Investing in Real Estate: Pros and Cons of Short-Term Rentals

Pros of Short-Term Rentals

Whether long-term or short-term rentals are a better choice for you is a personal choice, just like many other investing decisions. It all relies on your attitude toward the trade-off between larger income potential and reduced risk/stable income.

Examining the benefits will allow you to make an informed decision about investing.

1. Higher Rental Income Per Day

Short-term rentals often have higher net returns compared to long-term ones where the tenants work on extended leases. This is because someone is staying there on a loose budget and wouldn't mind paying a higher rate say for example if they are on vacation.

These costs are often more that the carrying costs required to maintain the property meaning a higher gap in profits. Property that turns in $1500 per month on a long term lease could get you as much as double that amount monthly in a good market area. 

This is even more true if only the owner is managing the property without a property manager. 

2. Easier to Adjust Rates

Supply and demand, the most fundamental economic principle, govern short-term rentals more so than long-term ones. This lets you change your prices whenever it's convenient for you.

Maybe you have an investment property in a coastal town where summer demand is substantially higher than winter demand. Should you agree to a one-year or longer lease with a tenant, you will not be allowed to increase the rental unit's price in the summer to attract beachgoers and then decrease it in the winter when interest is lower.

However, you may easily change the rates as soon as the current guest checks out if you advertise it as a short-term rental home for vacationers.

3. Flexibility

The freedom that short-term or vacation rentals provide to property owners is one of its most well-liked benefits. When the property is empty, you have the chance to visit it and take a routine look around.

This makes it possible to plan more frequent maintenance inspections without upsetting visitors. This alllows for seasonal maintenace tasks like switching some appiances or installing new ones.

4. No Long-Term Problem Tenants

Dealing with problematic tenants is one of the main dangers associated with long-term rentals. It could be challenging to convince a problematic tenant to quit or cease their conduct without going through the eviction procedure if you sign a contract with them and they are a party animal or smoker within the rental property.

On the other hand, short-term rentals will only require you to handle a troublesome renter for a brief period of time. In addition, you have the authority to delete guests' negative app reviews if they don't follow your guidelines.

5. Decreased likelihood of Legal Disputes

Short-term rentals have guests that come and leave in a short period of time making the likelihood of experiencing long legal disputes rare. This is unlike long-term rentals where a client is binded by a legal agreement through the lease which can bring issues.

This can be fueled by constant tenant to landlord relationships that can lead to disputes and therefore legal action. Short-term rentals though, allow for new relationships formed with the new clients every short while.

However, you should keep in mind that the same tenant laws governing tenant-landlord relationships in long-term residencies also apply to short-term ones. 

6. Increased Maintenance

While increased maintenance may seem contrary to the pros in this situation, as it may be costly or time taking, it is an advantage. With more frequent tenant stays, the short-term rentals receive regular professional maintenance on a reguar basis.

This ensures that the property is in good condition and minor repairs are done almost immediately after the tenant vacates.

7. Owner Use

Having a short-term rental property with guests in and out after short periods of time allows you to use it for your convenience as well. You may decide to use the residence during the low season peaks and rent it out short term during the high peak seasons.

This allows you to also use that vacation home for holidays if you decide to take your family for the hoidays.

Cons of Short-Term Rentals

As much as short-term rentals have their pros, they carry a number of donwsides that you'll need to weigh. No good thing comes without a bad, right?

Things like a problematic guest refusing to vacate the property on the stated check-out time or issues like plumbing can take a toll on it.

1. Higher Vacancies

Long-term rentals often involve leases with an assurance of predictable income as long as the client continues to pay on time. Short-term rentals on the other hand, depend on the seasonal demand and that one tenant will move in after the other checks out.

This can pose challenges if you are using the rental income on maintenance or even bigger, paying the mortgage if any. In areas with an infux of holiday homes or popular visits, you compete with your neighboring similar businesses which may not guarantee same prices or amenities. 

2. Wear and Tear

If you decide to rent out your property for a short period, you will have people coming and going all the time. The accumulation of minor scuffs and scratches as well as the accidental spills and stains will show on the furnishing which will lead to more cleaning or repacement.

This wear and tear over time will affect the asthetic appeal of the whole house due to increased maintenace and operational costs. The essential amenities needed for all guests will need replacement due to frequent use and washing to accomodate the level of satisfaction needed. 

