June 29, 2018
Do Long-Term Rentals or Short-Term Rentals Provide Better Investment Returns?
We are all looking for the best way to make money, and one of the major beauties of real estate investing is the many options it gives us to make some extra income. However, with the countless ways to make money in real estate, there come numerous questions which you have to answer before you can become a successful real estate investor. And one of the most important of them is: Do long-term rentals or short-term rentals provide better return on investment?
Unfortunately, as with most major questions in real estate investing, this one does not have a straightforward answer. The answer depends on many factors. In order to help you make your decision as a real estate investor, we have prepared for you a list of the benefits of both rental strategies.
The Benefits of Long-Term Rentals
1. There will always be demand
Regardless of the location and the time, people will always need places to live. As many housing markets are too expensive for ordinary people to buy a home, these people turn towards rental properties and become your tenants. This means that there will always be demand for traditional rentals, regardless of the location and regardless of the time.
2. The vacancy periods are lower
If you own a long-term rental, you’re set for the next few months or even years once you find your tenants. Vacancy rates for traditional rentals are generally low because these properties are rented out on a monthly basis, unlike short-term rentals which are rented out on a nightly basis. As a landlord and a real estate investor, one of the last things you want is for your property to remain unoccupied as every moment of vacancy means that you’re losing money. After all, you have to make your mortgage and insurance payments, pay taxes, and maintain your property whether you’re able to find tenants or not.
3. There are few legal issues
The vacation rental industry is picking up and facing severe legal challenges in many parts of the US housing market. This cannot be said for traditional rentals. Most locations have reasonable landlord-tenant legislation which protects the rights of both groups accordingly.
The Advantages of Short-Term Rentals
1. You have more flexibility
With short-term rental properties, you gain more flexibility as a landlord and a real estate investor. These rentals can serve a dual purpose. You can use them for your own family vacation, while renting them out on short-term basis for the rest of the year. In this way, you can enjoy your vacation from the comfort of your second home and make money as a real estate investor.
2. You get an easy entry into real estate investing
While it’s true that real estate gives you many opportunities to build wealth, not everyone is cut out for the job. Some people just don’t make good landlords for all sorts of reasons. With a vacation rental, you can give real estate investing a try, and if you decide that this business is absolutely not the right thing for you, you’re left with a second home which you use for your own purposes. On the other hand, if you decide that you were indeed born for this kind of stuff, you can look into options to expand your real estate investment portfolio to include more short-term and long-term rentals.
3. You enjoy tax benefits
Real estate properties – whether your primary home or an investment property – bring you various tax deductions on the mortgage payments, property taxes, insurance premium, and utilities, as well as other rental and business expenses. The same applies to your second home – i.e., your vacation home rental. Depending on the number of days per year in which you occupy your property, you may be able to claim various tax deductions. Since the case of short-term rentals is somewhat complicated, we highly recommend that you hire a professional property manager and/or a real estate lawyer to help you do your taxes in order to avoid breaking any tax laws and to enjoy the maximum tax advantages from your vacation home rental.
4. Property management gives you the option of a hands-off experience as a landlord
As we mentioned earlier, some people simply wouldn’t make a good landlord. Property management tailored for short-term rentals gives you an easy way to be a real estate investor without having to deal with the hassle. You can leave all aspects of managing your vacation rental to the professionals while enjoying your passive rental income.
5. Short-term rentals tend to make more money
Each real estate market is different, but when you cut to the chase, vacation rentals generate more income than long-term rentals. Even if they’re not occupied all the time, the nightly rate for short-term rentals is typically high enough to bring more cash flow to real estate investors than traditional rentals do. Since your ultimate goal as a real estate investor is to make money from your rental properties, the rental income is the most important advantage of short-term rentals over long-term rentals.
What Do the Numbers Say?
Don’t just take our word for it. As a savvy real estate investor, you should dig through the data to make a conclusion on your investment decision.
Below you’ll see the monthly rental income for 10 of the hottest real estate investment markets in 2018 based on data from Mashvisor, an advanced real estate analytics tool. We also show you the cap rate for these top markets, which is one of the main ROI metrics in real estate.
10 of the Hottest Real Estate Markets in 2018
As you can see, short-term rentals produced significantly higher rental income than long-term rentals in these markets, which also led to a better cap rate.
These cap rates may not appear to be great as most real estate experts recommend a cap rate of 8% or above, but keep in mind how times have changed. The world of real estate investment has become so competitive nowadays that anything above 4% should be considered excellent. And keep in mind, these are just city averages. With the help of a rental property calculator, you will find much more profitable neighborhoods within these hot real estate markets, as well as specific properties with cap rates reaching double-digits.
Short-term vacation rentals have tended to provide better ROI than traditional long-term rentals in the form of monthly rental income and cap rate, as well as cash on cash return. Just remember to conduct careful comparative market analysis and investment property analysis before you buy your short-term rental property in order to be sure that you’re choosing the optimal rental strategy.
Daniela Andreevska is Content Marketing Director at Mashvisor, a real estate analytics tool which helps real estate investors quickly find traditional and Airbnb investment properties. A research process that usually takes 3 months can now take 15 minutes. We provide all the real estate information in easy to understand visualizations.