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Short Term Or Long Term Rentals-Which Is Better

Performance Property Real Estate Question

Q: We are buying a rental property. Do you think we should do short term rentals or get a long term tenant? Issac, Green Brook, NJ

A: The best course of action in terms of choosing to rent short term or long term depends on your goals because short term and long term rentals each has different advantages and disadvantages for both owners and renters. You should also familiarize yourself with the law in the area where your rental property is located and check for ordinances that may prohibit or limit short term rentals. In general, short-term rentals (STRs) offer higher earning potential through flexible pricing but require more active management, have higher operational costs, and potentially stricter local regulations. In general, long-term rentals (LTRs) are a more passive investment with more stable and more predictable income, but offer less flexibility of use and have a lower revenue ceiling.

Advantages of short-term rentals (STRs):

  • Higher income potential: By adjusting prices based on demand, STRs can often generate more revenue than long-term rentals, especially in peak periods in tourist or high-demand areas.
  • Greater flexibility of use: You can use the property yourself during vacant periods, which isn’t an option with a long-term lease.

Disadvantages of short-term rentals (STRs):

  • Higher management effort: STRs require constant marketing, guest screening, communication, and cleaning, which is more demanding than long-term rentals.
  • More frequent maintenance: Frequent guest turnover means a property must be cleaned and minor repairs addressed more often.
  • Higher operating costs: The extra effort translates to higher costs, with property management & maintenance costs for STRs sometimes reaching up to 30% of collected rent, compared to 8-10% for long-term rentals.
  • Stricter regulations: Many cities have specific rules governing STRs, including zoning laws, occupancy limits, and special taxes.
  • Increased property risk: More guests passing through the property can mean more potential for issues like theft, property damage, or other problems.
  • Income volatility: Earnings can fluctuate based on the season, local events, and demand, unlike the steady income of a long-term lease.

Advantages of long-term rentals (LTRs):

  • More passive income: (LTRs) typically require less day-to-day management, making them a good choice for those who want a more passive investment.
  • Predictable revenue: Leases in (LTRs) provide stable, predictable income over a longer period.
  • Fewer regulatory hurdles: (LTRs) generally involve fewer local regulations than short-term rentals but that varies from local market to market.

Disadvantages of long-term rentals (LTRs):

  • Lower income potential: Rent for (LTRs) is set for a longer period, so you can’t take advantage of high-demand pricing.
  • Less flexibility: A long-term lease in (LTRs) gives the tenant control over the property for the lease duration, meaning you cannot use it yourself.

Thanks for your question, Isaac.

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