Short-Term Rentals vs Long-Term Rentals: Diversifying Your Portfolio
Current real estate investors have numerous investment options that surpass those of previous generations. They have created new ways for properties to generate revenue, while traditional leasing methods provide consistent and reliable income streams. Investors want to know which rental strategy works better for their business: short-term rentals vs. long-term rentals (STR vs. LTR).
The answer isn’t one-size-fits-all. The different models offer separate benefits and hazards, together with their unique operational requirements and potential earnings. Real estate investors need to understand the different types of assets because this knowledge helps them create strong investment portfolios. Let’s break down Short-Term Rentals vs Long-Term Rentals income further within the rental terms.
Understanding the Core Difference
The major difference between the two rentals comes down to the length of the rental. STRs are typically rented on a day-to-day or week-to-week basis. They are usually vacation homes or furnished apartments targeted at travelers or businesspeople.
The LTRs are typically leased for periods ranging from six months to 12 months or longer. The tenants sign a “standard lease” and treat the property you are leasing as their primary residence. Aside from the difference in short-term and long-term rental lease terms, these two types of rental properties operate differently.
Income Potential
Short-Term Rentals: Higher Revenue Ceiling
Due to their high revenue-to-month ratio, short-term rentals (STR) are a very attractive investment in both vacation and urban markets. Some advantages of STR include:
- Higher overnight rates
- Flexible pricing based on seasonality
- Adjustable rates for supply and demand
At the same time, occupancy levels depend on external market conditions, such as the local tourism market, as well as local economic conditions and weather. Therefore, a successful STR investment strategy relies heavily on several different factors:
- Location quality
- Market Demand Analysis
- Effective Marketing Strategy
- Dynamic pricing software tools
Long-Term Rentals: Stable Monthly Income
Long-term rental investments often provide steady, predictable monthly income. Some key benefits are:
- Steady income stream
- Less tenant turnover
- More predictable budgeting
- More favorable terms for lenders on underwriting.
Investors focusing on long-term rental investments provide an ongoing income stream and create stable, low-volatility performance.
Operational Demands
One of the biggest differences between short-term rentals vs long-term rentals is the level of day-to-day involvement.
Short-Term Rentals Are Management-Heavy
STRs are operated more like your own hotel. Management entails:
- Communicating with guests
- Cleaning and turnover
- Scheduling maintenance
- Furnishing the property (staging)
- Reviews/platform reputation
- Local compliance regulations
Long-Term Rentals Are More Passive
Long-term rentals require tenant screening, lease agreements, periodic maintenance, and rent collections. Once a qualified tenant has been placed in a long-term rental, the property will require very little management. With less tenant turnover, it requires less cleaning, staging, and marketing of the property. In addition, investors who want to grow their investment with minimum involvement find that long-term rentals are typically easier to create a system around.
Risk Profile: Volatility vs Vacancy Risk
When investing in short-term rentals vs long-term rentals, there are always some risk factors. However, there are different types of risk.
Short-Term Rental Risks
- Seasonal vacancy.
- Changing local regulations.
- The impact of economic downturns on travel.
- Guest damaging the property.
- Policy changes on the platform you are listing on (for example AirBnB).
Local governments are increasingly placing regulatory restrictions on short-term rentals by creating zoning laws, requiring licenses, and imposing occupancy taxes. These changes can have a dramatic effect on the profitability of your investment. The regulatory risk is one of the greatest concerns in today’s short-term rental investment strategy.
Long-Term Rental Risks
- Tenants’ ability to pay rent.
- Costs associated with eviction.
- Extended vacancies.
- Rent control laws in certain cities.
While long-term rentals are typically less volatile, a problematic tenant can cause long-term financial stress. Therefore, it is vital to thoroughly screen all prospective tenants and to have adequate reserves.
Furnished vs Unfurnished Economics
Short-Term Rental Expenses
Short-term rentals necessitate:
- Furniture & decor
- Kitchen essentials and utilities to be included
- Wi-Fi
- Cleaning services
- Platform service fees
Operating expenses will be significantly larger than long-term rentals. However, revenue potential could still exceed the long-term rentals with the right market.
Long-Term Rental Expenses
Basic maintenance of the property:
- Property taxes
- Insurance
- Sporadic repairs to the property
- Tenants typically pay utilities.
Start-up costs are much lower because no furnishing is needed. In terms of cost structure, long-term rentals are much simpler than short-term rentals.
Short-Term Rentals vs Long-Term Rentals Financing Considerations
Lenders view these property types differently in short-term rentals vs long-term rentals.
