Which Type of Rental Has the Best Returns - Short-Term, Mid-Term, or Long-Term Rentals?

WHAT IS THE DIFFERENCE?

Short-Term Rental Property: A short-term rental property typically refers to accommodations that are rented out for a brief duration, ranging from a few days to a few weeks. These properties are often sought after by travelers, tourists, or individuals in need of temporary housing. Some common examples of short-term rentals include vacation rentals, Airbnb listings, and VRBO listings.

Mid-Term Rental Property: A mid-term rental property falls between short-term and long-term rentals in terms of duration. It generally refers to rental agreements with a duration of a few months to a year. I typically think of them as being between 3-9 months as a rule of thumb. Mid-term rentals often cater to individuals who require housing for a medium-term stay, such as those on work assignments, students attending a semester of studies, or individuals in the process of relocating. They offer a compromise between the flexibility of short-term rentals and the stability of long-term rentals.

Long-Term Rental Property: A long-term rental property refers to accommodations that are rented out for an extended period of time, ranging from one year or more. It is characterized by longer lease agreements and tenants who intend to stay for a more prolonged duration, such as individuals or families seeking a permanent residence or stable housing for an extended period.

**Note - It's important to note that the specific timeframes and definitions can vary depending on local regulations, market conditions, and individual preferences. Some locations may have specific rules and regulations that define short-term or mid-term rentals based on the length of stay or the type of rental agreement.

INVESTMENT RENTAL PROPERTIES:

As a real estate agent, I have the opportunity to work not only with primary residence buyers and sellers but also with investors. Many first-time and seasoned investors love to ask the question, “What type of rental property sees the highest returns?

Now, generally speaking, I can answer this pretty straightforwardly. However, there are quite a few layers to consider when thinking through rental property options and what each investor’s goals are. Here are a few questions I like to ask to understand better what their goals are and which option may align best.

1. What monetary investment are you looking to make upfront?

2. Are the locations you’re interested in investing in better equipped for one over the other? Learn how to make smart real estate investments here.

3. Will you be managing the property? If so, does your career allow for flexibility around property management and communication?

4. Do you plan on using the property at all for personal use or is it solely to generate income and/or create a tax shelter?

WHAT ARE THE PROS + CONS?

Understanding the pros and cons of each rental term can truly help a real estate investor narrow down what may be the best fit for their needs. Here is a high-level recap of each that can help get you started.

Short-Term Rentals Pros:

1. Higher rental income potential: Short-term rentals often generate higher rental income per month compared to long-term rentals due to the higher daily rates and flexibility it allows its renters.

2. Flexibility for adjusting rental rates: With short-term rentals, you have the flexibility to adjust rental rates frequently based on demand, seasons, or events. This allows an investor to maximize profits and make adjustments as needed.

3. Personal use opportunities: Short-term rentals can offer the benefit of using the property for personal vacation homes or as a second home when it's not occupied by guests.

Short-Term Rentals Cons:

1. Higher management and operational costs: Managing short-term rentals requires more effort and resources due to frequent turnovers, furniture investment, marketing, wear and tear repairs, guest communication, and housekeeping.

2. Potential for high vacancy periods: Short-term rentals can experience seasonal fluctuations and periods of low occupancy, leading to higher vacancy rates and potential income loss. There is no guarantee on monthly income with short-term rentals.

3. Legal and regulatory challenges: Some locations have strict regulations and permits for short-term rentals, which may require additional compliance and potentially limit your rental options. In addition, many cities are restricting the minimum number of days a rental property may be rented out for, so staying on top of city guidelines is important.

Mid-Term Rentals Pros:

1. Steady rental income: Mid-term rentals provide a more stable rental income compared to short-term rentals, as tenants typically stay for several months.

2. Reduced turnover and vacancy costs: With longer lease terms, mid-term rentals have lower turnover and vacancy costs compared to short-term rentals, reducing operational expenses.

3. Less management-intensive: Mid-term rentals require less frequent guest turnover and generally involve fewer guest-related management tasks, making them less time-consuming for investors.

Mid-Term Rentals Cons:

1. Limited market demand: Mid-term rentals may have a narrower market compared to short-term or long-term rentals, as they target individuals with medium-term housing needs. Typically larger metropolitan areas due best with mid-term rentals due to the need for temporary housing with traveling nurses, students and executives.

2. Potentially lower rental income: Mid-term rentals typically have lower rental income compared to short-term rentals due to the longer lease terms and lower monthly rates. However, investors tend to see a bit higher premium than a long-term rental due to the flexibility it is offering to its travelers.

3. Less flexibility for rate adjustments: With mid-term rentals, it is challenging to adjust rental rates during the lease term. This limits your ability to respond to market changes and makes it even more important to plan ahead as best as possible for your cities activities that year.

Long-Term Rentals Pros:

1. Stable and predictable income: Long-term rentals provide a stable and predictable rental income stream, as tenants usually sign leases for a year or more.

2. Lower turnover and maintenance costs: With longer lease terms, long-term rentals experience lower turnover and maintenance costs, reducing expenses and hassle for the owner. In addition, there is typically no need for furniture or supplies which reduces the upfront and maintenance investment.

3. Fewer legal and regulatory challenges: Long-term rentals generally face fewer legal and regulatory challenges compared to short-term rentals, simplifying the management process.

Long-Term Rentals Cons:

1. Lower rental income potential: Long-term rentals typically generate lower rental income per month compared to short-term rentals due to the lower monthly rates.

2. Limited flexibility: Long-term rentals involve longer lease commitments, limiting your ability to adjust rental rates or make changes to the property for an extended period of time.

3. Longer vacancy periods: When a long-term tenant moves out, the tenant search may take a couple weeks or more. Investors should proactively ask for 30-60 day notice from their tenants if they plan to move, to reduce vacancy periods and minimize income loss while searching for a new tenant.

When deciding between short-term, mid-term, and long-term rentals, it's important to consider your investment goals, market dynamics, local regulations, and your own preferences as a real estate investor. Each option comes with its own set of opportunities and challenges, so it's crucial to conduct thorough research and analysis before making a decision.

MY BIGGEST PIECE OF ADVICE

If you are new to investing, you will want to spend some time understanding what your time is worth. With real estate investing, the opportunities are endless financially. What’s important to monitor is the value you place on your time and where it is best suited for the life you want to lead. Analyzing this may help you determine which investment strategy best suits you and/or if you need to plan to hire help at a certain point and account for that in your finances.

Wondering how much you can afford? Looking to buy real estate and curious how much you qualify for? Grab your complimentary mortgage calculator here to see how much you can afford on your next purchase

All the best!

Jen

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