenant will maintain your property better than 200 different guests coming in and out every year.
Regulations! Regulations! Regulations! It's all we hear about in the news whenever there is talk about Airbnb. There is no doubt that many cities have laid down the legal hammer on short term rentals and hosts are facing a multitude of restrictions, fees, taxes and more. You can read more about it here.
Long term rentals do not escape from regulations either, there are are whole set of rental laws, tenant rights and owner protections that a landlord should be familiar with. Depending on the city, some of the rules that exist include capped rent increases, evictions procedures, taxes, deposits and the usage of your own property.
Again this might be a surprise to many of you, but not only do I believe Short Term Rentals come out ahead here, it is by an extremely large margin. The fact is that even with the regulatory hammer laid down on short term rentals, the long term rental laws in most major cities (in North America) are heavily in favor of the tenants.
Don't get me wrong, if you have a high quality long term tenant, you should have nothing to worry about, but the real risk is when you encounter a problematic tenant which will quickly turn into a very difficult situation. Local eviction guidelines will determine how lengthy and costly the process will be and although most tenants will not want to go through this process either, a tenant who does not want to move can do serious damage to your wallet.
In summary, there are advantages and disadvantages associated with both long term and short term rentals. I have provided a categorical basis for assessing the costs and benefits, but every property, every city and everyone's personal situation is different. Many of the advantages and disadvantages mentioned may not apply to you at all, so be sure to do your own due diligence and happy renting!