Short-Term Rental Financing
Typically classified as investment properties:
- May require a larger down payment
- Higher scrutiny on expected income
- Difficulty finding lenders who offer STR underwriting
- New STR loan products are emerging
Financing for Long-Term Rentals
- Easier income verification
- Lenders use a traditional underwriting model
- Predictable debt service coverage ratios
- Lenders feel safe with traditional leases
Leverage is a key part of your strategy, so financing long-term rentals is less hassle.
Market Sensitivity
In short-term rentals vs long-term rentals, economic conditions affect each model differently.
Regarding Short-Term Rentals
STRs are impacted by five main factors:
- The travel cycle associated with tourism
- Airline fares
- Downturns and economic turmoil
- Travel habits
- Discretionary travel is typically the first to be cut during an economic downturn.
Regarding Long-term Rentals
- Housing will always be necessary for people.
- Demand may decrease due to a downturn, but it rarely disappears.
This helps many investors use LTRs as a strong defensive basis for diversifying their rental portfolio.
Tax Considerations
Both STRs and LTRs may qualify for depreciation, ordinary expense deductions, and mortgage interest deductions. However, tax treatment can vary based on factors such as average length of stay, services provided, and whether the activity is treated as passive or non-passive under IRS rules.
Short-term rentals may also involve local lodging/occupancy taxes and different reporting requirements. Because the rules are fact-specific and change, consult a qualified tax professional.
Which Strategy Builds Wealth Faster?
Several different factors will affect the answer to this question, depending on, but not limited to:
- Location
- Manager skillset
- Risk aversion level
- Available Capital
- Local regulations
Given a strong tourism market, short-term rentals will generate faster cash flow and a higher return on investment than long-term rentals that yield over time, due to the instability. Because of this, many investors purchase both types of properties rather than choosing between short-term and long-term rentals.
The Power of Rental Property Diversification
Instead of deciding which model is superior for short-term vs. long-term rentals, consider where they fit in your portfolio overall. For example, a spreading-out strategy might look like 70% long-term cash flow from rental properties and 30% short-term rental property, producing better potential upside. This type of structure reduces income volatility, balances regulatory risk, provides a hedge against downturns in tourism, and offers stability and growth through diversification.
By balancing your income streams within this type of diversity, you limit the risk that travel demand will fall off, as long as you have long-term tenants paying their rent. On the flip side, if there are caps placed on rental increases, then you still benefit from the flexible revenue of STR. The combination of these two scenarios creates a very strong position.
When Short-Term Rentals vs Long-Term Rentals Make Sense?
Choose a short-term rental if:
- You’re located in a tourist-heavy area
- Legal restrictions favor STR development
- Can support operation management
- You have cash reserves
- Can accept fluctuations in income
- Short-term rentals reward active management of STRs.
Select a long-term rental if:
- You want a reliable income source
- Seek less participation in managing your property
- Have several properties to build on
- When simplicity in financing is important
- You consider the stability of your investment more important than the growth potential.
- Long-term rentals also provide steady returns over time.
Hybrid Strategy in Short-Term Rentals vs Long-Term Rentals
Investors may use multiple strategies with a single investment property for short-term rentals vs. long-term rentals.
Examples:
- Utilizing a long-term rental during the off-season and a short-term rental during high season.
- House hacking is living in one part of the building and renting the other part out short-term.
- Renting out furnished units mid-term to business professionals who travel.
Hybrid strategies require investors to be flexible and to have an effective plan to optimize revenue over time in short-term vs. long-term rentals.
Conclusion
There are debates surrounding short-term rentals vs. long-term rentals, but choosing which is better is not a big issue. Instead, it depends on how they fit into your overall investment strategy.
Smart investors often do not choose between the two types of properties. They invest in both types to create a portfolio of diversified rental properties that can perform well, regardless of economic conditions or regulatory changes.
You need to thoroughly analyze the market, the resources, and your risk tolerance before developing a long-term wealth-building strategy.
FAQs
- Are short-term rentals better for making money than long-term ones?
In some cases, it may be profitable in high-demand locations, but income may vary with occupancy rates, operational efficiency, and the regulatory environment.
- Which rental strategy is safer during a financial crisis?
In general, long-term lease properties offer the greatest stability due to ongoing, consistent demand for housing.
- Is it possible to turn a long-term lease into a short-term lease?
In many instances, it is an option, but you must always check zoning regulations and HOA restrictions first.
- Does operating a short-term rental require more management than a long-term lease?
Short-term leases are more like running a hospitality-type business and generally require more turnover management, cleaning service, and guest relations than long-term rentals do.
- Is there a need for diversification when investing in real estate?
Diversifying your rental property portfolio helps reduce risks associated with investing in rental properties and provides for steady income streams over time. However, this is not necessary.