Long-Term vs. Short-Term Rentals: What You Need to Know

The top real estate investing gurus have mixed opinions on which real estate investing strategy offers the best possible return for your investment: long-term or short-term rentals.

Over the last decade, short-term rentals have become an increasingly popular alternative to the traditional, long-term buy-and-hold strategy that many investors hold dear. With the rise of digital platforms like Airbnb, VRBO, and HomeAway, short-term rentals can offer big profits when managed correctly.

But despite a handful of advantages that short-term rentals can offer, they are not without substantial risk. Moreover, there is a reason why long-term rentals have stood the test of time.

Focusing your money on long-term rentals is a more tactful approach to sustainable returns. Here’s a take on the pros and cons of both short-term and long-term rental models and why Doorvest backs a long-term approach to real estate investing.

What You Need to Know: Short-Term Rentals

There is a reason why short-term rentals (STR) have become much more prevalent in the last decade amongst real estate investors. At the end of 2021, the average annual revenue per full-time short-term rental unit hit an all-time high.

Industry revenue is projected to increase to $113.9 billion by 2027, which is a significant jump from the estimated $17.6 billion for 2022.

Nevertheless, many experts feel the underlying root of the current short-term rental market growth is pent-up travel and tourism spending coming off the recent COVID-19 pandemic. In fact, if inflationary pressures continue to be relevant, household budgets could retreat from discretionary spending in these areas once more.

The broader questions are: What makes short-term rentals appealing, and what are some challenges with this investing model?

For starters, short-term rentals do have the potential to charge higher rents which could lead to better monthly cash flow and higher profits. One of the reasons why STRs may also have greater income potential is that you have a larger resident pool to draw business from.

Additionally, short-term rentals offer a lot of flexibility with how the property is managed. For example, if you want to use the property as your personal vacation home at times throughout the year, you can simply black out those dates as ineligible for bookings.

Short-term rentals certainly have some advantages over long-term rentals; however, they also have several major drawbacks. While earnings potential could be greater for STRs, income can be extremely volatile. That is because turnover is exceptionally high, which can make cash flow extremely volatile month-to-month.

Similarly, short-term rental performance is often heavily dependent on the location they reside in. Your monthly earnings could be erratic if you are not in a high-traffic vacation hotspot or tourist destination.

Income volatility can be extremely problematic when you finance your short-term rental. The bottom line is that your lender doesn’t care how your cash flow fluctuates monthly; they still expect you to pay your monthly mortgage payment on time.

Additionally, many key areas where STRs are prevalent have strict short-term rental guidelines related to how you rent your property, which properties are eligible to be rented, and how you can manage them. While short-term rentals offer flexibility in some areas, they can be restrictive in others.