Long Term vs Short Term

[Chris Lindemann]

Hey Everyone!

I’ve been listening to Bigger Pockets for a while now, but first time poster!

I was hoping to get some general insight into pros and cons of a decision I’ve been weighing.
 I currently have a long term rental in the Cincinnati area. I have about $250,000 in equity in the property and a cash flow of $1200 not including capx. I was going through a cash out refinance to use that equity to purchase additional properties for long term rentals. However, My previous tenants lease expired as I was going through that process and I decided to pause the refi which would have more than doubled my monthly payment and reduced cash flow to around $300. 
Fast forward 4 months and my realtor and I have had little to no action on placing a tenant. I’ve been floating the mortgage/hoa payments with the reserves stashed away from the previous tenants. However, with no end in sight I am considering selling that property and purchasing a short term rental (or two) out of state with the equity. 
The short term rental is more aligned with my long term goals, but it is just skipping ahead by a few years and skipping over the 3 long term rentals I had Initially planned for my portfolio.

Do I keep the property and maybe drop the rent under market value, while also coming about of pocket until we find new tenants, or sell and use the equity towards short term? 

Any advice is much appreciated!

[William Sing]

Hi @Chris Lindemann,

Welcome to the BiggerPockets community! Your situation sounds like a classic investor's dilemma, and it's great that you're considering all angles before making a move.

First off, it's worth considering what the "rip cord" would be for your investment—essentially, what's your financial breaking point where you need to make a decisive move to avoid further losses? Given that you've been carrying the property without a tenant for four months, you're already feeling the strain, so let's break it down:

Long Term Rental vs. Short Term Rental

Long Term Rentals: They offer stable and predictable income once a tenant is in place and generally appreciate over time, adding to your equity. They also require less day-to-day management. However, the current vacancy is hurting your cash flow, the paused refinance poses challenges, and ongoing capital expenditures can be significant.

Short Term Rentals: These can generate higher monthly income and offer flexibility to adjust rental rates based on market demand. They align with your long term goals and can potentially accelerate your investment strategy. On the flip side, income can be less predictable due to seasonal fluctuations, they require more intensive management, and are subject to varying regulations.

Key Considerations:

• Financial "Rip Cord": Determine your financial threshold for continuing to float the property without a tenant. How long can you sustain this before it severely impacts your finances?
• Market Analysis: Conduct a detailed market analysis for both long term and short term rental markets in your target areas. Are there strong indicators for occupancy and rental rates?
• Property Condition: Consider any repairs or updates needed for either scenario. Short term rentals typically need to be furnished and maintained at a higher standard.
• Tax Implications: Understand the tax benefits and implications of both strategies. Short term rentals might offer different deductions compared to long term rentals.
• Risk Tolerance: Assess your risk tolerance. Short term rentals can be lucrative but come with higher variability and management needs.

My Take:

It might be beneficial to consider a mixed approach—drop the rent slightly under market value to secure a tenant and stabilize your cash flow, while simultaneously exploring the short term rental market. This way, you don't rush into selling a property that still holds potential and you can gauge the viability of short term rentals without fully committing yet.

Additionally, talk to a few local property managers or even consider different marketing strategies to attract tenants. Sometimes a fresh approach or minor property improvements can make a significant difference in securing a tenant.

Ultimately, aligning your strategy with your long term goals while managing current cash flow is key. If short term rentals are truly where you see your future, making a calculated shift might be the right move, but ensure you're not jeopardizing your financial stability in the process.

Hope this helps!

Cheers,

[Sam McCormack]

Quote from @Chris Lindemann:

Hey Everyone!

I’ve been listening to Bigger Pockets for a while now, but first time poster!

I was hoping to get some general insight into pros and cons of a decision I’ve been weighing.
 I currently have a long term rental in the Cincinnati area. I have about $250,000 in equity in the property and a cash flow of $1200 not including capx. I was going through a cash out refinance to use that equity to purchase additional properties for long term rentals. However, My previous tenants lease expired as I was going through that process and I decided to pause the refi which would have more than doubled my monthly payment and reduced cash flow to around $300. 
Fast forward 4 months and my realtor and I have had little to no action on placing a tenant. I’ve been floating the mortgage/hoa payments with the reserves stashed away from the previous tenants. However, with no end in sight I am considering selling that property and purchasing a short term rental (or two) out of state with the equity. 
The short term rental is more aligned with my long term goals, but it is just skipping ahead by a few years and skipping over the 3 long term rentals I had Initially planned for my portfolio.

