Short-Term vs. Long-Term Rental: Pros & Cons

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Short-Term vs.

Long-Term Rental:

Pros & Cons

I’ve been getting this question a lot lately from friends and clients: Should I Airbnb my investment property or do a long-term lease? While there isn’t a one-size-fits-all answer to this question, I would like to cover the broad-strokes pros & cons to each option.

WHAT IS A LONG TERM RENTAL?

Let’s start with some basic definitions. A long term rental property is rented out to the same tenant(s) for an extended period of time (6+ months). Typically, these properties are leased unfurnished with tenant(s) paying for all the utilities (gas, water, electric, sewer, trash pick-up, internet, etc.) Due to the nature of the extended lease terms, the owner receives consistent and predictable income from his or her tenants.

WHAT IS A SHORT TERM RENTAL?

A short term rental property is typically a furnished home that you lease for a short period of time (one night to a few weeks); often utilizing booking platforms such as Airbnb & VRBO. The turn-over is frequent and irregular, therefore the occupancy is not easily predictable. The owner often pays all the utilities, internet, and sometimes even additional amenities such as Netflix, Hulu, etc. The owner plays a significant role in the bookings, cleaning, lawn-care, turnover, and stocking of the property supplies. Short term rentals with hospitable owners and higher online rankings tend to attract more short term guests and produce more income.

WHAT ARE THE PROS & CONS OF LONG TERM RENTALS?

Pros:

  • predictable/measurable income

  • tenant is responsible for his or her belongings

  • aside from property maintenance calls and collecting rent, the owner is fairly hands-off

  • low time commitment compared to a short term rental

  • the quality of a long term relationship with a tenant can be built over the course of their lease

  • the owner only needs to vet one tenant for a long period of time, rather than vetting multiple tenants in a single month

  • if hiring a property manager, fees typically land close to 10%

Cons:

  • depending on the location and condition of the property; a long term rental may be less profitable than a short term rental

  • the owner typically visits the property only a small handful of times throughout the lease agreement

  • when a maintenance issue arises, the owner must respond quickly, where-as with short terms rentals, the owner may have a large window of time in between bookings to make a significant repair

WHAT ARE THE PROS & CONS OF SHORT TERM RENTALS?

Pros:

  • depending on the location and condition of the property; short term rentals can be much more profitable

  • the owner can more frequently visit the property to ensure it is being taken care of

  • the owner typically has more time to resolve smaller maintenance issues if there are gaps in the bookings

Cons:

  • monthly income is less predictable

  • owner pays for all the furniture and runs the risk of damages to personal belongings

  • the owner pays for all the utilities, internet, lawn-care, etc. (large overhead)

  • short term rental platforms typically side with the tenants if there is a dispute/issue

  • more time is involved with scheduling cleanings, managing bookings, and fielding tenant questions

  • if hiring a short term property manager, fees typically land close to 20%

A CASE STUDY

The short term rentals that perform best are typically close in proximity to a commercial corridor, centrally located to a downtown area or plenty of outdoor space, while also having plenty of bedrooms, bathrooms, and living space. Conversely, long term rentals that perform best actually have these identical features. So which option makes the most sense? So let’s look at an example:

Let’s say you have a 3 bed; 2 ba property in Fountain Square Indianapolis, IN - depending on the condition, square footage, and location - the property could be rented for $1800/month with the tenants paying for all the utilities and lawn care. If the property were a short term rental, you could be bringing in $3,000/month - however you would be paying for all the utilities ($300), internet/streaming services ($50), lawn care ($50), and cleaning fees ($750). And don’t forget, you would be spending several hours each week coordinating bookings and cleanings - leaving your net profit close to about $1850/month.

In this scenario, I would likely advise a client to pursue a long term rental option. Nevertheless, there are multiple variables to my advice. Everyone has different measures for how they value their time. The income for a short term rental on some months could be much higher than I am projecting. And some folks genuinely find enjoyment and fulfillment by hosting short term tenants.

Everything ultimately boils down to: (1) what are your personal values, (2) what are your financial goals, (3) what is the condition/location of your property, (4) and what is your realtor and the market data telling you.

