When it comes to getting started in real estate, you can pursue many ways to grow your wealth. For example, you can buy and flip houses, invest in commercial property, or go the traditional route and rent out a home or apartment.
If you decide to invest in rental properties, you have two main options:
- Long-term rentals, where you sign a lease with a tenant and have them live in your property for months or even years.
- Short-term rentals, where you rent out your place on a site such as Airbnb or VRBO for just a few days or weeks at a time.
Let's look at the pros and cons of each type of rental.
Steady income vs. higher income potential
Long-term rentals come with long-term leases that typically run for a year or more. That means the landlord has a guaranteed income stream for at least that amount of time. The steadiness of this situation may help you budget and forecast your rental income.
You also don't have to worry about finding tenants as often, since they'll be living on your property for an extended period.
On the other hand, a short-term rental offers the chance to make more money overall. This situation occurs because you’re typically able to charge a higher per-night rate than you can for a long-term rental.
So, when you are calculating rental income, usually short-term rentals make more money.
Saving on utility payments vs. saving on evictions
In most long-term rental situations, the tenant pays utilities. This may help you save money each month, since you won't have to pay for water, electricity, or gas.
On the other hand, short-term rentals mean you can skip the headache of evictions, which can be costly for landlords with long-term leases. If you're renting out your house on Airbnb and don’t like your renter, you have the solace of knowing that the troublemaker will soon be gone.
It is rarely that easy to get rid of a bad tenant in a long-term lease, as the renter might fight you every step of the way.
Pro tip: Offset the cost of monthly services when you pay with the best credit cards for utility bills.
Saving on cleanup vs. quicker renovations
Tenants in a long-term rental generally are responsible for keeping their rental unit clean until their lease ends. If a light bulb needs to be changed or the carpet needs vacuuming, the tenant usually takes care of it. So, they will spend cash on cleanup supplies and time doing the housekeeping, not you.
On the other hand, with short-term rentals, you will be cleaning up the unit after every rental. This situation may take up a lot of your time, and you may even have to hire someone to do it for you.
Then again, with a long-term rental, the tenant can do damage that may go unrepaired over a long period of time. When the tenant’s lease finally expires, you may find that what could have been a small problem has morphed over time into a big headache.
With short-term rentals, you can more easily spot developing issues and fix them before they become expensive.
Pro tip: Collect rewards and points you can redeem for other purchases when you use the best credit cards for home renovations to spruce up your rental.
Less spent on advertising vs. use of the property
With a long-term rental, you rarely have to spend a lot of money advertising your property. This situation may help you save a significant amount of money each year.
Contrast that with a short-term rental, where you might have to regularly spend money to advertise your getaway.
On the other hand, a short-term rental will offer at least some days when it is vacant and available to the owner. That means if you own a property or cottage in a popular tourist area, you may use the place for your own vacation when you aren't renting it out.
For example, let's say you own a property in Orlando that you rent out on Airbnb for $350 per night. You can use it as your vacation home when you're not renting it out, instead of booking an expensive vacation elsewhere. This can be a great way to offset the costs of owning a second property.
So which type of rental makes you more money? You will need to do the math to figure out which option is likely to leave more cash in your pocket and which aspects of being a rental property owner you’re willing to deal with.
If you're looking for a more passive income stream, long-term rentals might be the way to go. But if you're looking for ways to boost your bank account, short-term rentals could be a better option. Whichever you choose, do your research beforehand to know what to expect.
FinanceBuzz is not an investment advisor. This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice.
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