Short or Long-Term Rentals

Rental properties come in all shapes and sizes… Did you know that the “traditional” long-term rental isn’t the only way to go? Short-term rentals are also a great option when you’re thinking of ways to maximize value from your asset.

A Long-term rental property is typically occupied by a tenant with a 12-month lease whereas a short-term rental property is typically rented on a daily, weekly, or month-to-month basis. Short-term residential rentals include vacation rental homes, renting by the room and a single-family rental home with a tenant on a month-to-month lease.

Advantages of a long-term rental

• Rental income is more predictable - Rental income is consistent throughout the entire year when a tenant is on a 12-month lease and pays the rent timely. 

• Tenant turnover is lower – It is likely to find a good long-term tenant that is willing to extend their lease.

• Easier to finance this type of property – This applies when a buyer is in the process of purchasing a home that is intended to be a rental property. Buyers may receive more attractive interest rates and financing terms when a Lender assesses the long-term rental as it would typically have less risk in comparison to the of vacancy and higher repairs that short-term rentals pose.

• Lower operating expenses - Renters on a long-term lease generally take care of basic items such as cleaning the home, doing yard work, and paying for their own utilities. These rentals also typically have less wear and tear, because tenants tend to take better care of a property that they think of as their home instead of a hotel room.

• Economical Property Management -  Property Management fees for a long-term rental property typically range between 7%-10% per month. 

Disadvantages of a long-term rental

• Limitations to raising the rent - Lease agreements typically call for the rental rate to remain the same through the term of the lease, which means the potential cash flow from a rental property is limited by the rent price outlined in the long-term lease agreement.

• Difficulty of performing routine maintenance – It can be harder to catch and repair minor problems before they become big and expensive with a long-term rental property.

• Risk of renting to the wrong tenant – A long-term rental usually has a 12 month period, so it’s crucial to carefully screen prospective tenants. Evicting a tenant on a long-term lease can be time consuming and expensive.

Advantages of a short-term rental

• Higher potential gross rental income – Short-term rental rates can be adjusted to meet market trends more frequently. Depending on local market demand and conditions, a short-term rental property may generate 2-3 times the amount of monthly rent compared to a long-term rental.

• Increased flexibility - Some homeowners might be on the fence about what to do with their properties. A short-term rental agreement helps to keep options open if a homeowner is thinking about selling.

• Less wear and tear/ better maintenance - Tenants only stay for a limited length of time, which allows for more opportunities to conduct routine maintenance and cleaning.

Disadvantages of a short-term rental

• Lack of consistent rental income – Although there’s a potential to earn more with a short-term rental, there’s always the risk that the home will sit vacant for an extended period of time.

• Higher operating expenses - Properties rented short-term typically need to be fully furnished, well-maintained, and may need to be consistently stocked with personal items such as sheets, towels, toilet paper, and cooking supplies.

• HOA Policies and Local laws might result in restrictions - Depending on the HOA or city, occupancy may be limited to a maximum period of time, and owners may be required to collect an occupancy tax for short-term rentals, similar to a hotel room tax.

• Costly Property Management - Property Management fees on a short-term rental can be as high as 30% of the rent collected, because there is more work involved due to tenants moving in and out more frequently.