Nailing down a viable business plan is a crucial first step for would-be landlords. Some landlords prefer short-term rentals for high-profit margins with a high maintenance cost, while other landlords stay with long-term rentals for a stable revenue stream, and some opt for month-to-month leases to get the benefits of both.
Which one is right for you? This article compares earning potentials, maintenance, tax benefits, and operational risks to help you make the most informed decision.
Take a look at the high-level summary first:
Short-term rentals have gained momentum in recent years as their flexibility allows travelers to rent anywhere from a few days to a few months. Short-term rentals, also called vacation rentals, are typically furnished apartments, condos, or houses where renters can feel more at home. Short-term rentals can be more appealing than hotels because of the prices, furnishings, and amount of space they can often provide.
Short-term rental benefits
There are plenty of benefits to owning a short-term rental. The top benefits to a short-term rental are the earning potential and flexibility.
Twice the rent of long-term rentals
Short term rentals can be lucrative—for the right time. If there a festival, sporting event or convention in town, you can easily double or triple your regular nightly prices. Landlords can earn enough in one week to equal what a monthly rent would bring in.
Analysts from 2nd Address studied 8 major cities including New York, Los Angeles, San Francisco, Washington DC, Chicago, Boston, and Seatle, and discovered that short-term rentals ask for twice the rent of long-term rentals on average.
For example, in New York, the average nightly rate of one-bedroom short-term rentals is $215 a night on Airbnb in July 2019, according to data from Inside Airbnb. As a comparison, the average rate for month-to-month rentals in New York is $183 a night based on 2nd Address data; and long-term rentals average at $98 a night based on Zumper data (calculated from a $2,940 monthly rent).
To be fair, short-term and monthly rentals are usually furnished, while the majority of long-term rentals are unfurnished. You also need to factor in a one-time furnishing cost, which ranges between $3,000 to $5,000 to cover the essentials.
You set fluctuating rates depending on your area’s high and low seasons. Take advantage of the busy summer season to maximize your revenue, and lower your rates in the slow months to get more bookings.
Short-term rental hosts get to choose when to offer their space and for how long. You can easily block off your calendar or set the maximum stay length for your property. The added benefits of not having tenants for the long haul are fewer rental disputes.
Marketing is easy and low-cost
Posting a property for rent is free on many short-term rental sites. However, since these types of rentals are incredibly popular, it is necessary to use good visuals and descriptions on postings for the property to stick out amongst the crowd.
Short-term rental challenges
At the same time, short-term rentals have downsides too, such as slow seasons, wear and tear from high turnover, and maintenance costs.
30-40 total hours’ work per month
Running a short-term rental take much more than creating a listing, if you plan to do it on your own. In fact, the reality of hosts is: Replying dozens of messages every day, waiting to hand the key to guests who are running late, washing the sheets, drying the towels, managing reviews, dealing with demanding guests. The list goes on.
Managing multiple listings is usually a full-time job. Even if you just have one listing, prepare to put in 30 to 40 hours’ work every month. Does it really take that much effort? Here’s the breakdown:
Let’s say your listing get booked 80% of the time, and you get 6 bookings a month for an average of 4 nights. For each booking, there’s an hour to check-in and communicate with the guests, and another two hours to clean the property after move-out. That’s already 18 hours a month.
If you get 5 guest inquiries and spend 5 minutes on each, that’s half an hour a day, adding up to 15 hours a month. You probably need another two hours every month to update pricing and calendar and learn about the latest hospitality trends.
80% occupancy is actually pretty hard
Short-term rental hosts are not only competing with thousands of hotel rooms in the city, but also more with their fellow neighbors as more people are getting into the business.
Occupancy rate varies greatly depending on the location, from 84% in New York to just 60% in Miami.
Even in the busy market of New York, short-term rentals occupancy is much lower than long-term rental occupancy rates, which is almost 95% in 2018, according to the St. Louis Fed.
With short-term rental laws popping up across the country, it is imperative that property owners be well-versed in their area’s laws. These laws are very local in nature and have complex clauses, check out this article about short-term rental laws across the country.
For example, New York State law makes it illegal to rent out an apartment unless the owner is also present. In fact, advertising such an apartment is illegal. In Los Angeles, only primary residents are allowed to rent out their property as short-term rentals, and they can only do so for less than 120 days out of a year.
High maintenance cost
Think about short-term rentals as a hospitality business, rather than an apartment rental business. Hosts need to maintain great general upkeep of your property—from modern decorations to clean towels and even gift baskets—or you could receive some negative reviews. The high volume of guests coming through accelerates the wear and tear of your home.
