Investing in residential real estate rental properties comes with a plethora of investment decisions to make. One key decision an income property investor must make that will determine the kind of return on investment and cash on cash return received is the rental strategy.
This decision comes down to choosing short-term rentals (such as Airbnb rentals or vacation homes) or long-term rentals (traditional rentals). So, which is the better rental strategy for real estate investors? Many real estate investors find that the better rental strategy is short-term rentals.
Short-term rentals, or Airbnb rentals, are furnished rental properties that a real estate investor rents out for a short period of time to tenants looking for vacation homes. Some investment property owners rent out on a weekly basis, while others charge fees for a night’s stay at these types of rental properties.
Some of the most successful Airbnb rentals do so well because of the location these rental properties are in. The best type of investment property for Airbnb rentals will be in a location that has everything tenants are looking for in vacation homes including walk-ability to any major hot-spots as well as access to transportation, restaurants, shopping malls, tourist attractions, and other activities. Weather also plays a role in how popular a location will be among tenants looking for Airbnb rentals and vacation homes. A lot goes into choosing the best type of investment property for Airbnb rentals, but, as you’ll see, it is the better rental strategy for an income property.
Because the idea of investing in long-term rentals comes with a kind of consistency in rental income and a hands-off approach to investment property management, many real estate investors flock to this kind of investment property, thinking it is the better rental strategy. However, there are many reasons why Airbnb rentals are becoming a popular real estate investment, and that’s because real estate investors can reap numerous benefits that they cannot expect to gain from investing in long-term rentals. Let’s take a look at some of the benefits of investing in short-term rentals.
Related: Housing Market Trends: How Airbnb Affects Home Prices and Rents
Investing in Short-term Rentals: The Best of Both Worlds
Real estate investors can own dream vacation homes if they choose the rental strategy of short-term rentals. Naturally, vacation homes will only be used when real estate investors can get away, but when vacant, vacation homes can be turned into Airbnb rentals. Real estate investors can host tenants and make a profit from rental income, turning vacation homes into an income property. With a long-term rental strategy, real estate investors wouldn’t be able to enjoy their vacation homes when they please as they would be bound by the legal contracts with tenants in long-term rentals. If you’re looking for the luxury of vacations homes (and what real estate investor isn’t), short-term rentals are 100% the better rental strategy.
This rental strategy option isn’t just limited to vacation homes. Real estate investors looking to make extra money can do so by renting out their primary residential real estate property for rental income. Airbnb rentals can be a single room in the residential real estate property or the entire house if the real estate investor is traveling for work or pleasure. If the income property is in a location that gets tourists at certain times of the year, a real estate investor can take advantage of this rental strategy. Of course, when looking to make rental income from a primary residential real estate property, real estate investors will have more difficulty if they choose long-term rentals. This is yet another reason why short-term rentals are the better rental strategy for making money from rental income.
Investing in Short-Term Rentals: The Tenants
When investing in short-term rentals, real estate investors see a wide array of tenants from around the nation and even the world, coming in and out of the income property. There will be more opportunity to interact with these tenants when managing the investment property. Long-term rentals don’t involve as much of a personal touch, and so with this rental strategy, real estate investors won’t have the same opportunity for interaction.
In addition to this, Airbnb rentals allow real estate investors to make a more educated choice of which tenants will be staying at the income property. Using the Airbnb reviews, you can weed out tenants who are going to raise your income property expenses due to repairs or theft in consumables. In long-term rentals, real estate investors usually don’t get this benefit, leaving rental properties at risk for need of major repairs when tenants leave or are evicted for one reason or another, ultimately lowering cash on cash return.
While tenants of long-term rentals can cause a lot of issues for the income property owner by not paying rent on time or in full, short-term rentals will not have this issue. Tenants pay upfront, and real estate investors don’t have to worry about someone not paying rent.
While tenant laws for long-term rentals are more protective of the tenants themselves, for Airbnb rentals and short-term rentals, they lean in the favor of income property owners. Real estate investors should always check Airbnb laws in the location of their rental properties and learn all about tenants’ rights as well as their own rights.
Investing in Short-term Rentals: Higher Rental Income
Real estate investors who take the time to find the right location for Airbnb rentals will find that the profit from rental income is greater than that for long-term rentals. Generally, it has been found that short-term rentals bring real estate investors a 30% higher profit than what the same investment property would generate if it were used for long-term rentals. With long-term rentals, you will be waiting a long time for possible investment property appreciation to profit, but with Airbnb rentals, you’ll find a positive cash flow because of the pre-paid rental income from tenants throughout the year. Also, with the right location, it’ll be easy to find short-term tenants to bring in rental income.
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An Airbnb rental investor will also have the luxury of changing the rent prices on vacation homes. Depending on the time of year, holidays, or major events that are taking place near the location of the income property, you can raise rent prices in order to have a larger profit from rental income. This is, of course, unacceptable with long-term rentals. They will have fixed rent prices for tenants, and a long-term rental investor cannot benefit in any way from these events financially.
Generating higher rental income may make a real estate investor worry about facing higher property taxes. However, with a good understanding of the real estate investing business and a good accountant, you’ll find that you can write off a lot of things for rental properties including utilities, repairs, supplies used by tenants (like furniture), and cleaning expenses. Short-term rentals also qualify for a lot of the same tax breaks as long-term rental properties such as mortgage interest and income property taxes.
Related: Location Location Location: What Makes for The Best Place to Invest in Real Estate?
Choosing the short-term rentals strategy when investing in residential real estate may seem intimidating at first, with the extra work of managing and hosting and the strict Airbnb laws. However, ultimately the work and effort are negligible compared to the cash on cash return and overall benefits real estate investors find when choosing the better rental strategy of short-term rentals.
Related: Four Things to Consider Before Purchasing an Airbnb Investment Property