Short or Long-term Rental Properties: Which is the Better Investment?
Real estate investing has always proven to be an excellent way to build wealth. The U.S. Vacation Rental industry is projected to reach $15 million in 2021. Nearly half of investment property buyers choose to generate rental income from their properties instead of flipping them. With the rising popularity of Airbnb, is long-term renting still the way to go, or has it been replaced? Let’s look at them both within the categories of risk, passiveness, cost, predictability, and income to see which is the best choice for your borrowers.
Which poses the greater risk for the borrower? Long-term renting is less risky overall. With long-term, there is a signed lease stating the length and terms of occupancy. In addition, there is a set monthly amount that will be received from the tenant, so there isn’t any worry about keeping the property booked.
With short-term, there is no worry about evictions or getting caught up in legal issues with renters over delinquent payments or general negligence. Technology has made it easy to book an Airbnb, and payment is usually received before their stay. Since Airbnb is dependent on the travel industry, a downturn in the economy or a crisis such as Covid could affect the number of stays you could acquire.
How much work are they to manage?
With long-term rentals, there is less communication and less management. The tenant is doing most of the upkeep themselves, and there is less responsibility on the landlord depending on how the lease agreement is drawn up. Usually, landlords are responsible for bigger issues such as AC repair, structural, or major appliance issues.
With short-term, there is also more communication that needs to occur, often on a daily basis. Owners need to regularly touch base with their visitors to ensure their listing receives good ratings and reviews. Cleaning crews and maintenance personnel also have to be checked on regularly. Although short-term does allow you the bonus of having flexible pricing, it does require you to stay on top of your prices and make the needed adjustments at different times and seasons throughout the year.
With a vacation property, you can get a down payment as low as 10% if your credit score and application are strong. For long-term rental properties, the down payment is usually higher. Even though short-term properties need to be furnished, the savings received through better financing can be enough to pay for what is required.
Traditional renting usually has fewer utility costs than short-term, although those are usually calculated into the nightly rates, and cleaning fees are often added to cover the expense.
It does depend on the circumstances, but usually, short-term vacation properties do cost less upfront and are more budget-friendly.
Most buyers want the peace of mind of knowing the return on their investment is set and not something they need to be concerned with. Long-term rentals give you that. With short-term rentals, pricing is flexible and varies from month to month, and there is never any guarantee of occupancy.
Now for the big question – which one has the best ROI?
If you purchase a vacation home in an area with high visitation rates, buyers could see more in annual profits. Even for those who initially purchase a home for short-term rentals, that same home can be switched to a long-term rental property if visitation rates drop. Since you can also upsell additional services with Airbnb, it can be more lucrative provided you can sustain a good star rating and positive reviews.
While both types will (hopefully) gain equity, an added benefit on a vacation home/short-term rental is the owner can use the property for their personal enjoyment too!
Have your borrowers carefully consider which type of rental best suits their disposition and financial goals. Have them check with a tax professional as well since different legal terms and fees will apply. Should your borrowers decide a non-owner-occupied mortgage or second home is right for them, an FSB Mortgage team member can help you advise them on what product works best.