Short-Term Rentals or Long-Term Rentals

[Serena Kim]

Hi. What are your thoughts on what will perform better going forward, short-term rentals or long-term rentals? 

This is a topic that comes up very frequently in conversations with clients, investors, and friends here in Florida. I currently own 5 long-term rentals and 3 short term rentals, and everyday I wonder which one will do better over the next few years. Below is my answer to this question, but I'm very curious on what others think. 

Long-term rentals

Pros:

• Appreciation – in central Florida we’ve seen our condos and townhomes appreciate quite a bit since 2016. My opinion is that this will shift over the next few years in favor of single-family homes as people start valuing privacy, having space for their family and pets, and move to the suburbs. But for now, they have been fabulous investments.
• Passive Income – it doesn’t get any more passive. Besides fixing an appliance a year, if you have good tenants you can enjoy the fruits of long-term rentals for a long time. I think every passive income retirement plan should include long-term rentals.

Cons:

• Cashflow: when I started in 2016 the financial metrics were very good (monthly rent / price were greater than 1%, cap rates were decent at over 7%). Nowadays it’s very hard to find a long-term rental that meets most investor’s criteria in Orlando. If you move outside of the city you can still find attractive opportunities, but those present their own challenges.

Short-term rentals

Pros:

• Cashflow: the cashflow can be attractive. These past few months have been challenging, but the cashflow continues to be better than long-term rentals.
• Leveraged play on real estate and COVID aftermath – Airbnb homes tend to be bigger than long-term rentals. I personally consider real estate to be one of the best investments you can make for the next 10 years given record low interest rates, accommodative fiscal and monetary policy, and tax benefits. Unless your Airbnb home is in a vacation rental community, you can also benefit from the structural move to the suburbs and bigger homes. At the same time, once people start traveling, I think they will prefer the privacy of an Airbnb home vs traditional hotels.

Cons:

• A lot of work – managing a short-term vacation rental is a full-time job in itself. If I were to calculate the net cash flow / hours worked in 2020 relative to my long-term rentals…
• Seasonal business & COVID – there are many systems you can use in your business to make it more predictable, but there is still a lot of uncertainty out there. If you can weather the storm and up your game, I think short-term rentals will become a lucrative investment. Until then, you can’t ignore this headwind.

Conclusion

For now, I continue to focus on building my portfolio with short-term rentals on the view that once this year ends and people start traveling, they will do extremely well. That’s also because my husband and I have the time, energy, and motivation to put the hours required to renovate and manage a short-term rental. If we didn’t have the time or did not share the views of short-term vacation rentals doing extremely well post COVID, then we wouldn’t pursue this strategy.

Once COVID ends, I can see myself jumping back into long-term rentals (buy the rumor, sell the news). I can see a lot of landlords using the opportunity to sell their properties due to issues with their tenants not paying.

Regardless, I think both strategies will do very well over the long-term because appreciation and tax benefits can represent a large portion of the gains in real estate. Finally, I think real estate in Florida will do very well compared to other parts of the country (this also can be another full post).

Do you have different views? What are your thoughts?

Serena