In the world of real estate investing, property owners often find themselves considering whether to rent their properties on a short-term or long-term basis. The decision shouldn’t be made lightly, as it can significantly impact overall rental income, cash flow, and investment strategy.
In this article, we’ll provide a comprehensive comparison between short-term and long-term rental properties. By the end of it, we aim for you to have a stronger understanding of both options so you can make the best decision for your investment properties.
What Differentiates Short-Term and Long-Term Rental Properties?
When it comes to real estate investing, understanding the key differences between short-term and long-term rental properties is crucial.
Short-term rental properties, often classified as vacation rental properties, are typically leased for periods of less than six months. These properties are highly sought after on platforms such as Airbnb and VRBO, where homeowners can transform their investment property into a lucrative source of income. Using these platforms allows property owners to list their homes to vacationers or individuals seeking temporary accommodation, creating an opportunity for significant profit margins.
Long-term rental properties typically involve lease agreements of six months to a year or more. In some cases, a lease agreement can even extend over multiple years. Having such a long lease means that these properties are often used as primary residences by tenants. As a property owner, the stability of long-term rentals is often preferred as it can lead to consistent monthly rent and less tenant turnover, facilitating a steady stream of passive income.
How Do the Leases for Short-Term and Long-Term Rentals Differ?
Short-term leases offer flexibility, with terms ranging from a few days to several months. This flexibility caters perfectly to vacationers and transient renters who are merely looking for a temporary vacation home or aren’t planning to stay in the area for very long. However, this flexibility means property owners must be prepared for new tenants frequently, which can increase rental management responsibilities.
In contrast, long-term leases usually last at least one year, providing a stable income and less turnover for property owners. These leases often require a security deposit and the first month's rent upfront, providing an initial cushion for the homeowner. Additionally, long-term renters are more likely to treat the rental home as their own, potentially leading to less wear and tear over time.
In What Types of Markets Do Short-Term and Long-Term Rentals Thrive?
Short-term vacation rentals are popular in locations with high tourist activity or sizable transient populations, such as students or contract workers. These include vacation destinations or cities with significant seasonal events. The use of social media can significantly boost the visibility of these properties, attracting potential short-term rental owners and tenants.
However, certain locations do not allow short-term rentals. This might be a regulation set by the city at large or a specific building or area. Either way, it’s worth noting.
Long-term rental properties succeed in stable residential markets where individuals and families aim to establish roots. These are often single-family homes in suburban neighborhoods or apartments in urban areas. Long-term properties offer the comfort of a home for tenants and a consistent income for real estate investors.
What Are the Financial Implications of Short-Term Vs. Long-Term Rental Properties?
Making a decision between short-term and long-term rental properties requires a deep understanding of the financial implications of each. Both options can be profitable, but they come with different income potentials, expense considerations, and tax liabilities:
How Does the Income Potential Vary for Short-Term and Long-Term Rentals?
In terms of income potential, short-term rentals often command higher nightly rates, especially during peak seasons or events. For instance, a vacation home in Miami might yield substantial rental rates during the winter months when tourists flock to the city for its warm climate.
However, these properties can face seasonal occupancy fluctuations, leading to a less reliable cash flow month-to-month. Inconsistent occupancy rates can also make it more challenging for property owners to predict their earnings and plan their finances.
On the other hand, long-term rentals offer a stable monthly rental income, providing property owners with a predictable and consistent cash flow. While the monthly rental rates may be lower compared to short-term nightly rates, the stability and predictability of this income can be a significant advantage for many investors.
Long-term tenants also generally sign lease agreements that commit them to a set monthly rent, protecting property owners from market fluctuations.
What Are the Expense Considerations for Short-Term and Long-Term Rentals?
When considering rental expenses, short-term rentals often require more upkeep due to the frequent turnover of tenants. Higher operating costs can include utilities, cleaning fees, maintenance, and repairs, as well as costs associated with listing and marketing the property.
