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?
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%
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?
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
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.