Which is a better investment, a short-term rental or a long-term rental? Here’s the quick answer: The returns on short-term rentals are superior but come with elevated risk. Long-term rentals provide steady returns that are less susceptible to economic shifts and current events.
For more detail on how long-term and short-term rentals compare, read on. Below, we’ll compare these two investment styles based on six key areas—returns, risk, setup, management, permitting, and location—to help you decide which type is right for you. Remember, it all depends on your risk tolerance and the stage that your investment business is in. There’s no one-size-fits-all option.
Which has the Highest Returns?
Returns on short-term rentals are usually much higher than returns on comparable long-term rentals. Generally, people will pay more per night for hotel-like accommodations than they will for their primary residence.
To see this concept in action, let’s take a look at a property we recently purchased in Gatlinburg, Tennessee. This three-bed, three-bath cabin would have commanded a monthly rent of about $3,000 if rented as a long-term rental. But as a short-term rental, we’re able to charge $325 per night. Factoring in an estimated occupancy rate of 65%, our estimated monthly revenue is over $6300 ($325 * 65% * 30 days/month). That’s over double the revenue the property would generate as a long-term rental! Even considering the additional expenses involved in running a short-term rental, we still come out way ahead.
Pro Tip: You can estimate revenue for a short-term rental with the following equation: Revenue = Nightly Rate x Occupancy % x 30 Nights/Month
You can see this concept in action in urban areas and tourist destinations throughout the U.S. Pick a city, and check a few listings on Airbnb. Use the above equation to turn nightly rates into an estimate of monthly revenue (to get an occupancy percentage, look at the host’s calendar, and divide the number of days they are booked by 30). Then, search Zillow for similar properties that are listed as long-term rentals. You will find that in most urban centers and vacation hotspots, short-term rentals outperform long-term rentals.
Long-term rentals might generate more revenue than short-term rentals in locations with a weak tourist draw or in cities where Airbnb is highly regulated or banned outright. Long-term rentals are also a solid option for a long-term strategy to get ahead of short-term rental market saturation:
Pro Tip: Buy property in “up and coming areas”—locations in the early stages of gentrification. You should be able to get in at a low price, as the market does not yet reflect the coming urban renewal. Initially, your property might not work as a short-term rental, especially if the surrounding area is noisy, has high crime, or is otherwise undesirable. That’s fine—rent it as a long-term rental until the surrounding area improves. When conditions are better, you can convert it to a short-term rental. You’ll be combining the high nightly rates of short-term rentals with a low purchase price, resulting in a very high return relative to the cash put into the deal. A few years of patience can take you far.
Which is the Safest Investment?
The necessity of housing makes long-term rentals feel like a safe bet. Everyone needs a place to live, right? And with the current shortage of housing supply in many parts of the U.S., owners of long-term rentals are unlikely to experience extended periods of vacancy. Long-term rentals typically have year-long leases, with many tenants renewing for several years in a row. In return, landlords get years of steady income.
Long-term rental investing is not risk-free, however. As a long-term landlord, you may occasionally deal with problem tenants who need to be evicted. The eviction process can become a time-consuming headache, and could result in some expensive legal bills as well. You may also deal with extended periods of vacancy. For example, if you have a tenant that moves out in November or December, you might be vacant for a month or two. (Few want to move during the holidays.) Each month of vacancy corresponds to an 8% loss in annual revenue (not to mention possible advertising costs to get it on the market), so when long-term landlords have a move-out, they need to hustle to find a new tenant as quickly as possible.
However, vacancy is of greater concern to owners of short-term rentals. Remember, revenue for a short-term rental can be estimated with the equation Nightly Rate x Occupancy % x 30 Nights/Month. If occupancy is low, it doesn’t matter how solid your nightly rates are—revenue will be lacking as a result.
With short-term rentals, guests usually stay for a few nights at a time. Highly desirable properties often get booked a few months out, but beyond that, if your calendar is empty, nothing is guaranteed. And whether or not you make money in a given month, you’ve still got a loan that needs to be paid. (By the way, JOD doesn’t recommend paying cash for investment properties. Here’s why getting a loan is the way to go.)
