When investing in rental properties, are long term rentals or short term rentals the better real estate investment strategy for you?
Rental properties are the #1 most common type of real estate investment properties in the world. The advantages of investing in rental properties are numerous, and the profits that they can generate are significant.
Combined with the fact that rental properties are among the easiest real estate investments to get into, rental properties became the most popular type of investment properties among beginner real estate investors.
However, when we talk about rental properties, it is important to make the distinction between long term rentals and short term rentals, as each rental strategy has its own advantages and disadvantages depending on the area that you’re investing in as well as the type of property that you own.
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This article aims to explain the difference between long term rentals and short term rentals, and to highlight the different features of each rental strategy to help you decide which one is more suitable for you.
Long Term Rentals
Long term rentals, also known as traditional rental properties, are investment properties that you purchase and rent out to tenants for long periods of time, typically lasting from several months to several years.
Traditional or long term rentals are the most popular type of rental properties in the real estate market, and they are among the most ancient investment strategies that still exist in our modern times.
Short Term Rentals
Short term rentals, also known as VRBO or Airbnb rental properties depending on which service you’re using, are a relatively new concept in real estate investing.
Purchasing an investment property and renting it out to tenants for short periods of time, typically on a nightly or a weekly basis, was made popular by the emergence of Airbnb.
Airbnb is an online service that lists and manages short term rentals around the world, allowing tourists and travelers to find short term options that are more affordable than hotels, and that provide them with more personal space and a more private experience during their stay.
Related: Real Estate Investing: Traditional vs. Airbnb Investments
Advantages and Disadvantages of Each
Both short term and long term rentals are considered among the most lucrative and profitable real estate investments around the globe. While both strategies can be used to make significant profits when managed correctly, each rental strategy has its own advantages and disadvantages that need to be taken into consideration in order to achieve the maximum profits.
Legality
The first and foremost aspect that you should always consider whenever you’re trying to decide between long term or short term rentals is the legality of short term rentals.
Due to the competition with the hotel industry and the pressure of the hotel industry lobbies, short term rentals were made illegal or have several restrictions and limitations imposed on them in several cities around the world.
While long term rentals are not associated with any legal complications in most locations, when considering the use of the short term rental strategy, it is absolutely crucial to research the area that you’re investing in.
Make sure that short term or Airbnb rental properties in that area are considered legal, and that the laws and regulations surrounding them do not limit their profitability and make them an invalid choice for investing in real estate.
Related: The Ultimate Guide to the Airbnb Investment Property
Management
Although most beginner real estate investors believe that rental properties, in general, are easy to run and manage, the truth is far from that. Rental properties require extensive amounts of time and effort to be invested in them in order to make them successful investments and maximize their profits.
From maintaining the property to conducting repairs to tending to the tenants and collecting the rents, rental properties do not manage themselves; and the tenants are less than interested in managing them for you.
There is a difference, however, between the amount of effort needed to manage the property depending on the rental strategy that you use.
Short term rentals, in this regard, generally require more effort for managing them due to the frequent turnover of the tenants. If you’re renting out your short term rental on a nightly basis, for example, you will need to allocate a lot of your time for handing over the keys, collecting the money, and inspecting the property to make sure it hasn’t been devastated by the tenants.
This is something that you would have to do every time a tenant walks out of the property.
When it comes to long term rentals, however, there will be much longer periods of time between each turnover, and the tenants will generally be more inclined to take more care of the property and are less likely to cause any damages to it because they will be living in it for a longer period of time, and they will consider it more like a home than a hotel room.
In both cases, however, you will have the option to hire a professional property management company to manage all aspects related to the property and the tenants, but it will require budgeting and will take up a good portion of your rental income.
Profitability
Both short term and long term rentals are very profitable investment strategies.
Short term rentals, however, have shown a higher potential for profits in several places around the world, especially in tourist-heavy areas and travelers’ destinations. When you own a short term rental, the amount of rent that you can ask for the property on a nightly or weekly basis can simply be higher than the amount of rent that you can ask for a long term rental.
Keep in mind, though, that this can drastically differ from one area to another, especially when considering the laws and regulations that can affect the profitability of your short term rental.
Related: The 5 Most Profitable Airbnb Locations According to Mashvisor’s Investment Property Calculator
Bottom Line
While both rental strategies are considered valid investment strategies and can be very profitable for any real estate investor, my personal opinion is that short term rentals are the better overall strategy to use if you’re a seasoned real estate investor.
On the other hand, long term rentals are the better strategy for beginner real estate investors as they are less risky and easier to manage, allowing the investor to make slight mistakes and learn from them to carry down their experience when investing in other rental properties.
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If you can’t figure out which rental strategy to use or where to find the best rental properties to invest in, Mashvisor can help you out.
Our data comps and real estate analytics are designed to help real estate investors find the perfect investment properties to purchase and turn into rental properties while also giving you insights and advice on the optimal rental strategy to use in each area and for each individual investment property.