Co-founder & CMO at Onerent, a real estate services and PropTech company serving property owners and renters in 7 rental markets.
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Now more than ever, it’s critical to be strategic about investing your hard-earned money. As the largest asset class in the world, real estate remains a top choice for investment. But, with a lot of options, what type of real estate investment should you choose?
It pays to take a look at big names in the industry and see how they’re faring in light of recent events. As seen globally, travel restrictions and social distancing have slowed down the sharing economy, including short-term rental giants like Airbnb.
From helping 9,000 renters in seven unique rental markets, I’ve observed Airbnb hosts are finding alternative business models to stay afloat, and many are shifting to managing their properties as long-term rentals. Of the $6 billion assets we’ve managed in over 700 cities, our operations teams are seeing more short-term property owners preferring long-term tenants. On the flip side, many corporate renters we place are now demanding longer leases.
These are several in-depth analyses for what makes long-term rentals strategic for your investment.
Stable Demand For Long-Term Shelter
If you’re banking on your property for a consistent return of passive income, going long term is your best choice. Short-term vacation rental homes have suffered from bookings cancellations due to travel restrictions imposed since the pandemic. The situation was aggravated when several states temporarily banned short-term rentals.
The changing culture regarding work and commute has also contributed to the demand for long-term rentals. As companies such as Twitter roll out new “work from home forever” policies, I predict that many renters will opt for longer leases to settle down at home to work.
We are also seeing a trend of renters ditching big cities and renting homes in suburban areas with lower costs of living. Even after the pandemic dies down, I expect that the emerging “new normal” will continue to influence a shift in consumer behavior.
Higher Occupancy Rates, Less Turnover
With stable demand for long-term rentals comes steadier occupancy rates. Renters stay longer in long-term rentals, unlike the nightly or weekend bookings for vacation rentals. For example, during pre-Covid-19 times, the average Airbnb host had a 48% occupancy rate.
The longer your property is vacant, the more money you burn — and events like a pandemic can shift the market and wreak havoc on your short-term rental investment. With long-term rentals, your vacancy costs decrease, and you earn more by placing a long-term tenant. The consistent occupancy rate gives you a steady stream of rental income, which, in turn, bodes well for your investment.
Financial Security
The alleged higher returns from short-term rentals’ nightly bookings come at the cost of lower occupancy rates. This may place your financial security at risk.
The vacation rental market has set high expectations for good amenities in prime locations. The competition is intense, especially given the vast number of short-term rentals. This pressures hosts to list their properties at lower prices to attract more bookings. Add in the repairs and cleanings necessary to maintain a high-quality rental, and all these factors contribute to pulling down your potential income.
Meanwhile, investors whose tenants have leases that last for a year or more will save money on marketing, screening and maintenance. This ensures consistent cash flow regardless of the season.
Lesser Maintenance Expenses
To maintain a pristine vacation rental, investors need to set aside a budget for maintenance to cover housekeeping costs each time a customer checks out. Airbnb hosts have their fair share of horror stories of guests trashing vacation homes. They also lose income from bookings they cannot accept while the home is undergoing repairs or cleanup.
Renters staying in your home for the long term are more likely to work with you to keep your property in good shape. After all, it is their home for the duration of the lease term, whether that is months or years.
Long-term renters share the responsibility for basic maintenance work as agreed in the lease. Any major damage will also be settled before move-out. Not only do you save on maintenance costs, but you also keep your property’s market value up.
Less Work, Less Hassle, More Time
Managing a property not only takes money, but also time and effort. All the benefits discussed above reflect one point: Long-term rentals requires less work than short-term ones.
Owning a short-term rental takes much more than creating a listing. Hosts deal with the reality of replying to inquiries, attending to reservations, waiting on guests and managing reviews each time they take in a new guest. In my experience with long-term rentals, it will only take a few hours of work per month — even less if you have a property manager.
Getting Started
To get started, determine if your property has the potential to succeed as a long-term rental. Ask yourself if you’re a more hands-on or hands-off manager. Long-term rentals are more passive and hands-off, which allows you to adopt a set-it-and-forget-it mentality with management and maintenance. You’re required to check up on your property every few months for maintenance inspections, but rent collection can be easily automated for passive income.
Will you move back into the home in a few years? Some owners prefer that flexibility in having a second home. Securing a high-quality tenant you can trust is key with long-term rentals. Also ask if your city has complex laws and permits that apply to short-term rentals.
Lastly, determine if you are willing to risk having more tenants through Airbnb or a single long-term tenant. A single tenant group living in the home for months at a time guarantees fewer strangers living in your home, but also can be challenging to manage if they are underqualified.
Regardless of which option you choose, one fact remains: People will always need a place to live. With stable demand, higher occupancy rates and financial security, long-term rentals have the edge over short-term vacation homes for your real estate investment.
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