Property owners buy and rent out vacation homes for many reasons. For some, they provide a place to generate income in the summer months and a relaxing getaway in the winter. For others, vacation rental investments are just a few of the many properties that generate income and add equity to the owner’s portfolio.
When you are ready to rent out your vacation home, you have one of two routes to follow. Do you want to put your vacation home on Airbnb and rent your home out for a night or two at a time? Or do you want to list your home and secure long-term tenants for the next 12 months?
Let’s explore the pros and cons of short-term and long-term leases.
Pros and Cons of Short-Term Leases
Pro: You can still use your property.
If you have a vacation rental property, it may be tempting to take a vacation every now and again. Property owners have a lot more flexibility when they only rent to short-term tenants who will come and go. Once the tenants are gone, owners are free to use the property as they wish.
Even if you want to check in on a property, you may need to give your long-term tenants specific notice. When you only rent out your property short-term, you can block out dates ahead of time for your use or do to in-depth repairs.
Con: Your property may be vacant for half of the month.
Occupancy rates for AirBNBs vary greatly between different cities. Property owners in San Diego get twice as many bookings at property owners in Miami. 50% vacancy means that you get half as much income (or even less) than a long-term rental with occupants who pay full price every month.
Pro: Low occupancy rates may still cover your costs.
For some property owners, an occupancy rate of 66% may not be worrisome. If you set your prices high enough, you may be able to cover your mortgage, utilities, and other expenses with just a week or two of renting out your property. Property owners in a hot market or popular tourist destination have it made: they can use their property, generate income, and keep their property pristine as short-term renters move in and out.
Here’s an example. If your mortgage and utilities cost $1,500 each month, and you rent out your property for $200 a night...it only takes eight nights to make a profit.
These prices may seem outrageous for someone in say, Bozeman, Montana, but it’s more than reasonable in a hot city like Houston or Austin.
Con: Costs of Amenities
If you want your property to stand out amongst the other places in the area, you will need to provide (and pay for) amenities. Apartments without wifi are stricken from searches pretty quickly; if you can’t offer parking or a working HVAC unit, forget about it.
Budget in the cost of providing and maintaining these amenities to your tenants in order to keep your occupancy rates up.
Pros and Cons of Long-Term Leases
Pro: Steady tenants will pay rent - and utilities.
The drawbacks of short-term rentals are often the benefits of a long-term rental. Once you secure tenants, you shouldn’t have to worry about finding new ones for a few months, or even a year. These tenants won’t just pay rent - most long-term leases also ask tenants to pay utilities.
As a landlord, you might have to pay other fees (HOA fees, property taxes, etc.) but if you price your property right, you can cover this and still generate income.
Con: Risky tenants could rack up big costs.
Not all tenants are wonderful. In fact, some can be pretty crappy. If you rent your property out long-term, you run the risk of getting stuck with crappy tenants for at least a few months.
Risky tenants come with costs. What happens when your tenants stop paying rent or cause hundreds of dollars in damages? Before you start renting out your property, take the proper steps to ensure that your tenants will be held accountable for breaking your property or missing payments.
Pro: Good tenants make everything easier.
On the flip side, great tenants are a landlord’s dream. They pay their rent every month and keep the property clean. Property owners can easily make a budget with the guarantee that they will have income coming in each month.
Con: Once tenants are locked in, so are you.
If you want to buy a new rental property every year, you may want to eventually move markets. Long-term leases generally offer less flexibility; you can’t sell, lease, or use the property as you please. Property owners who don’t plan on moving any time soon may see this as an advantage, but more excited investors who want to invest around the country may find themselves tied down to their current tenants.
What is most profitable? It depends on the market.
If you are looking to make a bigger profit, you will have to consider the market.
Property owners in hot markets can find tenants who will cover the month’s mortgage payment and utilities with two weeks’ worth of payments. They will generate even more profit with higher occupancy rates. In slow markets, a long-term lease will not only ensure that income is coming in - it ensures that you get the income in the first place.
Before you decide to rent out your property to short- or long-term tenants, take a look at what properties around you are charging on Airbnb, Craigslist, and other websites. Use this number to budget how much you could get with a short-term rental at varying occupancy rates.
Remember, your profits don’t just come from tenants. If you can buy (or renovate) a vacation rental property for a cheaper price, you will have more money in your pockets to help you through times with low occupancy.
How to Purchase a Vacation Rental Investment For Less
Don’t let high real estate commissions eat into your investment. When you are ready to buy an investment property, consider reaching out to a buyer’s agent who offers home buyer rebates. These rebates allow you to make a higher bid on a hot investment property without paying any more cash.
If you are looking to sell your investment or sell an existing property to purchase an investment, you don’t have to pay your agent a full 6%. Pay a flat fee to get a high profit on your sale without sacrificing the quality of your real estate agent.
How do you find these real estate agents? We’ll handle that for you. Contact us for more information about how you can get the most profit out of your vacation rental investment.