TBT: Ask Marco – Long or Short-Term Rental?

Okay, well, Sandy, this is a good question. Now I know a few people who invest in vacation rentals, more specifically short term rentals that they market and advertise through places like Airbnb and a website called VRBO, and many of their properties are doing pretty well. And they do make a lot of money in terms of cash flow, but you know, it’s a different type of animal. And I will be honest. I have never owned or operated a short term rental. Now I’ve stayed in a short term rental. It was actually a newly constructed property. So it was pretty nice, but I’ve seen others.

And I wouldn’t say that I’d feel comfortable staying in many of the short term rental properties that I’ve seen. And that’s not to say it’s good or bad. It is what it is, but the variety of short term rentals out there are pretty amazing. But keep one thing in mind, um, when it comes to short term rentals, investing in short term rental properties is mostly about maximizing your income done, right? And in the right locations, you can get a very good cashflow from these properties. And in some cases it can be two times, three times, even four times what you would make on a longterm rental. There are some people who are out there just crushing it. So there are some pros and I don’t have a major issue with short term rentals, but there are some cons if you will, that make me pause and think twice about pursuing it.

Now I have not pursued this Avenue and I am not intending or planning to, and I’ll tell you why here in a minute now, when it comes to short term rentals, I’m just going to talk about the pros and cons, because I think most everyone listening to this show understands the pros and cons of longterm rentals. This is kind of just a quick comparison and painting the picture of what short term rentals are going to be like. But if you want to know the pros and cons of longterm rentals, it’s more or less just the opposite of what I’m saying here. Just take the flip side of these arguments. So when it comes to the pros at the top of the list is just the ability to have far more cashflow than a longterm rental. So that’s really the biggest benefit and the greatest motivator for people to pursue short term rentals is just that higher cashflow, whether it be monthly or annually, another benefit or pro for short term rentals has to do with the flexibility.

Now flexibility in the availability of the property and more so for you as a potential vacation spot. So the idea with short term rentals is that you want to have them in the right location. That is a critically important thing. And these are often places that have high tourist traffic. So these are areas that have strong demand because there is something going on there be like Disney world Disneyland. They are located in places where there’s always a lot of people coming in to visit, take vacations tourism’s going on. So if that’s for you and you want to have a place in a location that you plan to visit frequently, well, it gives you the flexibility to have a schedule that you can put you and your family on and visit as often as you like. And then for the days that you are not there at that vacation rental, you can simply put it up on Airbnb or VRBO or wherever it may be, and essentially advertise it and keep it filled on the days you’re not using it, which is probably most of the year.

The third thing is that potentially you may have more deductions than you can with a longterm rental, because now you are going to be paying for things like ongoing cleaning and maintenance fees, maybe other types of insurance, you may have additional expenses related to a short term rental online tools makes it easy. If you’re self managing your properties. There are tools like Airbnb, as well as VRBO. And there are also property management services specifically set up to manage short term rentals. And so there are some pros to having short term rentals. The biggest thing is really just the higher potential income, but that leads to one of the biggest cons I think in having short term rentals. And that is a lack of predictability in many cases, not all cases when it comes to traffic, because you need to be in places that provide for high vacancy rates.

You don’t want to be in locations that are seasonal, where you’re going to be down for half of the year, or have very light traffic. You want places that are least night after night after night. So that is a critically important thing is occupancy. And some locations will give you that all year long, some locations will not. And many people found this out during this COVID-19 pandemic that with the travel market being as unpredictable as it can be people who, who had Airbnb rentals found out that since people weren’t traveling, they really had months on end, a very low to no traffic. And so that might, you know, be painful if you have a mortgage on a property and you’re paying each and every month. So I personally love income predictability. I know what the longterm rental, you’re not necessarily making as much month after month or year after year, because you can make more from a cashflow perspective on short term rentals, but I just know that when I have a tenant, that’s locked in for a one or two year lease and they’re paying every month, I have that income predictability. And that’s good enough for me because the cashflow is one source of income from the property. And you have to remember that there are other ways that you are making money on your income properties on longterm rentals, which I’m going to talk about in an upcoming episode here pretty soon.

So another thing about short-term rentals is unlike typical tenants in a longterm rental, you have visitors for a very short stay and they’re not thoroughly vetted when they’re placed. They come and they go for a day or maybe for a few days, but they don’t go through the same screening process as a longterm tenant would in terms of credit checks, background checks, eviction checks, maybe criminal record checks. Your property manager will do this with tenants that are expected to stay for a year or more within your longterm rental. So you don’t have that thoroughness. Is that important? Maybe, maybe to some degree, I’m not sure if it’s as important because they’re not really there for very long, but I know I probably wouldn’t want someone with a bad track record staying in my property, even if it was only for one night, I just wouldn’t feel comfortable with that. You may have additional utility costs. In fact, this is almost always true because you’re going to be covering the utilities such as gas, electricity, and whatnot. So that’s not up to your tenant because they’re only there for a very short period of time. So you are responsible for the utilities. And that’s just another expense. If you are making that much more in income, then the utility bills are not going to be that negative in terms of your overall cashflow, but also keep in mind that you are always responsible for those utilities and always paying for them, regardless of whether your property is leased up for 30 nights a month or three nights a month. And if you’re in very hot locations where the air conditioning is running pretty much, 24 hours a day, like in Phoenix, Arizona, for example, you may have very expensive utility bills.

