Rental Property Investing: Vacation Rentals vs. Long-Term Rentals
Short term, Airbnb-style rentals have been gaining a lot of attention lately, especially in major metropolitan cities. The question is, how do they stack up as an investment strategy for long-term income property investors? Are they more profitable? Or are long-term annual rentals still the best way to go?
Vacation Rental Property Investing
Many real estate investors and entrepreneurs have discovered that there are very juicy rental rates to be found by leasing their units to short-term renters for a day, week, or month. A whole new crowd has jumped into this industry to capitalize on this. It is a trend we are seeing more and more each day.
When rented as a hotel, property owners can often get far higher average rates than as annual rentals. What may rent for $1,000 a month to a regular long-term tenant, may rent for the equivalent $3,000 per month on Airbnb. There is clearly a lot of value in this short-term rental strategy, but there can be some drawbacks.
These rough figures can be very misleading. They don’t account for higher vacancy rates, taxes, wear and tear, and property management costs. All of which can take a big bite out of those anticipated rents.
More importantly; experienced investors know that short-term and vacation rentals can be highly volatile. Short-term rental rates can fall just as fast as they rise, due to demand. There are many causes including the economy, new lists of top vacation spots, storms, gas prices, and other factors. All of which can catch short-term rental property owners by surprise. Those who have paid high prices for these assets, assuming they’ll be able to rent at these high rates, can be caught short, and find themselves in tough financial situations if they are not careful.
If the numbers won’t work on a deal as an annual rental, be very, very wary. Research around popular message boards and forums frequented by users of Airbnb, VRBO, and more.
Long-Term Rental Property Investing
In contrast, long-term rentals offer real estate investors more consistency, stability, and reliability for their investment portfolios. Good long-term tenants can also save a lot on property management, maintenance, and marketing. That can even out the spreads a lot. Even more so when investors are purchasing homes at far lower prices. It doesn’t take a genius to figure out that the yields on an $80,000 home that rents for $1,000 a month in the Midwest, may produce better yields than a condo on the coast that rents for $3,000 a month, but costs $500,000 or more. It is important to run these numbers before deciding on a short term or long term strategy
Both vacation rentals and long-term annual rentals can produce income and attractive returns for investors. It’s all about the numbers. Unfortunately, many are not doing the full math, or are looking far enough forward when trying to jump on the Airbnb bandwagon. Do your math well. Get a second opinion from an expert. Make sure your choice matches your personal financial goals and timeline.