A long-term rental property is leased for extended periods. The typical duration of the lease is six months to one year with a fixed rental rate. A long-term rental property can come with or without furniture. Most will contain appliances. The most popular types of long-term rentals are single-family and multi-family homes.
A short-term rental property, on the other hand, is leased for relatively short periods. The typical lease duration for a short-term rental is less than 30 days. Maximum durations for these types of rentals often vary according to location. Short-term rentals always come equipped with all the furniture and appliances needed in a functional home.
Knowing the difference between long-term and short-term rentals is vital for new property investors or experienced investors looking to diversify their real estate holdings. Although both are residential rental properties, the methods for managing them differ. Each property type places a different kind of demand on investors.
On average, a long-term rental property is easier to manage. That is one reason for new investors to start with a long-term rather than a short-term rental. This is true even though short-term rental properties are often vastly more profitable than long-term rental homes.
When and why is a long-term property sometimes better than a short-term rental?
The Pros and Cons of Long-Term Rentals vs. Short-Term Rentals
Long-term rentals: Pros
1. Income is more predictable
Because the tenant is locked into a one-year lease (typical duration for a long-term lease), the owner has guaranteed income for the next twelve months.
2. Easier to finance
Because long-term rentals have more stable income flows, investors who choose a long-term rental strategy are more likely to have their loan application approved.
3. Lower operating costs
Maintenance costs are lower because the tenant takes care of many basic costs – cleaning, lawn maintenance, and utility bills utility bills – are taken care of by the tenant.
4. Less tenant turnover
Long-term tenants mean that the marketing and advertising costs for the rental are lower. Administrative costs – negotiating and signing a new lease – are also lower.
5. Cheaper property management
A long-term rental’s professional property management fee is usually 8%-10% of the monthly rent. For short-term rentals, it is 30% of the rent.
Long-term rentals: Cons
1. Not easy to raise the rent
Since the owner has an existing agreement with the tenant, they cannot increase the rent. The landlord has limited cash flow throughout the lease period.
2. Maintenance is tough
Gaining access to the home is more challenging because the owner must be careful not to violate the tenant’s rights. That can delay essential repairs.
Risk of bad tenants
The impact of renting to a bad tenant is worse in a long-term rental because the lease duration is longer, and you must terminate the agreement with consequences.
Short-term rentals: Pros
A. Potential for higher gross income
The rental rate for a short-term rental can easily be adjusted to reflect current market rates. The rental can generate three times as much income as a long-term rental.
B. Easier access for maintenance
Because the tenants in a short-term rental property only stay for limited periods, it is easier to maintain the home.
C. Greater flexibility
A short-term rental offers investors more flexibility. If they plan to sell the home, they can keep leasing it to tenants while searching for a buyer.
Short-term rentals: Cons
A. Higher operating expenses
Higher maintenance costs offset the ease with which you can maintain a short-term rental. The homes are usually furnished and have to be stocked with supplies.
B. Additional expenses
Renters of short-term rental homes expect them to have cable TV, internet, electricity, gas, and water. But these services are paid for by the owner.
C. Income is not guaranteed
A short-term rental can sit vacant for extended periods despite its higher gross income potential. The income for such rentals is not predictable.
D. Regulatory hurdles
Cities and HOAs have stricter rules for short-term rental homes than long-term rental properties. In some areas, these short-term rentals are not even allowed.
When is a long-term rental better than a short-term rental?
If you are looking for a rental that offers a stream of reliable income with minimal property maintenance requirements, you are better off with a long-term rental home. Long-term rental properties also have significantly lower risk in terms of vacancies. Generating enough income to make the monthly payments on the property is more manageable.
Furthermore, if you want to learn the ropes of real estate investing, you want to avoid the volatility of investing in short-term rentals. Even if the income is somewhat conservative, a long-term rental property is better for new investors. That is in addition to the more favorable disposition of mortgage lenders to long-term rentals.
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