Many expert real estate investors consider traditional rentals one of the best ways to make money in real estate. The real estate housing market is very diverse, and often times beginner real estate investors wonder which the best rental strategy for them is: traditional rentals or short-term rentals. You’re going to hear many different answers to that question. However, one answer shared by expert real estate investors would be to invest in traditional rentals.
What Are Traditional Rentals?
Traditional rentals are rental properties that are purchased for the sole purpose of renting them out for 6 months or more. The owner of the property signs a rental lease (agreement) with tenants who are renting the house, and then the tenants would pay monthly rent to the landlord, which can be used to cover the expenses of the property, its mortgage payments, property taxes, and property insurance.
Long-term rentals are frequently used for single-family homes and townhouses. It is one of the most common and profitable ways to invest in real estate because, regardless of the state of the economy, the current US housing market, and the specific location, people will always need places to live in and to call home. Thus, traditional rentals are definitely one of the best real estate investments which no real estate investor should ignore.
Related: Learn How to Buy the Best Rental Property in Town to Make Money in Real Estate Investing
Why Are Traditional Rentals So Popular?
1. Positive Cash Flow
The main goal of real estate investors is to make money and generate positive cash flow. In traditional rentals investment, this goal is very attainable as long as a tenant can be secured for a long-term lease and all expenses are paid off as they should be. If you’re looking for long-term rentals that generate positive cash flow, be sure to use Mashvisor’s property search.
2. Real Estate Appreciation
Not only can you receive immediate profit with long-term rentals through positive cash flow, you will also earn profit through real estate appreciation. Since traditional investments are long term, their value increases through time. The value will increase regardless of rent prices; therefore, if your plan is to sell the investment property after a number of years, you will possibly make a huge profit.
3. Consistent Rental Income
When you invest in short-term rentals, many factors like location, season, and tourist attraction determine the rental income which makes it not as reliable as you would like. On the other hand, long-term traditional rentals generate more consistent rental income because tenants interested in long-term properties plan on staying in that location for a longer period of time; thus, they sign long-term leases, which ensures stability and consistency for the rental income.
4. Tax Benefits
Investing in traditional rentals means that real estate investors are able to deduct expenses off their tax forms. These benefits are one of the motivations for people to get involved in real estate.
5. Pay Off Debt, Plan for Retirement
With a steady stream of positive cash flow, traditional rentals can help you with major financial decisions like paying off debts you have such as mortgage, student loans, or car loans with the money you make from long-term rental properties. Additionally, you could build a retirement plan from the rental income, especially if you plan to invest in multiple long-term rentals.
Related: Tips on Rental Property Financing for Beginner Investors
Traditional Rentals vs. Airbnb Rentals
When choosing between traditional rentals and Airbnb rentals, you have to make sure that you select the best rental strategy for you. Here we are going to help you compare the two rental strategies based on some of their main aspects.
1. Rent Rates
Airbnb rentals generally have better rental rates because you have more tenants renting for short periods of time. On the other hand, in traditional rentals, you have to lower your prices as much as possible to make a better deal that satisfies your tenants.
In addition, as an Airbnb host, you can take advantage of the weekends and high seasons when demand is high by raising your price. This doesn’t apply to traditional rentals; you can’t just charge extra or increase rent during the lease period.
Renting out your investment property on Airbnb might have better financial potential, as you always get paid once your guests have checked in. In traditional rentals, alternatively, you might find yourself chasing your tenants in order to get paid. But a good feature of traditional rentals is the steady rental income: you know when you are going to receive your payment and how much it will be.
3. Occupancy Rates
In long-term rentals, you ensure that your rental property is occupied for the whole duration of the rental agreement. But in Airbnb rentals, you have short-term guests and there is no guarantee that you will have the same occupancy rate all the time.
Location is the main driver of profitability in the real estate investing business. Thus, as a beginner real estate investor, you should carefully choose the location of your investment property, regardless of whether it is for traditional rentals or Airbnb rentals.
Understandably, the most profitable locations for traditional rentals in the US housing market are those which allow you to spend as little as possible on your rental properties while receiving as much as possible from them in the form of rental income.
Related: The 10 Most Profitable Locations for Traditional Rentals in the US Housing Market at the End of 2017: Cash on Cash Return
5. Legal Aspects
If you’re renting a property and then rent it out to Airbnb guests, you could be breaking the law and get evicted. Many cities require you to register or get a permit for short-term leasing. With traditional rentals, you don’t have to worry about legal issues as much.
6. Property Management
Traditional rentals offer peace of mind when it comes to managing the property. There is less work required from owners than there is with short-term rentals. Long-term landlords only need to worry about having the property meet the minimum standards, such as providing furniture and amenities that are in a good shape.
7. Furniture Expenses
Airbnb rentals might cost a little more than traditional rentals because you have to furnish your investment property, whether it is a house or just a room, which will add to the expenses. In traditional rentals, on the other hand, you will mostly rent out unfurnished, which means you will only be responsible for the main facilities in your rental property, such as water and electricity among others.
Long-term rentals are some of the best real estate investments out there. They have great benefits and purchasing them is not too difficult; as long as you qualify for a mortgage, you will be set. If you are ready for buying your next investment property, check out Mashvisor’s property search engine and investment property calculator which help you choose the best investment property and the optimal rental strategy for it.