In addition, because tenants come and go, all utility fees would need to be covered by the landlord.
Month-to-month leases are exactly what they sound like—an agreement to rent a space on a monthly basis with the ability to vacate the property with short notice. Many websites such as 2nd Address, Sonder, and Zeus offers homes for monthly rentals.
These rentals provide hosts with the benefits of both short-term and long-term. Hosts deal with less turn-over than short-term rentals, and enjoy more flexibility than long-term rentals.
Month-to-month rental benefits
Less than 5 hours’ work every month
Less turn-over means much less work for hosts. For the months that you send off old guests and take in new ones, it’s probably two hours of cleaning and an hour of paperwork and check-ins. For the months without turn-over, little work is needed.
Other small tasks, such as updating your price and availability, calling for repairs, replying messages, usually take up another couple hours.
87% higher rent than long-term rentals
Landlords usually charge higher rent for on a month-to-month basis than long-term rentals to cover the risks. Analysts from 2nd Address compared the rental price of monthly and long-term rentals in 8 major U.S. cities, and discovered monthly rentals are on average 87% more expensive than long-term rentals.
No need to deal with short-term rental laws
Most short-term rental laws only apply to stays of less than 30 days. Hosts who set their minimum stay length at 30 days don’t need to worry about such laws. In most cases, landlords sign a lease with the tenants.
With such an agreement, it is easier for landlords to give tenants notice that they need to move out. The ability to easily evict a tenant in a month-to-month lease is especially beneficial to landlords in states where eviction laws are strict, according to rentprep.com.
When you rent out your property by month, the ability to increase rental rates that are comparable to others in the area is a huge plus compared to long-term rentals. You also enjoy the flexibility of short-term rentals, including blocking off your calendar for certain dates and updating price and house rules.
Month-to-month rental challenges
Lack of marketing channels
The market for month-to-month rentals is still relatively small, although the enforcement of short-term rental laws is converting more short-term rental hosts into this market.
Besides 2nd Address and a few corporate housing websites, there’s not much online platform for hosts to list their properties. Some hosts still rely on traditional agencies or Craiglist to find tenants.
Long-term rentals are the most common type of lease agreements. Typically a year long, these leases offer landlords a stable, steady rental income while minimizing turnover.
Long-term rental benefits
While landlords have to cover the costs to maintain and repair their properties, that’s about it for landlords’ responsibilities. Often times, landlords also charge tenants for any damages they’ve caused to their property beyond normal wear and tear.
Tenants are typically responsible for cleaning and covering the utility bills that are used.
Long-term rentals are usually not furnished. It will save a huge amount of time and money for landlords.
Marketing is easy
Since turnover is low, there may not be a big need to market the space except once a year or even longer. Options for marketing these types of properties can include anything from the old-school newspaper ads to social media postings on local pages, which are free to low cost.
Long-term rental challenges
Don’t expect high profit margins
Long-term rentals have the lowest rent compared to short-term and month-to-month rentals. And a landlord faces many restrictions if he or she wants to raise the rent.
Because everything is written in the lease, a landloard can raise the rent only when your lease expires, whether it’s a one-year or two-year or multi-year lease, and with the advance notice.
In most states, landlords are legally required to give tenants at least 30 days notice of a rent increase, although that can vary based on how high it’s hiked. In California, for instance, that advance notice expands to 60 days if the increase amounts to more than 10% of the rent.
Lack of flexibility
Landlords need to have a solid reason to evict someone, and evictions can be costly and time-consuming. A report from All Property Management listed renting to the wrong people as one of the seven deadly sins of property management.
It is necessary that landlords do thorough background checks on potential tenants to avoid being stuck for months on end with issues. Potential tenants should complete all application forms and allow landlords to perform credit checks and background checks. Landlords should put forth the effort to reach out to previous landlords, employers, and other references listed as part of the screening process, the report said.
Landlords should also make sure that tenants can afford the rent by verifying their income. It’s also a good idea to hire an attorney and have them prepare the lease agreement to ensure there are no loopholes and to make sure the landlord is in compliance with local laws. Attorneys can also help in the event of any rental disputes, such as late payments. An attorney can help spell out any fees and repercussions for late rent payments in the lease. Although it may seem like there is more work involved for long-term leases, there is a steady payout to be expected.
Once you’ve decided which type of is the most suitable for your needs and goals it is time to ready the property for rent and start searching for the perfect tenants.