Choosing the Right Agent

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The numbers don’t lie.  According the National Association of Realtors, there are 50,000+ new members per year nationwide.  80% of new agents leave industry after two years or less. The world of real estate has a massive revolving door of incoming and outgoing realtors.  It goes without saying that partnering with the right brokerage and realtor is extremely important!

So what exactly should you be looking for in an agent? While this list isn’t exhaustive, it’s a great place to start:

A great agent sets your expectations.

The process of buying or selling a home is not always easy.  It can require more emotional energy than you expect, cost more money than you budgeted, and demand more time than you planned.  Due to the ever changing state of the real estate market, realtors have a responsibility to set client expectations for the process from the very beginning of the relationship.  In today’s “hot market” in Indianapolis, the key to a sustainable home search is to be patient but willing to move quickly when the right opportunity arrives. Homes in Indianapolis can be sold in three hours or three months.  Expect to be patient but move quickly!

Indianapolis homes can be a few month old or 130 years old.  There’s a completely different set of expectations an agent should navigate with their buyer if a home was built during Benjamin Harrison’s presidency vs. Donald Trump’s.  While newer construction methods are more efficient, 130-year-old lumber (if properly maintained) has a structural integrity that far surpasses the fast-growing species of today’s pine lumber.

Far too often, the wheels of phenomenal deals fall off the transaction vehicle when buyers enter the inspection phase (I’m a little too proud of that metaphor...).  With 100 year old homes, agents are responsible to set the expectations for their clients before the home inspector even steps foot in the house. Termite damage, knob and tube wiring, lead based paint - the list of “surprise” defects that old homes include should be communicated to buyers; as well as solutions for navigating those items.

A great agent tells you the truth.

Although licensed agents throughout Indianapolis have the same access to comparable properties, market statics, and data - how this information is communicated to clients may vary. Data can be easily exaggerated to lead buyers into less than ideal acquisitions.  Partner with an agent who will tell the truth of the data, as well as guide you through the alternate interpretations of the data. Market corrections are cyclical. And while we don’t have a crystal ball into Indianapolis’ future, we do have data and market information to guide buyers to make confident, informed decisions.

This spring, while I was rehabbing a duplex in Bates Hendricks, I met an investor who was flipping the single family home next door.  He told me he was going to list his 1500 square foot property (3 bed; 2 bath) for $375,000 and receive multiple offers within a week. For a moment, I bit my tongue - knowing that 20+ other investors were doing the exact same thing within 0.1 miles of his property.  After hearing him rant and rave about the greatness of his property as well as his market expertise, I decided to tell him the truth: He would not be able to sell the property for more than $275,000 because of the neighborhood’s over-saturation of flips, the low square footage of his property, the lack of a garage, and the low-grade of finishes he chose.  He told me I was an idiot. His property is still active on the market today - now listed for $225,000.

A great agent knows your city.

Indianapolis is a unique city.  Each neighborhood has different sets of values, identities, and dreams.  Sometimes these identities vary street by street. A great agent will help you navigate the nuances of the city.  Did you know that some neighborhoods provide rehab assistance? Did you know that some lenders provide specialty products for owner-occupant homes in qualifying areas?  One size does not fit all in Indianapolis. Partner with an agent who knows not just your city or neighborhood but your exact street - to properly equip you with the resources to maximize the execution of your purchase.

A great agent maintains your emotional capacity.

Everyday, great deals fall apart because of a lack of maintaining a healthy emotional capacity.  The home buying and home selling process is EMOTIONAL. “But I’m not an emotional person.” Me neither, but the process of buying or selling can cost more emotional energy than you are budgeting.  Our team works to execute the deals in a way that preserves emotional energy. We come equipped with a team of transaction managers, listing specialists, showing coordinators, and inspection repair teams.  For first time home buyers, the process can feel overwhelming because there are so many “unknowns”. We’ve build out our team structure to maintain everyone’s capacity and set appropriate expectations with clients to make overwhelming processes manageable.  There are no transaction, inspection, or listing scenarios we haven’t walked through as team.

PLACEMAKING: What is it? And why do we believe in it?

