Choosing between a long-term or short-term rental for your investment property requires a thorough analysis of several key factors that can significantly impact your overall returns. Making the right choice involves evaluating the potential rental income, maintenance costs, occupancy rates, and insurance requirements for each option.
Potential Rental Income
One of the primary considerations is the potential rental income. Long-term rentals typically offer more stable and predictable rent rates, providing a steady stream of revenue. However, the short-term rental market, facilitated by platforms like Airbnb and VRBO, presents the opportunity for higher daily rates. This can translate to greater earnings, but it’s crucial to factor in occupancy rates, guest service fees, and any applicable occupancy taxes, which can vary depending on the location.
Many people assume Airbnb will generate more income because, during peak periods, you can charge significantly higher rates. Adam Timothy Group, part of AT Real Estate Group LLC, owns a property in Austin that was once an Airbnb. While we were able to charge a premium during ACL, F1 periods, and SXSW, the unit often sat empty during the hottest months. On average, after accounting for all the extra costs, our earnings were roughly equivalent to what we now make monthly from the property as a long-term rental.
For instance, in Austin, there are approximately 19,237 short-term rental listings, with about 64% listed on Airbnb alone. These properties achieve an average occupancy rate of 51% and an average daily rate of $298. However, the revenue generated can be influenced by seasonality and local events (AirDNA) (Steadily Landlord Insurance).
To gain deeper insights into the short-term rental market, platforms like AirDNA.co can be invaluable. AirDNA provides detailed analytics and data for STR owners, including historical performance, future occupancy rates, and revenue projections. By leveraging this data, property owners can make more informed decisions about pricing strategies and market opportunities, ultimately maximizing their rental income.
Using an Investment Property as an STR for Personal Use
Some people choose to keep their investment property as a short-term rental (STR) to allow them to use it while in town. This approach offers personal convenience and the potential to generate income when the property isn’t in use. However, it also comes with challenges such as inconsistent income due to personal use blocking rental availability and higher maintenance costs from frequent turnovers. Balancing personal use with rental bookings can complicate management, and it’s essential to have the right insurance coverage to protect against potential risks.
Maintenance Costs
Maintenance costs are another important factor to weigh. Long-term rentals may have more predictable expenses, such as regular lawn care and non-Airbnb cleaning, while short-term rentals may require more frequent cleaning and attention to guest needs. Renters typically pay a security deposit to cover any damages, which is more common in long-term rentals. However, this is relatively rare on STR platforms. Although Airbnb insurance covers damage and renters pay a cleaning fee, owners typically end up covering ad hoc cleaning, cleaning during empty periods, and regular lawn care. Many people assume they can recoup all of their maintenance expenses through the cleaning fee, but depending on the size of the property, your fees may be higher.
This can impact the overall operating expenses and, consequently, the net returns on your investment. It’s essential to account for these costs when budgeting for a short-term rental property.
Insurance Requirements
Insurance requirements also differ between the two rental models. Homeowners insurance may not provide adequate coverage for a short-term rental, necessitating the need for specialized short-term rental (STR) insurance. Landlord insurance is typically required for long-term rentals, and both models may require additional liability coverage.
Recently, insurance companies have been cracking down on STR usage. For example, State Farm and other major insurers have added riders to their homeowner policies that explicitly state temporary guests are not covered. While Airbnb does offer its own form of coverage, it recommends that hosts carry additional coverage in the form of an endorsement or commercial policy. If you are using another platform, such as VRBO, this is something you’ll want to research before you list your property. It’s important to first speak to your insurance provider about what types of endorsements they offer for Airbnb hosting. Often, hosts will be required to hold a commercial policy or business use endorsement to properly and safely operate their home as an STR. Additionally, Allstate offers HostAdvantage® home-sharing insurance to cover damages from home sharing. All these extra costs should be factored into your overall financial planning.
Ensuring proper insurance coverage is crucial to protect your investment and mitigate potential risks. Understanding these evolving insurance requirements is essential to avoid potential pitfalls and ensure you are fully covered under the right policy.
Making the Decision
By carefully analyzing these factors, including the potential rental income, occupancy rates, maintenance costs, and insurance requirements, you can make an informed decision that aligns with your investment goals and maximizes the potential returns on your property. This comprehensive evaluation will help you determine the most suitable rental strategy for your investment property, whether it’s a long-term or short-term rental approach.
Investing time in this thorough analysis will pay off in the long run, providing you with the confidence to choose the best rental strategy for your unique situation. Whether you opt for the stability of long-term rentals or the potential high returns of short-term rentals, understanding these key considerations is essential for successful property investment. Ask us for our quick back of the envelope worksheet we use for decision making in this regard.
An informed client is a great partner in the real estate home buying or home selling process. We want to share with you insights on the market so that you are better informed. We are here for buyers and sellers to make sense of the often tough market. Don’t go it alone. Let’s talk today! If you need help leasing out your luxury condo or single-family home, we may be a good fit for you.
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We don’t just buy and sell homes. We build community by helping clients find their place in the world.
Timothy Powles and Adam Stanley work together on the Adam Timothy Group at Compass RA and manage AT Real Estate Group LLC, a rental and vacation property investment business. We are about building community. We believe a real estate transaction is an important and extremely significant event but relationships last a lifetime. Our clients, partners, and friends trust us to get to know their story and what is most important to them. And we work tirelessly to retain that trust.
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