Investing in real estate can be a great way to generate passive income, and one of the most popular ways to do so is through rental properties. However, when it comes to investing in rental properties, there are different options and strategies to consider, including long-term rentals, medium-term rentals, and short-term rentals. Each type of rental strategy comes with its own set of pros and cons, which we'll explore in this article.
Long-Term Rentals
Long-term rentals are defined as properties that are rented out for a period of six months or more. These types of rentals are typically leased to tenants who are looking for a place to call home, and are willing to commit to a longer-term lease.
Pros:
Stable Income: Long-term rentals offer a stable source of income, as tenants are required to pay rent on a monthly basis for the duration of their lease.
Lower Maintenance Costs: With long-term rentals, tenants are responsible for the upkeep of the property, which means lower maintenance costs for the landlord.
Lower Vacancy Rates: Because tenants are committed to staying for a longer period of time, long-term rentals typically have lower vacancy rates compared to short-term rentals.
Cons:
Limited Flexibility: Long-term rentals offer limited flexibility as landlords are locked into a lease agreement with their tenants for an extended period of time.
Slow to Respond to Market Changes: Long-term rentals can be slow to respond to market changes, such as fluctuations in rental rates, because landlords are locked into a lease agreement.
Medium-Term Rentals
Medium-term rentals are properties that are rented out for a minimum of 30 days or more but will typically range between three to six months. These types of rentals are often used by individuals who are in transition, such as people who are relocating for work, or students who are studying abroad. Some other common examples may be traveling nurses near hospitals or corporate employees on short-term assignments.
Pros:
Higher Rental Income: Mid-term rentals often command higher rental rates compared to long-term rentals, which means a higher income for landlords.
Increased Flexibility: Mid-term rentals offer increased flexibility as landlords are not locked into a long-term lease agreement with their tenants.
Cons:
Higher Turnover: With shorter lease periods, mid-term rentals have a higher turnover rate, which means landlords will need to spend more time and money finding new tenants.
Higher Maintenance Costs: Because tenants are not required to stay for a long period of time, they may not be as invested in the upkeep of the property, which could result in higher maintenance costs for landlords. Example: Landlords now may have to pick up the expense of utilities, instead of passing this expense to a long-term tenant.
Short-Term Rentals
Short-term rentals are properties that are rented out for a period of less than three months. These types of rentals are often used by travelers who are looking for a place to stay while on vacation or business trips.
Pros:
Even Higher Rental Income: Short-term rentals can command significantly higher rental rates compared to long-term and mid-term rentals, especially in popular tourist destinations.
Increased Flexibility: Short-term rentals offer increased flexibility as landlords can rent out their properties on a daily or weekly basis.
Easier to Respond to Market Changes: Because landlords can adjust rental rates and availability on a daily basis, short-term rentals are more responsive to market changes.
Better Tax Advantages: Depending on how long the property is rented out between tenants, the income may be considered qualified business income and can actually offset your active W2 income. Speak to a tax professional for more details.
Cons:
Higher Turnover: With a high turnover rate, landlords will need to spend more time and money cleaning, restocking, and finding new tenants.
Higher Maintenance Costs: With short-term rentals, landlords are responsible for the upkeep of the property, which could result in higher maintenance costs.
More Regulation: Short-term rentals are often subject to more regulation compared to long-term rentals or medium-term rentals, which could limit the ability of landlords to rent out their properties.
It is important to also consider not only the cost and return on investment, but also how much time you may need to allocate towards actively managing the property. In general, as you move down the spectrum from longer term rentals to shorter term rentals, your time and effort involved increases as a result. While you can try your hand at all of these strategies throughout your real estate investing journey (and diversify your real estate portfolio in doing do), it is imperative that you stick to ONE strategy in the beginning and master it before moving on to a different one.