It’s no mystery that real estate is a profitable industry. As you begin your journey toward real wealth, you might be wondering whether short-term vs long-term rentals are more profitable.
In the short-run, short-term rentals often net you a higher income month-to-month, but you’ll be doing more work to earn it. On the flip side, long-term rentals are much more hands-off, but you may need more of them to make a living.
There are advantages and disadvantages to each method, and you’ll want to consider outside factors like your location, seasonality, demand, and local laws. From a purely profit-oriented perspective, however, let’s look at the overall pros and cons of each.
Short-term Rentals: Pros and Cons
A short-term rental (STR) typically describes rental periods under 30 days. Also called short-term vacation rentals (STVR), you’ll see these properties listed on sites like AirBnB and VRBO.
Overall, short-term rentals tend to be more profitable than long-term rentals. But that extra income comes at a cost. Here are the pros and cons of STRs.
Pros of Short-term Rentals
• More income potential: You have the chance to make more money month-over-month with STRs. A long-term rental that costs $1,200 per month could make that in a week with a short-term rental. Why? Because tenants are willing to pay more per night for vacation rentals. Instead of competing with housing, you’re competing with hotels and motels. Also, you can charge a cleaning fee which could net you an extra $50 to $150 per stay depending on the size of your property.
• Consistent upkeep: Long-term tenants have more time to damage your property resulting in higher maintenance and repair costs. With short-term rentals, you frequently have the opportunity to get inside your property and check for damage, perform routine maintenance, and clean.
• More access to your property: With an STR, you can use it, too! Save family and friends money by blocking off your vacation rental calendar and letting the people you love stay for free. It’s pretty nice to be able to enjoy the fruits of your labor.
• Control your pricing: Didn’t make enough last month? Time to raise your rates! This is especially handy for first-time landlords who are setting prices without a birds-eye-view of what the rental property will truly end up costing in maintenance and repairs. Plus, most STVR platforms let you charge extra for pet fees, extra guests, cleaning fees, etc.
Cons of Short-term Rentals
• More upkeep: If you’d like to pocket that cleaning fee, that means you’ll be cleaning yourself. This can be great from a profitability standpoint if you have one-night stays, but that also means you’ll be cleaning and staging every day, every other day, or every week. If you hire a cleaner, you’ll still need to check their work. And just a heads up: good cleaners can be hard to come by!
• Seasonality: STR income is less predictable than long-term rentals. You may make a killing in the summer and find your place is mostly vacant during January and February. If you’re going for an STR, be sure you save up enough money to cover expenses during downtimes.
• Higher occupancy taxes: Depending on your state and municipality, you may find yourself handing a larger chunk of change over to the government in occupancy taxes and fees. Worse, your city may have restrictions on STRs, as in Portland and Asheville.
• Higher risk of bad tenants: Of course, if you have any bad tenants, long or short term, you could be in bad shape. With properly vetted long-term tenants, however, you can ensure your property is safe for a whole year. On the flip side, short-term tenants turn over so quickly that you’re facing the risk of a bad tenant weekly. Be sure to include “no parties” and other rules that will deter bad tenants in your house rules if you go the short-term route.
Pros and Cons of Long-term Rentals
Long-term rentals (LTR) may not make you as much instant income in the short term, but there are definitely pros to renting long term.
Pros of Long-term Rentals
• Much less work day-to-day: If your property is in good condition, you may not have to visit it but once every 6 months. LTRs are much more “set it and forget it.” This can be excellent and profitable if you have many LTRs. The rent adds up - not the work.
• Consistent income: Your renter pays the same rate monthly, which means you can easily calculate your net income year-over-year and plan for upcoming expenses. As long as your property is leased up, you’ll never have to wonder if you’ll earn your keep that month.
• Net leases: With a long-term rental, you can pass expenses like utilities on to your renter. You can (and should) calculate your monthly rent to cover property taxes and routine maintenance, too.
• Property management: Thanks to the lack of day-to-day maintenance, it’s far more affordable to hire a property management company to cover long-term rentals. Property management companies take care of finding tenants and keeping them happy.
• Be a boon to your community: Affordable housing is a hot topic, especially in tourist areas. By providing long-term housing for local residents, you’re supporting your local economy.
Cons of Long-term Rentals
• Long-term damage: Have you ever gone to a friend’s or family member’s house only to be deeply troubled by how they live? Multiply that by 365 and then imagine cleaning it up! Long-term renters who struggle to clean and maintain their spaces, especially if they have pets, can ruin carpets, paint, or worse, cause pest infestations.
• Capital gains tax: Many long-term rental landlords own multiple single-family rentals to make their living. At the end of the day, wealth is built through property appreciation. From a tax perspective, it may be more costly in capital gains taxes to sell many properties rather than one or two. However, this may be a wash depending on how much your properties appreciate.
• Evicting bad tenants: In some states, it can be hard to evict a bad tenant. With an STR, you can easily cancel your tenants’ reservations and give them the boot for breaking house rules. In states like California, evicting a tenant who isn’t paying or who is damaging your property requires you to go through the court system and can be time-consuming.
Short vs Long-term Rentals: The Bottom Line
At the end of the day, the decision to make your investment property a short or long-term rental will depend on your current financial standing, location, local laws, and how much sweat equity you want to invest in your rental.
If you’re just getting started, consider beginning with a short-term vacation rental to earn a down payment for your next property. If you play your cards right, you could retire with many long-term rentals that require little work from you and pay your efforts back handsomely.
Tee Corley is a contributing writer, journalist and SEO at Leverage.com and an AirBnB SuperHost. She is active in the real estate community in her home city of Asheville, NC.