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Every few years or so, the real estate community gets hooked on a new buzz word. Experiential retail, densification, PropTech, the “agile” workplace - the list goes on. This year is certainly no different. But don’t get me wrong. As an agent and real estate developer, I appreciate terminology that provides a framework for the work we are trying to accomplish within our communities. Without the proper definitions however, these buzzwords can do just as much negative damage as positive development. This brings us to PLACEMAKING: Becoming a city of inclusion and connection.

 

WHAT is placemaking and WHY is it important?

Placemaking is an intentional effort to build around our community’s already existing identity while harnessing a neighborhood’s hopes and dreams for the future. Placemaking goes beyond simply developing physical spaces. It encompasses communal efforts to provide human interaction and connection that create a culture of inclusion. Without intentional placemaking, cities develop around faulty designs that fail to promote walkability, social equity, and sustainable living.  A lack walkability creates household isolation. An absence of missional social equity develops into hostility. A failure to use intentional design can negatively affect healthy living. Indy is certainly not immune to the negative side-effects of nonexistent, or under-executed placemaking.

 

What does successful placemaking encompass?

- Designed walkability

- Cultural opportunities and engagement

- Inclusive neighborhoods that promote safety and hospitality

- Green spaces and environmental sustainability

- Supported Education Systems

- Multi-Mobile Transportation Network

- Entrepreneurial Opportunities and Small Business Support (i.e. co-working spaces)

- Messaging/Technology

 

Why is Indianapolis fertile ground for placemaking?

It doesn’t take long for an Indy newbie to realize that Indianapolis operates less as a “big city”, and more as several small towns that form one city. Despite being a 15th largest city in the United States, we operate as a collection of neighborhoods with distinctive identities (one of the reasons I dearly love my city). Much of placemaking is most successfully executed on a neighborhood, street-view level. But don’t get too cozy - 75% of the state of Indiana will transition to Indiana’s major cities over the next 22 years. This trend means effective placemaking is incredibly important for our communities today!

 

Why is Indianapolis going to struggle with placemaking?

Hoosier Hospitality. We love it, we live it. But despite our hospitality, we suffer from an incurable case of "Hoosier Humility”. We fail to market our city with pride. We are one of the top growing tech cities, and yet our city has only grown 6.4% over 8 years, which unfortunately means our current growth rate is not sustainable for our future. We draw crowds of workforce talent to our city, yet our retainage of talent is a struggle. We need to help people fall in love with our city. I bear responsibility in that my tribe of realtors has a duty to help newcomers engage in community connectedness and placemaking not only during the home search process, but even beyond the closing table.

 

Indianapolis is one of the least walkable cities; which means we have low pedestrian "friend-ability” (AKA too many pedestrian danger zones). Safety is a huge burden on our walkability scores.

 

Indianapolis also has major hurdles to overcoming in improving the lives of folk who are aging-in-place. Some of the neighborhoods that most desperately need placemaking and connectedness are the neighborhoods that NeighborLink most actively serves the elderly with home repairs and addressing health department violations.

 

What component is often missed from the placemaking conversation?

Inclusion, inclusion, inclusion. Placemaking is not just for the millennial or the middle class or the city’s new residents. Real placemaking must involve the hopes and aspirations of current residents rather than just the residents the city is trying to attract. Placemaking needs a healthy balance of place-keeping. Placemaking solutions that might be ideal one people group, may not be effective for everyone. (side note: I LOVE the Lime & Bird scooters, but I have yet to see a senior citizen scootin’ around to get to that ‘hard-to-reach’ Kroger. Within framework of placemaking, we cannot call this an effective solution for everyone) You get my point - one size doesn’t fit all.

 

What can you personally do?

Placemaking doesn’t have to be sexy or monumental, but sometimes it does take place on a grand scale - like developing a community garden or petitioning to demolish a dangerous vacant building that poses a threat to the kids who play on the street. Other times, it can be light, quick, and cheap. Sometimes it’s as simple as organizing a 2-hour neighborhood cleanup. Sometimes its as simple as being the connector between a neighborhood boy that mows lawns to an elderly neighbor that struggles to walk down their own front steps. Sometimes it’s simply asking ourselves the question: "What is one thing I can do this week to add value and hope to my neighborhood?”

 

Meet your neighbors.

Brainstorm simple solutions.

Advocate for the needy.

And get around passionate people who are doing it!