Real estate investors looking to expand their reach in the market are most likely interested in adding a short or long-term rental property to their portfolio. Although many investors opt for long-term rental properties, this may not be the best option for everyone. Continue reading to learn the ins and outs of both short and long-term rental properties to find out which one’s better for you.
What Are the Pros and Cons of Long-Term Rentals?
A long-term rental property is a property where the tenant is leasing for at least 6 months to a year or more. The pros of owning a long-term rental are:
- Predictable income
- Less advertising
- More affordable management
Long-term rentals have the advantages of having more predictable income than short-term rentals as longer leases ensure that cash flow will remain consistent. Seasonal variation won’t impact your monthly budget as much. The low turnover rate for long-term rentals means that property owners will spend less time and money on advertising and management.
The cons of owning a long-term rental are:
- Less flexibility
- Less transparency
- Lower profit margins
With a long-term rental property, your flexibility is limited when it comes to making changes to the property and adjusting rent since you are dealing with long-term leases. The inability to adjust pricing based on current market conditions can result in lower profit margins than short-term rentals. Landlords must abide by strict privacy laws, meaning less transparency with your property as well. It’s recommended that investors schedule regular inspections with their tenants to assess the property.
What Are the Pros and Cons of Short-Term Rentals?
A short-term rental property is a property that is rented to tenants on daily, weekly, or monthly basis. The pros of owning a short-term rental property are:
- More control
- Personal getaway
Short-term rental properties are preferred for their flexibility, higher potential earnings, and their status as a personal getaway. While your short-term rental is not occupied, you can reserve time to enjoy the property with friends and family. With short-term leases, you have more flexibility and more control since tenants are not staying for extended periods of time, meaning you can keep up with property maintenance and adjust rent more often.
The cons of owning a short-term rental property are:
- Lower occupancy rates
- Aggressive marketing
- More maintenance and expenses
Short-term rentals come with their downside, too. Since tenants will be on short-term leases, you can expect a higher vacancy rate than long-term rental properties. Due to heightened vacancy, you can expect to spend more in advertising and marketing. As tenants come and go, you’ll find that maintenance costs begin to add up. Many investors agree that restocking amenities such as shampoo and toilet paper and cleaning properties after tenants is the most time-consuming aspect of owning a short-term rental property.
Which One’s Better?
Depending on your long-term real estate investment goals and financial capabilities, you may find that one category of properties suites your strategy better than the others. Some determining factors in your strategy will include:
- Property Location
- Local Laws
- Tax Implications
Your property’s location may be the determining factor of its place in your real estate strategy. Successful short-term rentals are more likely to be found in high demand areas such as vacation spots. When determining the location of your long-term rental, you’ll want to think about the local demographics including educational and employment opportunities. Your local laws will have an effect on your property’s potential, especially for short-term rentals. Often times, city ordinances, zoning laws, or homeowner’s association rule make certain properties a no-go for short-term rentals. Also, there will be slightly different tax rules depending on how long you rent a space. Before posting a rental property, it’s important to make sure you fully understand the tax implications.
Lastly, the final determining factor is your overall budget and what you’re looking to spend on improvements and upkeep. While a short-term rental may yield higher profits, it may also require more cleaning, supplies, and amenities to compete with popular hotels.
RCN Capital offers short-term and long-term financing options for real estate investors. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. Connect with us today to discuss your next real estate investment.