One of the great benefits of being a homeowner today is that you have the opportunity to make money on your property in two ways. The first way that most everyone is familiar with is an appreciation of the home’s value. While we all appreciate our home because it provides a roof over our heads, we don’t mean that kind of appreciation. We mean the kind of appreciation that happens as prices rise. Home prices generally rise with inflation. While inflation has been a sizzling eight percent of late, over the past 60 years it has averaged a little under four percent. At that rate, it would take approximately 18 years for your home price to double. Meaning, that unless your neighborhood suddenly becomes the place to live, or, our personal favorite, unless you buy your house for the price of a car, you’d better pack your patience when it comes to realizing the appreciation value of your home.
The second way realizes a return on your house is by renting it out. And the good news is, that the range of rental options is increasing every year, allowing you to create a structure that works for you.
Given these two methods of earning a return on your home-sweet-home, it pays to educate yourself on the numerous factors involved when buying a property, so that you can take advantage of both avenues. My Smart Cousin can help you figure out how best to wring appreciation and rental value from your current home, or help you find a house for the price of a car that has a high appreciation and rental value.
If you’re a real estate investor focused on renting out your home, something you’ll need to decide early on is if you want to offer your property as a long-term rental or a short-term rental. Both strategies have their pros and cons, so it can be tough to decide which one is right for you. In this post, we’ll take a look at the advantages and disadvantages of each strategy, so you can make an informed decision about which option works best.
A BRIEF INTRODUCTION
· LONG-TERM RENTALS – In most jurisdictions, when you lease a property for more than one month (30 consecutive days to the same person), the rental is considered a long-term rental, and is regulated under landlord and tenant laws. The one-month rule holds whether you rent the entire home or just one room in the home. Likewise, the interpretation applies whether the tenant pays for utilities or does not explicitly pay for utilities (that is, you charge a room rate with no language in the contract regarding utilities). If the tenant doesn’t live at the home full time but has a one-month or longer contract, or, if you have permitted the tenant to store their belongings in the home while not ‘living’ there, the one-month rule would likely still hold. As such, if your intention is to rent out your home or a portion of it on only a short-term basis, then ensure that the contract and tenant occupancy match this intent.
SHORT-TERM RENTALS – The best alternative to a hotel is a short-term rental. And in fact, many guests prefer staying at a home (either renting the entire home or just a room or sofa) rather than booking a stay at a hotel. Short-term rentals can be an excellent way for a guest to experience a city in an authentic way, can be more comfortable than a home, and are often more affordable.
One of the biggest attractions of a short-term rental home, however, is that the guest can make use of private indoor space as well as outdoor space. If you have a balcony or lovely yard, this can place you at the top of the list for out-of-town and local guests.
HOW DO YOU DETERMINE WHICH OPTION IS BEST FOR YOU
The decision to use a property for either short-term stays or long-term rentals comes down to one important question – which option works best for you— your lifestyle and way of life? By considering the pros and cons of each option, you can make more informed decisions about how best to fit this investment into your plans.
THE PROS AND CONS OF LONG-TERM RENTALS
ADVANTAGES
A CONSISTENT CASH-FLOW – Long-term tenants are perfect for those landlords who want a consistent cash flow that they can depend on. With a high-quality, long-term tenant in hand, you have a roommate who can help you pay for the expenses of your home.
MINIMUM TURNOVER – If you hate the idea of a new person coming to stay with you every day or week, then a long-term structure allows you to minimize turnover. Less turnover not only minimizes the disruptions from revolving-door roommates but also cuts down on paperwork— from the marketing promotions that need to be done with a short-term rental, to the increased bookkeeping from tracking multiple transactions.
UTILITIES – Unlike hotel guests or guests in a short-term rental property, long-term tenants will not be surprised when you tell them that they must pay a percentage of the utility bills. Water, electric, and gas bills can spiral out of control when you don’t see them or have to pay for them. Long-term tenants or roommates help keep these expenses under control.
· DISADVANTAGES
PROFIT MARGINS – A big disadvantage of long-term rentals is their overall profitability. Profits for long-term rentals typically are lower than for short-term rentals because short-term rentals charge a higher daily rate. A condo that is renting for $1,500 a month in an urban neighborhood, for instance, means that if the $1,500 were paid on a daily basis, the cost would be approximately $50 a day. On the other hand, finding a short-term rental in an urban neighborhood for $50 a day, for an entire condo, would be extremely rare indeed.