Additionally, short-term rental properties may incur higher property management fees due to the increased demand for services like booking management, guest communication, and turnover services.
In contrast, long-term rentals typically experience less wear and tear, which can result in lower upkeep costs and higher incomes. Additionally, managing long-term tenants can be more straightforward and less time-consuming, potentially reducing property management fees. With long-term rentals, property owners often only need to find new tenants once a year or less, which can save on marketing and tenant screening costs.
How Do Short-Term and Long-Term Rentals Affect Your Tax Liabilities?
Tax liabilities for short-term and long-term rentals can also differ significantly, and rental owners should consult with a tax professional to understand their obligations fully.
For instance, short-term rentals are permitted to be rented for 14 days or less each year tax-free as long as it’s owner-operated for at least 14 days. So, using the property for personal use for two weeks a year can lead to a lower tax liability. However, if the property is rented for more than 14 days, all rent income and expenses must be reported.
The main difference between the two is the total amount of general expenses that can be deducted. Some of the most common expenses include mortgage interest, real estate taxes, cleaning, repairs, depreciation, and utilities. The difference is that these only apply during times when the rental home is occupied. If the home is only rented for 90 days a year, then you can only deduct about 25% of the expenses.
How Do Management Responsibilities Vary Between Short-Term and Long-Term Rentals?
When it comes to property management, the responsibilities vary significantly between short-term and long-term rentals. Each type of rental property comes with its unique set of challenges and requires a different level of time commitment and handling of tenant issues.
What Are the Differences in Time Commitment for Managing Short-Term and Long-Term Rentals?
For short-term rentals, the time commitment can be extensive. Property owners need to manage bookings, communicate with potential renters, organize cleaning and maintenance between stays, and handle any issues that arise during a guest's stay. This type of rental requires continuous attention and quick response times to inquiries and concerns to maintain high customer satisfaction and positive reviews.
Long-term rentals typically require less time once a reliable tenant has been secured. Initial activities may include marketing the property, screening potential tenants, and preparing lease agreements. However, once a tenant is in place, the ongoing management responsibilities often decrease substantially. Property owners might only need to perform periodic maintenance, collect rent, and respond to any issues or concerns raised by the tenant.
How Does the Type of Tenant Issues Typically Differ Between Short-Term and Long-Term Rentals?
In short-term rentals, issues might include booking conflicts, damage to the property, or complaints from neighbors about noise or disruption. In contrast, long-term rentals might involve late rent payments, requests for property improvements, or dealing with the eviction process if a tenant violates the terms of their lease.
What Are the Pros and Cons of Short-Term Vs. Long-Term Rentals in Market Variability?
Market variability can significantly impact the returns of both short-term and long-term rentals, with each presenting its distinct set of pros and cons.
How Does Market Fluctuation Affect Short-Term and Long-Term Rental Returns?
Short-term rentals can offer high returns, particularly in peak tourist seasons or during high-demand events when property owners can charge premium rates. However, these rentals can be highly susceptible to market fluctuations.
Changes in tourist activity, competition from other short-term rentals, or changes in local regulations can all impact demand and pricing. For instance, during off-peak seasons or periods of reduced travel, the demand for short-term rentals might decrease, leading to lower occupancy rates and reduced income.
On the other hand, long-term rentals provide a steady income that is less influenced by seasonal fluctuations or temporary market changes. The income from these rentals tends to be more predictable, as it's usually based on a fixed monthly rent outlined in a lease agreement. Long-term rentals aren’t immune from the effects of market fluctuations, but these fluctuations are often less volatile when compared to the effects of short term rentals.
How Does Economic Downturn Affect Both Types of Rentals?
Economic downturns can affect both types of rentals. For short-term rentals, a decrease in travel or discretionary spending can lead to lower demand, reducing occupancy rates and revenue. For long-term rentals, tenants may face job loss or financial instability, impacting their ability to pay rent. Property owners may also find it challenging to fill vacancies during these times, leading to a potential loss of income.
