Rental properties are the most popular type of investment properties among beginner real estate investors. But which rental strategy should you be using to achieve your goals when investing in real estate?
As a beginner real estate investor, a crucial part to guarantee the success of your investment is to choose the right rental strategy that suits your personality and will help you achieve your investment goals.
In the world of real estate investing, there are two main rental strategies to choose from: short-term rentals and long-term rentals.
Each rental strategy has its own advantages and disadvantages depending on the location you’re investing in, your personality as a landlord, and the type of property that you want to invest in.
So, in this article, I will be talking about the advantages and disadvantages of each rental strategy, and a tool that can help you choose the optimal rental strategy to use when investing in real estate.
What’s a Rental Strategy?
There are two main types of rental properties in real estate depending on the rental strategy that you want to use.
The rental strategy here refers to the duration of the lease when you rent out the property to a tenant. Therefore, the two types of rental properties are:
- Long-term rentals
- Short-term rentals
As their names suggest, short-term rentals are properties that are rented out for short periods of time, which range from a nightly basis to a weekly basis. Long term rentals, on the other hand, are rented out for longer durations that typically last from several months to several years.
This time dynamic for each rental strategy is extremely crucial when investing in rental properties, and it can drastically affect the way you operate your investment property, the amount of money it can generate, and several other aspects that need to be taken into consideration.
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Long-Term Rental Strategy
Long-term rentals, also known as traditional rentals, are properties that you can rent out to a tenant for several months or several years at a time.
The biggest advantages to investing in long-term rentals are as follows:
Long-Term Rental Occupancy Rate
Traditional rentals generally have much better occupancy rates than short-term rentals.
This is because the tenant will be signing a lease agreement that guarantees they will be occupying the property and paying the rent for the duration of the lease, which can be several months or several years depending on how you want it to be.
For this reason, you will find that most traditional rentals have around 100% occupancy rate since you only need to find one tenant to rent out the property for an entire year or a number of years, which gives you fewer things to worry about.
Long-Term Rental Property Management
Since long-term tenants typically treat their rental property as their own and will use it as a primary residence for a long period of time, they will usually handle most aspects of the rental property management, which saves you a lot of time and effort, or a lot of money on hiring a property management company to do the work.
This is a major advantage to traditional rentals and the number one reason why they are the most popular type of investment among beginner real estate investors.
Disadvantages of Long-Term Rentals
The most noticeable disadvantages of long-term rentals are mostly related to their profitability.
Since long-term rentals are sometimes rented out for multiple years at a time, the landlord will often be stuck with the same rental rate that was set when the property was first rented out. This prevents the landlord from increasing the rent if the area’s rents appreciate and the average rental rate becomes higher than it was at the time of signing the contract.
In the long run, this could result in financial losses or lost opportunities where the landlord could have increased profits significantly, but couldn’t do so.
Another disadvantage that long-term rentals have is the lack of utility.
Generally, when you purchase a property for the purpose of renting it out traditionally, you will not be able to use the property for any other purposes, like a second home or as a vacation rental.
Short-Term Rental Strategy
Short-term rentals are considered a new concept in real estate, and they were made popular with the emergence of short-term rental services like Airbnb.
Airbnb rental properties are special in that they can be rented out for much shorter periods of time, which range from a single night to a couple of weeks.
Short-term rentals are becoming very popular in today’s real estate investment market due to their higher potential for profits depending on their location and your management of the property.
Generally speaking, short-term rentals have several advantages over traditional rentals in terms of their profitability and utility. However, there are a few disadvantages to short-term rentals that can greatly affect their performance and make you think twice before investing in them:
Short-Term Rental Seasonality
One of the most noticeable aspects of short-term rentals is their seasonality.
Most short-term rentals are seasonal properties. Meaning their performance will increase/decrease during the different seasons. Certain seasons will bring in more demand and potential tenants to your property, while you might not be able to find any tenants to rent the property during the rest of the year.
This also makes it harder to analyze short-term rentals and predict their future performance and returns because not only will the property’s occupancy rate be volatile, but the rental rate that you set on the property will also have to change between the seasons to match the level of demand on the market.
Short-Term Rental Legal Issues
The single biggest disadvantage to Airbnb rentals is their legality.
While Airbnb rentals make for an excellent investment and provide new options for landlords and tenants alike, they’re not legal everywhere.
There has been an increasing number of cities around the world that have been placing restrictions on renting out a property for the short term. For this reason, investing in short-term rentals might not be viable at all in certain locations, while their profitability has been severely hindered in others.
Before investing in any short-term rental, make sure to research the market and be aware of all laws and regulations that can affect the performance of your Airbnb rental.
Short-Term Rental Property Management
Finally, the biggest advantage that long-term rentals have over short-term rentals is related to rental property management.
Traditional rentals do not require a lot, or any, rental property management; short-term rentals, on the other hand, require a lot of time, effort, and possibly money to be invested in managing them and taking care of the tenants.
This is because short-term rentals have a much higher turnover rate, and they are often treated by the tenants as hotel rooms instead of primary residences, so the tenants are less keen on taking good care of the property and its conditions.
This means that you will have to handle all aspects of the property management, including screening and choosing the tenants, helping them move in, maintaining the property, answering the tenants’ calls and requests, hiring people to do the repairs and cleaning…etc.
Alternatively, you can opt for hiring a rental property manager to do all of these things, which will cost you around 8-12% of your rental income.
Want to know how much your property can earn as a short-term rental? Use our free Airbnb calculator.
A Tool for Analyzing the Rental Strategy
Knowing all of this, it becomes obvious that there is much to consider when it comes to choosing the right rental strategy to use for achieving your investment goals.
But this is the reason why we’ve created Mashvisor.
Mashvisor is a real estate analytics platform that can help you find, analyze, and compare rental properties in the US and learn about the return on investment that you can achieve from investing in each property.
To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.
Since the platform focuses on rental properties, the analytics we provide include both rental strategies, allowing you to see which rental strategy has the higher potential for each property and each market.
If you don’t know where to start your search, this is the perfect tool for you. Use it to analyze each and every property that you want to consider and see what the return on investment will be with each rental strategy before you commit your money to it.