Why short-term rentals are a safer investment than long-term rentals
Let’s paint a scenario, you have acquired a 5 year old single family house for rental income, it’s currently in good condition and vacant. Your options are short-term rental(STR) vs. long-term rental(LTR). A short-term rental is defined as 28 days or less. This is a minimum 5 year buy and hold investment for your portfolio. Your net objectives are return on investment, cash flow and long-term asset quality, but you don’t want to be involved in day to day operations.
What is the best way to achieve your objectives LTR or STR?
The best way to answer this question is to weigh the pros and cons of each and compare.
Long-term rental pros:
security of income
familiarity with tenancy
minimal day to day involvement
Long-term rental cons:
typically a low return (6%-10%) on investment
single tenant risk if tenant can’t pay rent
Short-term rental pros:
increased cash-flow (at least 2x market rent)
asset stays well maintained
no single tenant risk
risk is broken up into smaller time increments
Short-term rental cons:
uncertainty of income
higher upfront investment (furniture, etc..)
more day to day involvement
dealing with a 3rd party booking channel
Now that we have an overview of the pros and cons of each type of income producing strategy we can compare. The main reason why you would choose to do STR over LTR is increased cash flow, although with more reward comes more perceived risk, dealing with the uncertainty of an open calendar with no bookings can be scary. Also, an STR comes with more work, the day to day cleaning and communication tasks can be daunting. From your investors’ lens you conclude that using your asset as an STR hits your objectives. You will have better cash-flow (as long as you can deal with some occupancy uncertainty) therefore better return on investment. The asset will be well maintained because its for short-term use, keeping it well maintained is directly correlated to guest review feedback which in turn has a direct effect on pricing and revenue. Whereas, with long-term rental, maintenance is not correlated with revenue in such an immediate and direct way. Simply stated, you have no choice but to keep the asset well maintained with STR if you want to achieve revenue goals.
What about dealing with the day to day operations, booking channels and guests when it comes to STR?
The solution here is implement the right people, process and pricing strategy to run your STR in a profitable way. You’re an investor, you have no time or desire to implement all of this. The solution can be even more simple, which is choosing the right property manager or co-host to handle all of these responsibilities. The right co-host will add value to your investment and not require much of your time. There are many property managers/co-hosts in the market today. The right one will pay attention to top line revenue, operating costs, asset quality and beat the LTR market by at least 20% after expenses.
How is STR a safer investment strategy than LTR?
The covid-19 virus has changed the landscape of the residential real estate market and renters at least for the time being. The economic uncertainty, loss of jobs and business shutdowns due to the virus have impaired many renters ability to pay rent, the prevailing government reaction has been to implement eviction moratoriums, this mean that landlords cannot evict non-paying tenants but are still required to meet their debt and tax obligations, this makes for a very uncertain and risky environment for landlords of LTR’s. Whereas, in the world of STR’s there are no evictions, anyone who stays past their reservation time is considered criminally trespassing and can be easily removed from the property. In a world gripped by pandemic people are looking for shorter term stays, less monetary commitment, versatile housing with no contact access, privacy and space. Whether or not peoples housing habits will change for the long run is still yet to be determined but from an investors point of view STR makes more sense monetarily and is a lower risk approach to getting the most out of your residential real estate investment.
You do STR for better cash flow and return on investment.
The right co-host will add value to your investment and money to your bottom line.
LTR can be a more risky investment with the uncertainty caused by covid-19.
Thanks for your time and attention,