Do I keep the property and maybe drop the rent under market value, while also coming about of pocket until we find new tenants, or sell and use the equity towards short term? 

Any advice is much appreciated!

I think you will regret selling now if you do. Yes STR does align with your goals a lot better, but for what you have already gathered with your LTR in Cincinnati, I think you may be missing out on looking at your opportunity costs for your LTR already. I think pulling your equity to do so is smarter, short term and long term, but that is just me.

I know you mentioned a realtor (I am an investing agent), but if you ever want someone else's opinions/eyes on something, let me know. Or contacts, etc. Let me know how I can help you best

[Gregory Wilson]

The rental market is still strong in Cincinnati, especially at the upper tiers. Something is not working. Time to get more eyes on your ads and presentation.

[Bryan Montross]

First, I do question why your current LTR is not rented after 4 months. Is the market dropping off in your area? I feel like that probably isn't the case based on all the posts I see from people investing in the Ohio region. Are you getting showings, but no applications? Maybe the house doesn't show well and you need to put some money in to spruce it up and make it show well. If you're not getting viewings maybe you need to change up your marketing. How much is your Agent really doing to get your property rented? Do they have any incentive or are they making money regardless? It might be time to look for a new property manager.

Now, onto your question as to whether you should sell and move on to STR. Make sure the numbers make sense. Are you going to self-manage or hire a management company? A management company can cost significantly more than you are used to with LTRs. And self-management might take significant time. Where will your listing fall if you are a new owner manager and have no reviews? Start-up costs are always higher because you have to furnish the rental. You could buy a current STR and you might get all that included, but it also sounds like you have equity you can afford it. I would caution on the tax treatment of STRs. Your income is treated as active income and taxed at ordinary rates instead of the passive income we are used to with LTRs, but there might be more deductions you can find as well.

After all that, if you know you want to do STRs in the long run, now might be the best time to make the jump. If you are unsure, selling your LTR and getting into a bad STR might just take you out of the real estate business until you can regroup and go back to long-term. Really think about your future goals and decided if the next step you take is getting you closer to that goal.

[Jimmy Lieu]

Quote from @Chris Lindemann:

Hey Everyone!

I’ve been listening to Bigger Pockets for a while now, but first time poster!

I was hoping to get some general insight into pros and cons of a decision I’ve been weighing.
 I currently have a long term rental in the Cincinnati area. I have about $250,000 in equity in the property and a cash flow of $1200 not including capx. I was going through a cash out refinance to use that equity to purchase additional properties for long term rentals. However, My previous tenants lease expired as I was going through that process and I decided to pause the refi which would have more than doubled my monthly payment and reduced cash flow to around $300. 
Fast forward 4 months and my realtor and I have had little to no action on placing a tenant. I’ve been floating the mortgage/hoa payments with the reserves stashed away from the previous tenants. However, with no end in sight I am considering selling that property and purchasing a short term rental (or two) out of state with the equity. 
The short term rental is more aligned with my long term goals, but it is just skipping ahead by a few years and skipping over the 3 long term rentals I had Initially planned for my portfolio.

Do I keep the property and maybe drop the rent under market value, while also coming about of pocket until we find new tenants, or sell and use the equity towards short term? 

Any advice is much appreciated!

Hi Chris! Having a LTR vacant for 4 months is too long. Are you self-managing this? One of the core roles of a property manager is marketing and filling the vacancy quick. You might need to look for one! As for STRs, they need more hands-on involvement and has higher start up costs. You have to think if is this something you can manage and afford if you decide to sell. Or you can also consider looking into other rental markets. Happy to connect and answer any questions you have!

[Alecia Loveless]

@Chris Lindemann If you are anywhere close to this property get it listed on Facebook Marketplace ASAP if it’s not already. I live in a market that wouldn’t even be considered tertiary it’s so small and still generate 100 inquiries on every Marketplace listing I post.

Yes there will be dead ends and tire kickers but you SHOULD be able to get it rented quickly.

[Andreas W.]

@Bryan Montross

A question to your income remark. LTR income is taxed as ordinary income as well in my opinion. Or am I missing anything?

[Bryan Montross]

@Andreas W.

I apologize as I put some incorrect information in my post. I was distracted and talking to someone about fix and flips and letting them know that the sale is taxed as ordinary income instead of capital gains and completely messed up what I was trying to point out.

I was trying to say that STRs may help to offset some ordinary income with losses if you actively participate, whereas LTR losses only offset passive income unless you are classified as a real estate professional. Please consult your CPA for the rules so you understand how you qualify.

Again, sorry for misspeaking and thank you Andreas for catching that.