Regardless, the great thing about owning real estate is that you’re in control of your investments. Unlike the owner of a stock, whose only options are to buy, sell, or hold, owners of real estate are in the driver’s seat. They can adapt and be nimble in the face of an economic disaster like Covid. In fact, JOD actually began its short-term rental investing business right in the middle of the pandemic. A few months into the pandemic, many people who were working from home were desperate to get away and work from a new location. We were able to target this market segment by requiring a minimum 30-night stay at one of our properties. What we could charge for a 30-night stay in one of our properties was far greater than what we would have received as a long-term rental. (If you have a 30-night stay at a short-term rental, you get to combine the high nightly rates of short-term rentals with 100% occupancy. Do the math on that!) The point is, even though the world was in bad shape, our creativity was able to make us a good bit of money throughout the turmoil while providing beautiful homes for people who needed a place to stay.
JOD believes that while short-term rentals as a whole do carry more risk than long-term rentals, the risk can be minimized through research, careful decisions, and skillful management. And even if some extreme event caused the short-term rental market to crash, you still own the underlying real estate and structures. You can always convert to a long-term rental to cover your mortgage while you ride out the storm. Then, when the storm has passed, you can jump back into the short-term rental game.
Which is the Easiest to Set Up?
The initial process of setting up a property is essentially the same for short-term and long-term rentals. You need to make sure all appliances (washer, dryer, fridge, stove, etc.) are working, likely put in new carpet, and probably do a fresh coat of paint.
If you’re running a long-term rental, you’re pretty much done at this point. All that’s left is to find tenants (who need to be vetted for criminal background and financial stability) and have them sign a lease. You can hire a realtor if you are struggling to find a tenant but they’ll charge you one month’s rent as commission. We recommend you list your property on Zillow first to see if this generates enough applicants.
However, if you’re starting a short-term rental, you’ve only just begun. Setup is probably one of the most involved parts of running a short-term rental. Luckily, you only have to go through the initial setup process once per property, and once it’s done, it’s done. And each time you do it again it gets easier as you become more confident in what to look out for.
A short-term rental must be furnished and provide everything a guest might need during their stay, including (but not limited to) a couch, a TV, a dining table, coffee table, beds, linens, art, rugs, decor, silverware, plates, towels…and the list goes on. You don’t want to cheap out either—our strategy is to do it once and do it right. Typically, it costs JOD about $5,000 to get a property fully set up and ready to list on Airbnb. Five thousand dollars may sound like a lot, but the following example will show you why it is money well-spent:
We purchased a property with $1,200/month in fixed expenses—a $1,000/month loan payment and $200/month in taxes and insurance. In our estimation, the property would have earned $1,500/month as a long-term rental, resulting in $300 per month in profit. This is fine, but not great. The moment we have a problem, like a broken water heater, we’re eating into months of profit to get it fixed. And if we have just one month of vacancy, we need four months of profit to pay our fixed costs. This long-term rental deal isn’t necessarily a bad one—in today’s market, it is a reasonable strategy for long-term rental investors to settle for a few years of breaking even in anticipation of appreciation and better returns down the line. But, as you’ll see in a second, we do way better running this property as a short-term rental.
As a short term rental, this same property commands a rate of around $125/night, while occupancy hovers around 65%. Our estimated monthly revenue is 30 Days x 65% Occupancy x $125/night, which equals about $2,500 per month. That’s 67% more revenue than we’d get with the long-term rental—an extra $1,000 per month! When treating this property as a short-term rental, we have the same $1,200/per month in fixed costs. However, our monthly revenue is $2,500, resulting in a monthly profit of $1,300. With $1,300 per month in profit, we can cover the $5,000 of start-up costs in the first four months of operation. Once that’s taken care of, we see incredible returns—4x the profit we’d make as a long-term rental. So, even though the $5,000 in start-up costs may seem high, you can see that the short-term rental game is well worth the price of admission.
Pro Tip: Turn someone else’s long-term rental into your own short-term rental. Using a strategy called “lease arbitrage,” you sign a year lease on an apartment, then furnish it yourself and get it set up on Airbnb. This is a great way to learn the short-term rental ropes when you don’t have a ton of money to invest, but be warned: many long-term landlords prohibit this practice so we recommend you get permission first.
Which is Harder to Run and Maintain?
If you own a long-term rental, the bulk of the work you do will be finding qualified tenants, getting them through the process of signing a lease, and making sure the apartment is cleaned and repaired between tenants. With long-term rentals, you’re responsible for collecting rents yourself, and you’ll need to set up a system for collecting payments. When you have tenants who don’t pay on time (or at all) being a landlord can quickly become a thorn in your side. You’ll have to assess late fees, and if things don’t improve, you may even need to go through eviction proceedings—potentially expensive, and definitely not fun.
