A Crash Course in Short and Long-Term Rentals
Investors have several advantages whether they invest in short-term or long-term rental properties. It’s crucial to understand both options so you find the strategy that fits within your financial goals.
Both long-term and short-term rental properties are effective ways to invest in real estate. They each have crucial differences in approach and varying strategies. So how do we define the two types of real estate investments?
Let’s review the things you should know about short and long-term rentals before you invest.
Tax advantages for rental properties
As a real estate investor, you could benefit from tax advantages whether it is short or long-term. Investors use tax deductions for the amount of mortgage interest that they pay along with taxes. Regular operation expenses such as repairs and renovations are deductible too. Anytime you travel, pay insurance or use utilities, carefully keep records of everything you spend as an investor. Your expenses as an investor should be used as an advantage.
Make sure you consult with your CPA before tax season so they can maximize potential deductions and save you money each year.
Long-term rental advantages
A long-term rental property is often rented out to a tenant on an annual basis. Investors collect rent income every month until the lease agreement is up. Typically, investors target the purchase of a multi-family home where there are multiple units or single family houses with ADUs, renting by the room, or other ways to find cash flow. That means purchasing one building results in collecting several rent checks every month. Long-term rentals have been a reliable investment strategy because of how possible it is to scale up.
Investors love stability rather than volatility. Long-term rentals lock in a lease agreement that is usually six months to a year long. Before leasing to others, investors could screen tenants and make sure they have the financials to pay every month. This generates a steady, passive stream of income every month and creates another channel of wealth.
The hands-off nature of long-term rentals means that investors don’t have to spend too much additional time making money. They have the option to hire a property manager who handles the main operation and landlord duties. Investors can focus on purchasing other properties and handling deals instead of juggling many hats. Of course, this assumes that you have reliable, well-screened tenants.
Loan pay down on someone else’s dime
Investors can rapidly pay off debt with long-term properties. It’s very possible to charge rent that is more than your mortgage (be sure to run the numbers and due diligence here). Even though investors have to pay expenses for their property such as repairs while occupied by a tenant, it could be well worth it. In fact, there are tax advantages given to landlords that also help your bottom line. Plus, that monthly rental income could go directly towards the principle of the rental property. Overall, investors are gaining equity every month while simultaneously receiving cash flow (in some instances).
Short-term rental advantages
Short-term rentals have gained popularity over the years thanks to their flexibility. A short-term rental is for temporary renters who are usually looking to stay less than a month. Vacation rentals are popular for short-term rentals thanks to the rise of AirBnb. As a short-term rental investor, you probably look forward to the challenge of managing your space and actively paying attention to rent trends more often than long-term rental investors do.
Higher-potential for income
Short-term rental properties have plenty of potential for making more money. Buying a property in a vacation hot spot means that the demand for rent is high. Investors could rent to people going on vacation who are willing to pay premium prices. They could charge by the day orby week, maximizing profits.
Let’s say the property is high-end and goes for over $2,000 to rent long-term. An investor may be able to charge $300 per day to stay at their property on Airbnb. Even if the property was occupied for only half of the month, they would generate $4,500. If there’s a concert or event that brings more guests to the area, prices may increase as well. The short-term strategy has enormous potential if the rent demand is there. The flip side is that price fluctuations make it hard to predict cash flow month to month.
Short-term rental investors enjoy more flexibility with their properties. They can adapt to markets and adjust their rent prices on the fly. If a special event is happening in their location, they can increase prices to meet rent demand. Additionally, if demand is low, they can lower prices to raise their occupancy rate. Not to mention, short-term investors could still make lease agreements on a monthly basis if they find a fitting tenant at an agreed rent price. A snowbird escaping the cold for a few months, a business person staying for a short period of time, or even traveling nurses are examples of potential “medium” term tenants that fit into this category.
The flexibility requires more hands-on work, but it certainly could be worth it.
Easier to monitor wear-and-tear
Investors benefit from less overall maintenance with short-term rentals. Generally people rent short-term so they have a temporary place to stay while they plan other activities. It’s not a permanent home with constant use where frequent repairs are needed. When people are on vacation, they are in and out of the property. Not to mention, short-term properties are cleaned in between guests (which they usually pay for). That means they can be managed and maintained regularly, staying in good shape as a result.
Does long-term or short-term suit you better?
Your strategy should be based around your own time, resources, and goals. Both long and short-term rentals have outstanding benefits when investors plan properly. Long-term rentals have more stability and give investors a hands-off experience. Short-term rentals require more effort, but offer greater returns and flexibility. However you decide, know that trends change all of the time. Pick the strategy that makes the most sense for your current situation and goals in the future.