3. Neighbor Complaints

Every tenant is different with different societal patterns and reasons for stays. Common neighbor complains from short-term residents often stem from excessive noise and lack of familiarity with the neigborhood everyday patterns.

This could be anything from parking spaces, garbage collection and security protocols which could lead to conflict with the neigbors. This is made worse in comunities with strict HOA regulations all attributed to the guests' transient nature.

4. High Involvement

While we may say that real estate brings in passive income, does it apply to short-term residency? This is because of the high level of involvement involved in managing it. As the host, you have to be available to handle check-ins and check-outs, answer guest questions, and communicate throughout the booking.

You need to be actively enganging the guest to facilitate the best stay ensuring they have access to amenities. The fast in and out involved in short-term residency requires quick coordination with things like cleaning and maintenance services to have the place always ready.

This can be quite a task during the peak guest seasons, and you may need to hire a property manager to add on the expenses. 

5. Urgent Maintenance

For long-term residecies, maintenance can be scheduled with the convenience of the current tenant on lease. For short-term residencies on the other hand, maintenance needs to be done immediately to satisfy the guests and secure the property's reputation.

This urgent maintenance calls for quick faciitation of services that may be on the higher price tag like opperating past normal business hours. The property also needs constant maintenance and repacement on damaged or worn items.

Having these done during the guest stays can negatively impact the reputation and guest preference of the property.

6. Limited Tenant Screening

Long-term renting involves traditional tenant screening, like financial stability and rental history. On the other hand, short-term renting only has basic measures like sending an email, an ID verification, or a phone number.

This doesn't allow a deeper background check, which is not a convenient time for such short notice that works on short-term residency. The guests could either be very good guests or damage your property, go against the house, rules and have disruptive behavior. 

The tenants simply have you work with their accountability and understanding of the rules you've put in place. This is unlike long-term residency where a lease agreement binds them to the terms you've put in place for the property's well-being. 

The Influence of Local Regulations

Some places have strict regulations on the short-term rental market, which can make it more difficult for you to profit from some of the main advantages. Although renting to tenants on a month-to-month basis is still an option, it doesn't always have the same potential for profit as renting to tourists for a few days or weeks at a time.

Therefore, the additional danger or vacancy might not be worth the rental money you could make. Thus, before making an investment in one of these marketplaces, you should learn about the local rules pertaining to short-term rentals.

1. Check Local Regulations

Despite their growing popularity, short-term rentals are not accepted in many cities. Regulations can change, so if you're thinking about making an investment in a new location, keep an eye on any proposed laws and the overall opinions of local authorities regarding short-term rentals.

If new limits are imposed, investors might want to have a "Plan B" approach in place for the property, especially in locations where policies are erratic. It's a good idea to keep abreast of local laws in case potential tenants want to list your apartment on a short-term rental website.

2. Estimate Potential Income

The income from a short-term rental depends on the rate and quantity of reservations, as opposed to a long-term rental property where you have a set, known amount coming in each month. To gain a better idea of the potential rate your house could fetch, take some time to peruse the listings of rival properties on various sites.

You might not be able to match the pricing of a unit with greater amenities, but you might be able to charge more for yours if the property of a competitor appears dilapidated. Examine the properties in the community you intend to purchase in and use the zoom feature to get a sense of what to expect.

Take into consideration that your prices and bookings will fluctuate throughout the year if you're thinking of investing in a location where visitors are only visiting for a limited time.

3. Extra cash flow Means Extra Work

Higher rates mean short-term rental properties tend to generate more cash flow than long-term rentals, but the extra revenue comes with additional costs. Unlike typical long-term rentals, short-term rental units must be furnished and amenities taken care of.

Short-term rentals also tend to require more hands-on management and property managers specializing in short-term rentals can take over those tasks. However, they also tend to charge higher fees than long-term rental managers.

Real Estate Investment Tips for Beginners

Short-term rentals have many benefits to investors especially in areas with high resident traffic. This can earn you quick money in a short-term as compared to long-term stays which are under non-adjustable prices for longer periods of time.

However, short-term rentals have a high risk , high reward profile that may not make sense in every area or market. This puts you up to task to weigh the pros and cons of investing your short-term business in that specific market.

Want help crunching these numbers? With some real estate tips, you can get started on investing in short-term rentals or any other real estate business.