Rental properties are a great investment strategy that can provide a low-risk return on your investment. While long-term rentals have traditionally been the model for investment properties, short-term rentals have become much more viable with the advent of sites like VRBO and Airbnb. That begs the question – which rental strategy will provide you with the best returns? Let’s take a look at both the advantages and the disadvantages of each model.
Long-Term Rentals: Advantages
Long-term rentals are those that are leased on a monthly or yearly basis. Some advantages of long-term rentals include:
- Stability – Long-term rentals will provide property investors with a steady income stream, with many tenants staying for years if the property is properly managed.
- Low turnover – Long-term tenants means less money spent marketing and looking for new renters, and less time that the property is vacant.
- High demand – Renters will always be looking for long-term housing, especially in markets where the cost of homes is high.
- Fewer legal issues – Traditional long-term rentals face fewer legal issues than those that short-term rentals are experiencing.
- No utilities or furnishings – In most cases, tenants will absorb the costs for utilities and furnishings.
Long-Term Rentals: Disadvantages
On the flipside, long-term rentals do have their share of disadvantages when compared to short-term rentals, such as:
- Bad tenants – If you find yourself with bad tenants, then it can be complicated and expensive to evict them from your property.
- Caps on rent increases – In many locations, municipalities will impose caps on how much rent can increase every year, making it difficult to compensate for inflation.
- Restricted access – When you have long-term renters, your ability to check on the home will be limited, as you’ll need to give renters advance notice in order to inspect or repair the property.
Short-Term Rentals: Advantages
More and more real estate investors are turning to short-term rentals because of their advantages, which include:
- More income potential – In many cases, short-term rentals are more lucrative than long-term rentals, because your nightly fees are higher and you can charge a premium during the high season.
- Strong demand – More and more vacationers are turning to short-term rentals instead of traditional hotels.
- Passive investment – Many real estate investors are finding that their short-term rentals provide a great opportunity for passive investment when property management companies are utilized for day-to-day operations.
- Flexibility – If your short-term rental is in a desirable location, you can block off dates so that you can enjoy your own property.
- Possible tax breaks – Depending on how many days a year you rent out your vacation property, you may be eligible for tax breaks on a second home.
Short-Term Rentals: Disadvantages
Although short-term rentals can seem like a homerun, they do have drawbacks. These include:
- Legal issues – As mentioned above, some cities are placing restrictions on short-term rentals that may result in legal issues for the property owner.
- High turnover – In short-term rentals, you may have guests who stay as little as one night, making maintenance a much bigger issue. You can help mitigate this problem by hiring an effective property management company.
- Slow periods – If rentals in your area experience seasonal shifts, then you may find your vacancy rate to be much higher in the off-season.
Ultimately, only you can determine which rental strategy is right for you based on your needs. If stability is important to you, then a long-term rental may be more appropriate. If you are attracted to the benefits of a short-term rental but aren’t sure if it’s a good fit, you can always try it for a few months to see how it goes.
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