You might have an extra room, separated suite or investment property and wondered if you should rent it out long term or short term. It is a good question to think about, especially because most people tend to think of long term rentals as the default option.
In this article I will break down long term and short term rentals by category and see which one has the advantage. It is important to note things do vary based on your market, your circumstances and the local regulations.
Short Term Rentals are generally defined a rentals under 1 month in most local jurisdictions. In practice though, if you are listing your property on a platform such as Airbnb or VRBO, a few days to a week is the norm for each tenant.
Long Term Rentals on the other hand, are generally defined as rentals over 1 month. In most cases, lease terms would be at least one year and often last several years for a particular tenant.
Most of the time, hosting your short term rental will require quite a bit of initial time and money investment. Some of the initial set up costs include:
Alternatively, you can hire a property manager to assist on these tasks, which will also add to the costs.
One cost to consider for new listings on large platforms (such as Airbnb) is that you start of with no reviews, which serve a key role in attracting customers. This means you may need set a price below your target price until you build up a long enough review history. This process could take up to a month or longer.
Generally it is relatively 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. Viewings, the vetting process and drawing up contracts are all tasks diligent landlords should perform. It is common to hire an agent to match potential tenants and assist with performing these tasks. Agents would commonly charge a fee equivalent to 1 month's rent.
We can see that long term rentals have the advantage when it comes to initial costs. It take's a lot of work to set up your short term rental before you can get your first tenant. Generally the setting up of short term rentals also tends to continue to be revised after the first tenant too.
Short term rentals allow hosts to have more control over setting the price and time of their rental. It is much easier to capitalize on the days when demand spikes (such as the local vacation season) to target a higher daily price. Many vacationers are also willing to pay a few extra dollars for a higher quality space.
When comparing to the short term rentals, the landlord fetches a lower and "locked in" rate. Your tenants will want to minimize their costs while both sides are still subject to the current market price. Landlords are also subject to rent control laws which limit how much they can raise the rent each year with the same tenants.
In terms of earnings potential, short term rentals comes out far ahead. The price differences and fluctuations in the daily rates means short term hosts can charge a premium on top of what a long term landlords charge. It is important to note that a poorly managed short term rental can fail to fill their occupancy and thus not generate enough revenue.
Due to the nature of short term rentals, hosts must continuously attract new guests to keep a consistent cash flow. Hosts are exposed to a multitude of risks that are out of their control. Things ranging from pandemics to regulation changes to issues within the property can put a screeching halt to the revenue flow that hosts depend on. Prices can also fluctuate very quickly, which is especially a concern in cases of late cancellations where replacing that booking will be a challenge.
Long term tenants pay a consistent rental amount (usually on a monthly basis). This is required when a rental or lease agreement is signed and landlords can reasonably count on receiving this cash flow.
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, long term rentals come out ahead. This is not to say that this is guaranteed. A poor tenant can cause a lot more problems and cost landlords a lot of time and money. The time it takes to replace a tenant is a significant cost as well. And a well managed short term rental can actively average out their cash flows from revenues over a longer period of time.
If you are like most short term hosts, you may decide to manage the property yourselves. You will then need to keep on top of your bookings and maintain availability for your guests. Some hosts may also decide to spend the time to do the cleanings themselves and pocket the cleaning fee.
The time spent can also be reduced significantly by hiring a property manager to manage the day to day.
Long term rentals require much less effort once occupied. Landlords mainly are limited to collecting their rent and dealing with maintenance issues such as plumbing, electricity or replacing a broken appliance.
Similarly to short term rentals, a landlord can also hire a property manager to take care of any unexpected issues and rent collection.
This is another advantage 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, it would cost more for short term rentals than long term rentals. Do be aware that a problematic long term tenant can be significantly more troublesome than a guest who only stays 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.
A benefit when incurring these expenses are that they can be written off against your income on when you do your taxes. Items such as gas for your car, mortgage interest and utilities can potentially be turned into tax benefits.
Expenses are generally kept at a minimal, but do vary slightly depending on the agreement with the tenant. Some landlords choose to provide utilities and internet while others don't. An additional consideration are the turnover costs, which include agent fees and idle time between tenants.
Long term rentals have the advantage of lower recurring expenses. The cost of property managers only reaffirm this point. Short term rental managers will charge a much higher fee compared managing a long tern rental.
Though, with appropriate budgeting and good management, a short term rental can potentially achieve a lower expense ratio (as a percentage of revenue), even with a higher total expense.
You have probably heard of all the horror stories about the nightmare Airbnb guests. But these are rare situations that can be mitigated with proper guest vetting and setting strict and stern rules. Most guests of short term rentals are respectful about the place they are staying at, and the reviewing system (on the platforms) are effective tools that helps reinforce guest quality.
There are occasions 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 after. Especially before enough time is allowed for it to accumulate to a major mess or problem.
Although the vetting process is more stringent for long term rentals, background checks mainly focus on the financial viability of your potential tenants. This process will not tell you how messy a tenant is and there isn't a large history of reviews for you to look up.
Long term tenants also lack the incentive to fix small problems as they do not own the home and often do not notify their landlord either. A broken sink for example, if ignored, may be hiding a larger underlying issue with the piping. Neglecting these small problems for too long can turn into very expensive problems.
If you encounter a very problematic tenant, they will likely have certain protections which could pose great difficulty for you, including during 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 for less rent than seeking to find a new one who will pay more.
This might seem appear controversial on the surface, but due to the risks and hassles if encountering a problematic long term tenant, short term rentals definitely have the advantage. For short term hosts, tenant quality is very much within their control control, and that is where the advantage lies. Tools such as reviews and 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 occupancy is concentrated on weekends and peak seasons as opposed to every day of 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 can performing routine maintenance and upkeep between each guest, making sure everything is flawless and functioning properly. As already mentioned earlier, this allows problematic issues to be detected and dealt with immediately.
Long term tenants will be utilizing the space a lot more often, especially if there are multiple occupants. 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. This 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 will make a noticeable difference in the aggregate. With that said, I cannot stress enough that a high quality long term tenant will unquestionably keep your property in better condition than 200 different guests coming in and out every year.
Regulations is a big topic! 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 now 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. Some of the rules encompass capped rent increases, evictions procedures, eviction payments, taxes, deposits and the usage of your own property. These will be highly dependent on your city, so it is important to understand the laws you are operating under.
Again this might be a surprise to many of you, but short term rentals come out ahead outside of being under a total ban. 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. The real risk is when you encounter a problematic tenant which can quickly turn things into a very difficult situation. Local eviction guidelines will determine how lengthy and costly the process will be. Most tenants will not to invite problems to themselves, but 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!