How Does the Rental Shortage in South Florida Impact the Short-Term Vs. Long-Term Rental Market?
In the wake of the COVID-19 pandemic, the entire county has been experiencing issues relating to the housing market. The pandemic, inflation, and rising interest rates have all contributed to a burgeoning housing crisis that has left many living in South Florida struggling.
How Is the Rental Shortage in South Florida Affecting Demand for Short-Term and Long-Term Rentals?
Few locations in the country can rival the beauty of South Florida. Even during the pandemic, the tourism industry of southern Florida was as strong as ever, with millions traveling to experience the sunny weather and beautiful beaches.
New Investment Opportunities
The increased demand for these vacations has made it easier than ever for short term rentals to generate a profit. More and more investors have started looking for apartments with short term rental capabilities to capitalize on the trend.
For many condos in South Florida, there are limitations on short-term rentals. However, we’re seeing new condo inventory on the horizon that will cater to short-term rental investors in Miami. Options such as Nexo Residences in North Miami Beach offer turn-key residences that are designed specifically with short-term renters in mind who might be traveling to the area for an extended vacation or work.
Shortage of Affordable Housing
The problem is that the profitability of short term rentals has contributed to a shortage of long-term rentals in some areas. The lack of affordable housing for local residents has contributed to a rental shortage in the area, with many people unable to afford rent payments. As a result, it can be more difficult to find tenants for long-term rentals, leaving many property owners stuck with short-term rentals.
Furthermore, the demands for more affordable housing have led to conversations regarding the banning of short-term rentals. Certain state laws effectively prevent a potential ban on short-term rentals, but there could be changes if the housing situation for local residents doesn’t improve in the near future.
Has the Rental Shortage in South Florida Skewed the Potential Returns for Short-Term and Long-Term Rentals?
The rental shortage has thrown the entire real estate market of South Florida into uncertainty the past few years. On the one hand, the potential returns for short-term rentals are so high that many investors are only interested in leasing their properties for a limited time. On the other hand, the price of long-term rentals has skyrocketed over the past few years. While that’s led to an increase in profitability, it’s also led to many homes being left vacant as local residents can’t afford the price.
In navigating the current real estate landscape in South Florida, investors must carefully consider these economic principles. The interplay between supply, demand, and pricing is dynamic, and the market's response to the influx of new housing developments will likely shape the future landscape of short-term and long-term rentals in South Florida.
Given South Florida's Unique Challenges, Which Rental Strategy Comes Out on Top?
It’s important to weigh the pros and cons when determining the best rental strategy for your investment property. The decision will likely be, at least in part, based on the location of your property and the type.
For example, smaller units, especially with one bedroom, are often better suited for long-term rentals in densely populated cities that command higher rents, such as New York and Miami. However, units with four or more bedrooms stand to make a significant return as short-term vacation rentals. This also applies to location — if your property is located in the center of a popular area for vacationers, a short-term rental may be a better option.
Short term rentals are currently popular and can result in a higher profit. However, it’s unclear if these rates will stay as high as they’ve been in the past, and the inconsistency of occupancy can mean periods without any cash flow.
Long term rentals are also experiencing a high in terms of average rates and profits, along with the bonus of consistent monthly payments. But with brand new apartment buildings springing up all over South Florida, it can lessen the demand for long term rentals and result in a price stabilization
The South Florida real estate market is currently in flux, and it’s hard to predict what might come next. There are benefits to pursuing both short term and long term rentals, but each one also comes with its own set of risks and challenges. Succeeding in the world of property management means staying educated and adaptable. One of the best ways to achieve both of these goals is to partner with Vaster.
Vaster is backed by two of South Florida’s largest real estate firms with more than 30 years of expertise. We offer a variety of loan programs that can help you maximize your profits and investment strategies. Whether you opt for short term or long term rental properties, we’ve got you covered with personalized assistance and experience.
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