CONTROL OVER THE PROPERTY – With a long-term tenant, there is much less privacy and control over the property, as you’ve rented out a room, for instance, to someone else, who has the right to stay in the house as much or as little as they want. It can also be difficult to put off maintenance issues that you might be willing live with, but that your paying tenant is not.
RULES AND REGULATIONS – When you decide to lease your property long-term, you may well find yourself having to become an expert in the licensing requirements rules, and regulations that the town, county, homeowners association or building (particularly if it is a condo or co-op) have. Most cities will require you to register the property with them before leasing it to a tenant. In some cases, an inspection may be required. You will want to reflect in your lease any restrictions that the building or homeowners association has. For instance, if the building does not allow you to cook food on your patio, then you will need to reflect this in your lease and not advertise the property as an ideal spot to grill hamburgers and hotdogs.
SEARCH FOR THE RIGHT TENANT – Finding the right tenant for your property is both the most important and the most overlooked component of being a landlord. Even if you have a month-to-month lease— and keep in mind that most leases can’t be canceled in a time period shorter than 60 days— the days and months will be some of the longest of your life without the right tenant.
THE PROS AND CONS OF SHORT-TERM VACATION RENTALS
· BENEFITS
HIGHER RENTAL INCOME – As mentioned above, short-term rentals provide a higher daily rate than long-term rentals. While the property might not be at full capacity day after day, odds are that it will be rented more days than not and that this will outweigh the monthly rental income from a long-term lease. If you have a short-term rental that also happens to be in a great vacation spot, then the opportunities to increase the daily rate during the peak vacation season provide even more revenue upside.
LESS WEAR AND TEAR – Short-term rentals, by their nature, are properties where guests don’t bring furniture, fixtures, and other markers of someone putting down roots. Other than the scuffs that the wall and coffee table might take from suitcases, the house will have less wear and tear. The main area where maintenance will be required is housekeeping (no one wants to stay in a dirty house).
FLEXIBILITY – A short-term rental offer the ability to block off dates that you absolutely don’t want guests around. For instance, are you having a family visit for the holidays or do you want the house and yard to yourself in the summer? No issue, just make these dates unavailable for guests to book.
CHALLENGES FACED BY SHORT-TERM RENTAL PROPERTIES
REPAIRS AND MAINTENANCE – As a landlord of a short-term rental, you need to be on top of making repairs and taking care of maintenance in between guest visits. This means that not only does price matter when evaluating contractors, but also timeliness. While it’s no biggie for a handyman to come to make repairs or do routine maintenance when a long-term tenant is home, this is a no-go for short-term tenants.
PROPERTY MANAGEMENT – The advantage of short-term renters is that the damage they tend to cause is quite small because there are no large furniture pieces to move in and out. However, the disadvantage is that the need for minor maintenance and deep cleaning is constant. If being a hands-on maintenance person is not for you, then property management services will need to be used. The cost of a short-term rental property manager can be as low as 10% of the daily room rate and as high as 50%, depending on the property size and market.
HIGH COMPETITION – Short-term rental properties have three main competitors: 1) hotels, 2) long-term hotel residences, and 3) other short-term rental properties.
The high competition in the short-term rental markets means that enterprising landlords must view the marketing and re-pricing of their property as a full-time job.
OFF SEASON LOSS – The biggest disadvantage of putting of short-term rentals is that customers can be far and few between during the off-season. The impact of the off-season on the daily rate and the daily occupancy means that short-term landlords must carefully budget their cash flow during the peak season to ensure that it will cover the off-season.
FINAL THOUGHTS
So, which is the best option for you? A long-term rental property or a short-term one? The answer to that question depends on your goals and what you hope to achieve with your rental property. If you’re looking for stability and a consistent income stream each month, a long-term rental might be the way to go. But if you want more flexibility and don’t mind putting in a bit more work each month, then a short-term rental might be better suited for your needs. In the end, it all comes down to what works best for you and your business. Have you decided yet which type of rental is structured right for you?
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