A rental property can be a fantastic investment, but it can also be money going down the drain. This all depends on how it’s managed. Managing a property requires a lot of time and patience, both in terms of tenants and the investment itself.
People looking to invest in a property typically think along the lines of long term rentals, but short term rentals are just as lucrative of an opportunity. These are two very different ways of investing in real estate. As short term rentals rise in popularity, they’re starting to give long term options (which have long had the monopoly) a run for their money.
Investors want to know what the best option for them might be. With our expertise at Zumbly using home scoring to help investors find the right property, we’re here to help. Let’s start by going over some common terms.
What is a long term rental?
A long term rental is a property that can be lent out for approximately six months or longer. The tenant signs a long term rental agreement with the landlord and must stay for the given period of time.
What is a short term rental?
This is just the opposite of a long term rental since it can be rented for less than six months. These are also referred to as vacation rentals because a stay in a short term rental could be as short as a week or even a few days.
According to the legal definition, subletting is leasing or renting a property in part or whole to a subtenant, who then has the right to use the property. The subtenant has the right to use the property for rental purposes as long as they have the consent of the landlord. This is a form of short term rentals that usually works well for tenants who travel often or for long periods, but still want to retain their apartment back home. It allows them to make a supplemental income while having a physical presence in the house to deter burglars.
However, it’s important to note that there are many rules and regulations against subletting. For instance, subletting social housing is a criminal offense. It’s also illegal to sublet if one hasn’t obtained the consent of the landlord, even if the rental agreement allows subletting.
The sublease is very similar to subletting. In subleasing, the tenant who signed the original lease can lease the property to another tenant (the sublessee). The process is a bit more complicated, as the sublessee has to sign the original contract and pay the subleasing fees.
This is perhaps the most popular form of short term rentals at the moment. It’s usually easier to arrange than subletting and subleasing because the logistics are much simpler. Airbnb is not classified as subletting by law in some states in the US. The concept of Airbnb borrows heavily from subletting, but with variations to minimize confusion and increase the legality..
For example, in some states, the homeowner must be available in the rental for the duration of the client’s stay. In some places, space can only be occupied for 120 days in the year, and one cannot have multiple property listings. For others, the property manager must rent out the property for more than 30 days. These kinds of Airbnb restrictions make it more of a home share than a sublet.
Related: Top Airbnb Host Tips
Benefits of Short Term Rentals
Short term rentals are more flexible compared to long term ones. The contract is usually for a few days to several weeks at most. All you need to opt out of the contract is to provide a notice to the landlord that complies with the terms and conditions of the agreement entered by both parties.
Most people consider this flexibility an advantage only for the tenant, but it works both ways in case the landlord is dealing with an unruly customer. They can cancel their booking even if it may result in a penalty. Greater flexibility can also mean pricing that can be adjusted depending on how popular a season is in a given area. For example, short term rentals can be priced higher in summer when there’s more demand due to an influx of tourists versus the winter season.
Short term rentals are cleaned frequently, so there’s ongoing maintenance as tenants move in and out. Issues that would typically take longer to identify are easier to spot since clients bring up the problems they encounter during their stay in the rental.
The investor can decide to use the rental for their own personal use for a vacation with the family instead of spending money on a hotel room. If you live in your short term rental property, you can simply take it off the market and take a break if you desire. One can do this during off-peak season to avoid interfering with the regular rental season.
Better income potential
A short term rental in a popular vacation spot is guaranteed to bring in more income compared to a long term rental. This is because one can change the rates according to the season and facilities offered. If the tenant is on a short-term lease, the landlord can increase the rent depending on the market conditions. This concept is different from long term leases, where the landlord is stuck with the same rate in the contract even if the market rates are favorable for a rent increase.
Check out some homes on Zumbly to use as short term rental properties.
Disadvantages of short term leases
Just like the property manager can terminate the lease with an unruly tenant, the tenant can also terminate their contract earlier. This leaves the landlord with uncertainty when it comes to the flow of income. Also, short term rentals have peak and off-peak seasons when business is booming and when it’s slow. This can also affect the flow of income for the investor.
However, this is not a big problem if you’re using your short-term rental as a strategy to generate passive income. Long-term tenants can also terminate a lease early, and it’s much more difficult to find long-term guests. On the other hand, the short-term model requires less commitment and you are more likely to find replacement guests more quickly.
Higher maintenance costs
Short term rentals see a lot of traffic because different people are using it use your facilities regularly. Without proper maintenance, the property can gradually deteriorate. To maintain the property at peak conditions, the property manager must set aside more resources for maintenance and repair.
Related: What Happens When You Break a Lease
Benefits of long term rentals
Long term rentals utilize the traditional concept of renting, which is why they enjoy a steady stream of income. The tenant is on board for the long haul, and they have committed to the lease by payment and signing a lease contract. This means the investor doesn’t have to keep looking for new clients for the duration that the tenant is legally using the property. These rentals don’t suffer from seasonal variances that affect the flow of income.
Withstands market fluctuations
The real estate landscape is a dynamic process that is always fluctuating, so property prices can quickly dip. Long term rentals are less affected by the daily fluctuations since there is already a fixed rate by the property manager and the tenant. Any changes can be made at the end of the lease protecting the investor, similarly to the level of protection that the tenant gets.
Appreciation in value
Long term rentals will appreciate in value with time even with the rent fluctuations. This means that the property is an asset that one can sell later on for huge profits. The investor can even use the rental as leverage to acquire more property.
But remember, short-term rental prices are easier to adjust. They can appreciate too, in the sense that property managers of short-term rental properties can raise prices as demand increases.
Disadvantages of long term rentals
Long term rentals can stay vacant for long periods before clients occupy them, meaning they are not bringing in any money. It’s challenging to find a suitable tenant who fits the profile that one needs for the rental. This can be a huge setback, and property managers may find themselves eventually losing money.
Once the place is rented, the investor has limited control over the property. Tenants can make some changes to fit their needs, and the property manager needs to be okay with the changes to make the tenant happy.
The property is rented for long periods, so both parties are stuck in their contracts. There is little room for flexibility unless a major problem arises. This also means the property manager can’t make significant changes to the property as long as the tenant is still on the premises without compromising the terms of their agreement.
Check out some vetted and scored homes at Zumbly for your next property.
Which one is right for you?
This question can only be answered depending on the investor’s needs. For investors looking for higher income and flexibility to change rates according to seasons, then the short term rental is a good investment fit. Long term rentals are beneficial to investors who don’t have a lot of time on their hands but want passive income and investment that appreciates regardless of their direct involvement with it.
Owning property is an excellent strategy for generating passive income, whether you are acquiring a short term or long term rental. However, before investing, it’s crucial to have a clear goal of what you want to achieve with the property. With that in mind, whether or not you should use a long-term or short-term lease strategy depends on your goals. Consider them carefully and match them up against the factors we listed above to make your final decision.