If you run a short-term rental using Airbnb or Vrbo, the process of collecting payments is more straightforward. Guests pay ahead of time, so there’s never any risk of not getting paid. Airbnb and Vrbo do collect a nominal fee of 3-5% of nightly rates, but we consider these fees to be well worth it, considering the large returns we achieve with short-term rentals.
Whether you’re renting as a short-term or long-term rental, you’ll deal with requests from whoever is staying at your property. With short-term rentals, you’ll get similar requests over and over again. You can create automated responses for these using a tool like Guesty, and over time they become easier to handle. As a long-term landlord, you’ll deal with more one-off requests that can demand big chunks of your time. For example, you might have a broken HVAC unit or a water heater that needs to be replaced. These can be harder to deal with as a long-term landlord, as you’ll have to work with tenant schedules to get a contractor in there to fix the problem. With short-term rentals, if you have a major appliance break, you can work maintenance in between guests. Short-term rentals also make it easier to keep up with preventative maintenance—it’s easier to block off a few days and perform preventative maintenance without having to work around tenants or guests.
There’s no denying that short-term rentals are more work during the initial setup process. But once setup is taken care of, short-term rentals become surprisingly easy to manage. The JOD strategy of using a real estate manager makes the process of setting up and running our short-term rentals much more manageable. (If you’re not familiar, our real estate manager is the brain of our real estate operations. Among other things, she gets our short-term rentals set up, manages their day-to-day operation, and assists guests with all of their needs.)
From her perspective, the bulk of the work is in the setup process. Once these short-term rentals are up and running, they’re actually quite autonomous. We achieve a high level of autonomy through 1) our use of the Guesty management platform to automate the bulk of our guest communications, and 2) by empowering our cleaning team to do solid work with minimal input from us.
Which has Easier Licensing and Permitting?
Short-term rentals and long-term rentals are both regulated, but short-term rentals tend to be regulated more strictly.
Some cities require landlords for long-term rentals to be licensed, but most do not. Owners of long-term rentals may also face rent control in certain areas, which limits how much they can raise rents each year—not ideal for investors interested in maximizing profits. However, rent control is not common in the U.S. (you’ll mainly find it in densely populated cities like San Francisco and New York). Long-term rental investors should always research licensing, rent control, and other local regulations before committing to buy in a new location.
Short-term rentals usually have stricter regulations than long-term rentals. Many cities in the U.S. require a permit for anyone who wants to rent their property as a short-term rental. A business license may be required as well. Many cities only allow short-term rentals in certain districts and may limit the number of nights a short-term rental can be rented out or the total number of short-term rentals allowed in the city.
Don’t be discouraged by the rules and regulations regarding short-term rentals. Just do your research ahead of time, and avoid the costly mistake of buying a property in a location where you can’t get a short-term rental license. If you don’t, you may be forced to rent at a long-term rental rate that barely pays your bills.
Which Locations are Best for Each Investment Type?
Long-term rentals are a good investment in many cities throughout the U.S. The success of these investments is determined by your ability to purchase property at a favorable cap rate. If you know how to calculate real estate investment returns, you can do your homework and find solid deals throughout the country.
If owning a short-term rental is your goal, there are some locations you’ll want to avoid entirely. Some cities have banned Airbnb altogether, while others, like Breckenridge, have placed a moratorium on new short-term rentals because locals are running out of places to live.
Some investors will choose a location, then select an investment type based on what is best for that location. However, at JOD, we prefer to actively seek out the best locations in the U.S. to own short-term rentals. We love short-term rentals so much that we go wherever the best short-term rental opportunities are, then deploy the strategies we’ve developed for remote management.
On paper, long-term rentals have a ton of advantages. They’re less risky, easier to set up, easier to maintain, and easier to insure. However, the returns that they provide aren’t even close to the returns you can potentially earn with a short-term rental. When you invest the “JOD Way,” short-term rentals are a no-brainer. By hiring a dedicated real estate manager and leveraging the power of property management automation software like Guesty, you significantly cut back on time required for management. The increased time required to manage short-term rentals is often cited as a con of investing in them—but in our experience, this “con” is overblown. Sure, a significant amount of time and money is required during the start-up phase—but once the wheels are in motion, our short-term rentals are basically “set it and forget it,” as long as you have a dependable system for communicating with and supporting your guests Another bonus is getting to be your own guest. After months of research and setup, treat yourself to a free vacation in your own short-term rental!