Most investors associate the term "rental property" with long-term residential rental housing. However, there's also money to be made by investing in short-term vacation rental properties.
While both fall under the umbrella of rental property investments, these are two very different ways to put your money to work in real estate. In this article, we’ll look at some of the advantages and disadvantages of both options to help you decide which is the best way for you to invest.
The exact definition of what constitutes a short- or long-term rental can vary depending on who you ask. For the purposes of this discussion, we’ll define short-term rentals as places rented for one month or less at a time.
Advantages of long-term rental properties
There are some clear advantages to investing in properties that are rented to tenants on a long-term basis. This generally means that tenants sign an annual lease, but long-term rentals can be month-to-month as well. Here are some of the biggest advantages:
- Consistent income: Because the same tenants occupy the property for longer periods of time, long-term rentals tend to produce consistent rental income. And there’s no need to worry about busy seasons versus slower times if your tenants are living in the property.
- Easier to manage: Whether you choose to manage the property yourself or hire a property manager, long-term rentals require less time. You don’t have to advertise the property as frequently, handle constant tenant turnover, or make sure the property is ready to rent. If you don’t want your real estate investment to be a job, or you don’t want to pay a fortune in property management fees, you’ll probably be better off with a long-term rental property.
- Tenant-paid utilities: At a minimum, long-term tenants usually pay their own electric bill. Most landlords pass the cost of water and sewer along, as well. Short-term renters don’t have to worry about paying these utilities and tend not to worry too much about conserving electricity and water.
- Fewer maintenance concerns: Tenants don’t take care of homes the way owners do. However, they tend to handle some of the maintenance issues that are the owner’s responsibility in short-term rentals, such as cleaning, stocking toilet paper and other essentials, and sometimes even yard maintenance.
- Cheaper property management: Because they have less turnover and ongoing maintenance and marketing requirements, hiring a property manager is much cheaper with a long-term rental. The market rate for long-term property management tends to be 8%–12% of the collected rent. On the other hand, hiring a property manager for a vacation rental can cost 25% or more of the rental income.
The investment properties I own (so far) are all long-term rental properties. I really don’t want my investment properties to take too much of my time to manage, and as I was building a portfolio, the idea of consistent income was rather appealing to me. However, my wife and I are considering buying our first short-term vacation rental property, and the next section should shed some light on why.
Advantages of short-term rental properties
While long-term rentals are great for consistent income and ease of management, there are some compelling reasons to consider a short-term rental instead:
- Higher income potential: Short-term rentals can make more money, plain and simple -- especially in a popular vacation area. A property that could get $1,500 per month from a long-term tenant can often make more than double that amount as a vacation rental. While management expenses are generally higher with short-term rentals, the higher income potential can more than offset that cost.
- Better maintenance: I mentioned that owners generally have less ongoing maintenance with long-term rentals, but there are two sides to this. Because the owner of a vacation rental will typically have the property thoroughly cleaned between renters (and will pass the cost on to the renter), vacation rentals are generally better maintained. Not only are they cleaned frequently, but because there's more frequent turnover, it can be easier to identify maintenance issues before they become serious problems.
- Ability to adjust pricing: In addition to the higher income potential, owners of short-term rentals have the additional luxury of being able to adjust pricing as they see fit. If inventory is filling up quickly, an owner can raise the rent to maximize profits.
- Personal use: This is the number one reason I want to invest in a short-term vacation rental. It’s a great combination of an investment and somewhere for my family to go on vacation without paying for a hotel.
- Self-management is getting easier: Until a few years ago, managing a vacation rental was like a second job. That’s no longer the case. Platforms like Airbnb and VRBO have made it easy (and affordable) for owners to advertise their properties, and technological advances like smart locks have made it easier to manage vacation rentals even if you don’t live nearby. Managing a vacation rental is still more of a hassle than managing a long-term rental, but it’s much easier than it used to be.
It’s also worth mentioning that some properties work best as a combination of long- and short-term rentals. For example, in popular vacation destinations, properties are often rented out for days or weeks to maximize profit potential during busy months. Then they're rented out on a long-term basis during the off-season. When it's not as busy, it might be more trouble than it’s worth to keep the property occupied with vacationers.
Make sure you’re allowed to rent your property short-term
As a final thought, if you think a short-term rental might be the right move for you, it’s important to make sure that you're allowed to rent the property on a short-term basis.
For one thing, many resort areas restrict short-term rentals to maintain an adequate supply of affordable housing for year-round residents. As an example, I’m considering a vacation rental in Key West, Florida, where I used to live. Unless you have a special permit known as a transient license, rentals of less than one month aren't allowed. As you can imagine, these licenses can be very expensive.
In other markets, you might need to pay a fee and register with the city government before you can rent your property short-term. A local real estate agent can help you navigate the rental rules wherever you're looking.
It’s also worth mentioning that certain condominiums have their own restrictions. For example, in addition to the local laws, three condo buildings I’ve looked at in Key West restrict rentals to minimum lengths of 30, 60, and 90 days.
It’s important to know the rules. Under no circumstances should you rent out a property on a short-term basis if you aren’t allowed to. The penalties can be extremely severe.
What’s the best option for you?
Like most investment decisions, there’s no perfect answer for everyone. I know people with portfolios of long-term rentals who would never dream of investing in a short-term vacation rental. And I know people who have built a lucrative portfolio of properties in vacation towns that they rent nightly.
It all depends on how much income consistency you want, how much time you want to spend on your investments, and how you feel about the other benefits and drawbacks of each type of rental property.