With online platforms like Vrbo and AirBnB gaining so much popularity, short-term vacation rentals have become all the rage. Rental property owners used to seek out long-term tenants to rent their homes and condos for entire seasons. They preferred the steady, dependable income of long-term tenants if/when they weren’t using the property for their own personal purposes.
However, short-term vacation rentals have become extremely lucrative thanks to these booking sites. They are easier to advertise, reservations are simple to manage, and adjustable pricing models can enable better profitability—even if the property isn’t occupied all the time.
For the purpose of this discussion, let’s consider any rental period longer than a month as a long-term rental. Anything shorter (even a booking as short as one single day/night) will be considered a short-term vacation rental.
So which is better for you? Let’s take a look at some factors you should take into consideration before determining how to position your vacation rental.
Location means so much in real estate, and it’s especially important in rental property ownership. Some markets are simply ideal for short-term rentals. Beachfront homes, mountain ski cabins, lake houses—these often benefit from peak seasons where short-term rentals can generate maximum profit through variable-rate pricing models. You can get a great rental price for a beachfront home in Newport Beach during the summer months or a place in Big Bear during skiing and snowboarding season. Meanwhile, that Big Bear cabin may also do well in mid-summer because of the lake, while being less desirable in the shoulder seasons of fall or spring.
You have to research the rental occupancy rates of homes in your market. This may help you determine if a short-term or long-term rental plan is best. You may also strive to have short-term renters one time of year and long-term renters during another season. If you can rent out a Palm Springs home for a few months during late spring, summer and fall, you will likely benefit from the steady cash flow. Meanwhile, you will likely get more out of it with short-term vacation rentals in the peak winter and early spring seasons. Some rental property owners are fine with their places being unoccupied during slow seasons as long as the strong seasons provide enough income from short-term bookings.
There’s no doubt that property management is generally easier for long-term rentals. You have to do less work if someone leases your home for a year compared to it being rented out by different people every weekend. You have to consider cleaning costs in between rentals. Then, you have to manage the bookings, guest services and everything else more like a hotel. At the same time, short-term rentals often lead to less wear and tear on the property. Most long-term rentals require more significant maintenance, repairs and upgrades between tenants.
When comparing short-term vs. long-term rentals, you have to look at the ownership costs and the cash flow opportunities. You’ll be paying the utilizes on short-term rentals, though that can be factored into the variable rental prices. Tenants generally cover those in long-term rentals. Meanwhile, long-term rentals generate a steadier flow of income. This may be preferable to you than short-term bookings that may not be consistent. Those shorter bookings will offer more profitability when the home is occupied, but how are your books affected when you have slow periods and off-seasons?
Another factor to consider is if you intend to use the property for yourself. This may dictate if you can use it for long-term rentals or if it should only be utilized for short-term bookings during the times you are not using it for your own pleasure.
The biggest difference in short-term vs. long-term rentals is pricing. Short-term rentals allow you to use variable-rate pricing models where high times of demand will allow you to set higher prices. Then, you may offer lower rates when the property/market is less desirable. A long-term rental gives you consistent cash flow, but at daily rates that are much lower on average. Let’s say you are able to rent out a home for three weekends a month for six months out of the year at $1,000 a weekend on average. Or, the same home will get you $1600 a month for a year-long lease. In this scenario, the short-term rental would generate $18,000 a year in income compared to $19,200 for the long-term rental. Of course, you must run the numbers for your specific property and its market to get a fair assessment of return on investment (ROI).
The truth is there is no right or wrong answer for everyone. It really depends on your personal investment plan, budget, goals and the property itself. Both short-term vacation rentals and long-term rentals (whether vacation or residential) can both be great investments. It’s a matter of doing the research, making a strong investment plan and managing the property effectively to make it as profitable as possible.
For help with your real estate investment planning, contact Illumination Wealth to talk with one of our trusted financial advisors.