When investing in real estate for vacation rental purposes, owners have to decide what they want to do with their new home. Many factors can help owners and managers weigh up whether they should opt for long or short-term vacation rentals. Most of the time, this decision is made easily and depends on the nature of your property itself and what you want to achieve. There are, however, several advantages and disadvantages to these two rental strategies.
What is a short-term vacation rental?
Before anything else, let’s familiarize/clarify ourselves with the definition of a short-term rental. A short-term rental (commonly referred to as a vacation rental), is the leasing out of a furnished property on a short-term basis. Depending on the owner, rental location, and many other factors, these properties are rented by the week or by the night. Many owners of short-term vacation rentals rent their property for the majority of the year when they are not using it themselves. They have become a hugely popular alternative to hotels in the last 20 or so years, most notably with the surge of sharing economy websites such as HomeAway, Airbnb, and VRBO.
Advantages of short-term vacation rentals
while long-term rentals offer consistent income and are generally easier to manage, there are several advantages to consider a short-term rental instead:
1. Higher rental income potential
Not only can you set fluctuating rates depending on your area’s high and low season, but you can also set a minimum length of stay for your most popular times of year to ensure you receive maximum profits.
2. More flexibility
For owners who rent their properties short-term, there is a lot more flexibility involved for you and yours. You can specifically block off calendar periods that you want to keep free for your personal use without inconveniencing anyone.
3. Less wear and tear
In general, vacation rental contract lengths range from a few days to a few weeks maximum. Receiving guests in short bursts like these ensure that guests are simply visiting your property, and so won’t be thinking about redecorating or rearranging furniture.
4. Tax breaks and deductions
Many vacation rental owners are entitled to certain tax breaks or even deductible property expenses because the property isn’t being let long term. Be sure to check your local authority’s rules and regulations on this.
5. Contribute to the sharing economy
We hear a lot these days about the sharing economy and its positive effects on wider society. By letting your property short-term to vacationers, you’re showing that you’re an innovator who is helping contribute to this modern way of living and thinking.
6. Automate property management
Advancements in technology such as smart apps or smart locks, have made it easier to manage vacation rentals even if you don’t live nearby.
Challenges of short-term vacation rentals
When managing a vacation rental, you will have to consider looking into local laws, property maintenance, and slow seasons.
1. More maintenance and upgrades
When your business is vacation rentals, you need to maintain great general upkeep of the property or you could receive some negative reviews. Not only does this include things such as regular cleaning, maintenance such as drain unclogging and paint fixes, it also takes into account changing technologies and modern inventions. You’ll need to update your rental amenities every so often to include all the essentials and more for a pleasant stay – and this can come with a hefty price tag.
2. Not guaranteed income
One frustration many vacation rental owners face is the effect of seasonality on their business. While their high season is fully booked, off-peak bookings are scarce which can ultimately cause them to lose money. While rates can be adjusted to compensate for this seasonality (cheap deals off-peak and more expensive during peak times), income and bookings are not always guaranteed.
3. Competition from surrounding properties
Unlike the housing market, whereby apartments and houses are swamped with interest by renters, the vacation rental or short-term market sees many more homes listed than travelers searching. This may put some owners at a disadvantage (again, depending on location and availability) because competition for vacation rentals could be rife in your area.
4. Too many things to manage
While for some owners, vacation rentals are a retirement hobby-turned-vocation, for others they’re a full-time job. There are plenty of tasks to keep you occupied throughout every guest’s stay. From ensuring calendar availability is correct to facilitate a smooth booking process, plus a simple and easy check-in and check-out, and not to mention cleaners, gardeners, and the rest – vacation rentals can be hard work if you don’t have the right tools.
What is a long-term rental?
Unlike short-term vacation rentals, long-term accommodation typically refers to that which is leased for periods of one month or longer. Whether it’s an entire home or just one room for rent, in general, renters pay the homeowner each month and typically take care of other expenses such as utility bills.
Advantages of long-term rentals
There are certain advantages of investing in long-term properties; here are a few of the major advantages:
1. Consistent income
One of the key advantages of renting your property on a long-term basis is knowing that you have a monthly rental income that you can rely on. This can help take the pressure off new homeowners who have a lot of other expenses to worry about. Additionally, long-term renters are generally responsible for paying monthly and quarterly utility bills for electricity, gas, water, and even the internet.
2. Easier to manage
Whether you choose to hire a property manager or manage the property yourself, it will require less time than a short-term rental. You don’t have to promote the rental property as much, tackle frequent rental turnover, or make sure it’s ready to rent.
3. Less turnover
If you’re renting to long-term guests, you’ll find you’ll have less to worry about when it comes to administrative tasks such as paperwork, key handover, and even marketing. Once your renter signs the lease, you know how long (to a certain extent) you can expect them to stay. You only need to worry about filling the house again once you know it will be vacated.
4. There may be no need to furnish
Some (though not all) long-term guests come with their furniture in tow. This can make the decision easy if you’re thinking about leasing your unfurnished property. Not only will you have a guaranteed monthly rent payment coming in, but you also won’t need to fork out new furnishings for your home.
5. You can charge a high-security deposit
If you’re worried about the finer details of renting, such as insurance, rental agreements, and security deposits, then there’s no need to panic. For long-term rentals, you can usually charge quite a high-security deposit, which will be returned to the guest at the end of the tenancy unless in case of property damage. These deposits can give owners a lot of peace of mind when it comes to renting out their properties.
Challenges of long-term vacation rentals
Some of the challenges worth noting are less earning potential and higher occupancy rates. Some other cons include:
1. Less earning potential
Vacation rental properties that are rented over a longer period of time are usually discounted by as much as 40%. Charging premium rates for peak season is not always feasible.
2. The owner has less flexibility
Unfortunately, in the world of long-term rentals, there are no spontaneous trips to your mountain lodge or July 4th getaway to your beach hut for celebrations. If you have a tenant in your home, you can’t ask them to leave for a weekend here and there. This can be a huge turnoff for many owners who are renting out their property simply to gain some extra income in the months and weeks it’s not used.
3. Less control over the property
Most of the time, nothing goes wrong during a rental stay. There is, however, a big difference between the short-term and long-term options when it comes to checking up on your property. For short-term rentals, owners benefit from being able to inspect the property between each guest, to check everything is in working order and that nothing is broken or damaged. For long-term rentals, however, it’s a bit more complicated. You would likely have to give considerable notice (from 24 hours to one week) before dropping by for routine maintenance and security checks.
4. Restrictions in your neighborhood/city
Depending on your property type and its location, there will be different laws, restrictions, and licenses you need to take into account before leasing it out long-term, which can often be stricter and more costly than short-term renting.
5. The lengthy process to find the right tenant
When someone is going to stay in your home for a long time, you want to make sure they’re a good fit. But when you consider the time you’ll spend vetting and checking references before drawing up the contract, this can soon turn into a very long process. In contrast, for short-term renting it’s generally a much easier process – especially with tools like instant booking.
Resources for understanding the best investment for you.
Knowing where to find some of these numbers can help you figure out what is a good investment or not. Check out Dynamic.RE to help you understand the market value, the rental rates, and even the Airbnb Annual Revenue.