Some people say there is more risk involved in short term rentals because you have such a higher turnover of people. In other words, it’s a revolving door and you have all kinds of different people coming in and out all the time. I don’t know, maybe it’s anecdotal, but I know that some people say that it is a higher risk investment. One thing I think is pretty clear is that it does take more time and more effort to run a short term rental. Especially if you have multiples. Now, some people may enjoy that and some people may not. They don’t have the time for it, but the property does need to be thoroughly cleaned and restocked between each reservation. You’re going to have a higher turnover. You’re going to have more emails, texts, and phone calls related to the property. Unless you hire somebody to take care of all this for you. Then you will have to put in more time and effort. Some people really enjoy that and that’s okay, but I’m busy enough. So that’s not for me. And I don’t want to have to deal with that. There are supposedly higher maintenance costs. And I think this has to do with the fact that you have just more people in and out of the property rather than having one common tenant. That’s got their belongings in there and they’re pretty much set and situated. So is that true again? I don’t know for sure. I haven’t owned a short term rental. You can do your own research and talk to other people. There are certainly a lot of articles that have been written about this topic online. So you can find more information about this.

Here’s the biggest con I think, especially when it comes to short term rentals, this is the thing that has always made me nervous. And that is the restrictions that may apply to your short term rental. And they may not be there the day you buy the property, but it might happen after the fact. And I’ve heard stories of people who have purchased properties as short term rentals. And this is especially true in states like California, where local governments come in and they pump the brakes on short term rentals. And that could be because that’s just what they want for the community or for their city, or maybe because neighbors have complained and have just driven the HOA to enact rules or regulations or even cities to put in rules and regulations. So homeowners associations can make it difficult because if you are buying a property that is in an association community, they can pass their own laws or rules to essentially restrict either short term rentals altogether, or how many nights you can have people in your rental. The other thing too is there is potential future bands from homeowners, associations, and cities. So this means that you may be okay today, but tomorrow you’re going to have problems with not being able to lease the property out to prospective tenants. And so now your short term rental becomes a longterm rental. You don’t have a choice, but to rent it to people for a one or two-year lease. And thirdly, you have to be aware that your typical homeowner’s insurance policy may not cover some situations, even common situations that happen in a short term rental. There actually may be clauses within your policy that restrict you from leasing or being covered or being able to file a claim on your insurance policy when it comes to a short term rental and last but not least, there is less culpability for your tenants.

And what I mean by that is a bad short term tenant can actually cause a lot of damage in a very short period of time in your property. And the fact that they’re going to be gone tomorrow, it’s going to be very hard for you to find them chase after them or sue them. If it was something pretty serious, you are going to have very limited information to be able to track them down, chase them down, pin them down, especially if they’re coming in from another state or even another country. So those are the concerns that I have. I think the bottom line here is that short term rentals are in its infancy. There are going to be many growing pains. That whole industry of short term rentals is still very new. And I think there is going to be a lot of changes going forward within the industry and particularly with state and local government and how they intend to regulate this industry going forward. Because I think there’s going to be more regulation being applied on these short term rentals than there will be on what has been around for literally decades upon decades with longterm rentals.

And the last point I’ll make here is that location is critically important. If you’ve heard the concept of location, location, location, being important for longterm rentals, it’s probably 10 times as important with short term rentals, because the most critical thing to keep your income high and steady is tourist demand and good vacation spots. That is typically what keeps these short-term rental properties attractive from a cash flow perspective. And so I think that it is a good investment. If you know what you’re doing and you have the skin for it, and you’re buying in a good location that is expected to be high traffic or high touristy area for a long time to come.

And also it is not a seasonal location. So something like a property next to Disneyland or Disney World is probably a great location because no one is expecting Disneyland or Disney World to close anytime soon, it’ll always be there. However, that also means that there’s probably going to be more regulation put in place and imposed by the cities surrounding these locations because they obviously know that short term rentals are going to be something that is going to come on strong in the area and be there for a long period of time. And it could be problematic for neighbors and people who live in that community. And you know, the other thing too is I know hotel chains have lobbied regulators at the city-state level to essentially restrict or limit how many short term rentals or even whether there can be short term rentals in certain areas because it is essentially taking business away from hotels and motels.

So that whole competition thing, they have a lot more muscle and marketing dollars to eliminate or restrict short term rentals. So keep that in mind as well when you’re looking at different locations. Anyway, I know I sound pretty about short term rentals, but the reality is that they have their place and it’s not for everyone, but some people who have gone down this road have done very, very well. So I don’t want to sway you away from it, but at the same time, I want to be brutally honest about how I feel about it. All right. Well, anyway, Sandy, I hope that helps if you have other follow up questions just hit me up.

I hope you enjoyed this week’s throwback Thursday episode. If you haven’t already, remember to subscribe so you don’t miss out on a single episode. If you have a question about real estate investing or finance, simply go to passiverealestateinvesting.com and click the Ask Marco button. . I read all of them, I reply to many of them, and sometimes I cover them on the show, and I’m gonna try and do more of that. So, I am going to encourage you to go to passiverealestateinvesting.com and submit your question for Ask Marco. Lastly, help us share the show with other like-minded people that you know who can benefit from it as well. Just visit us on your platform. Most of you are on iTunes and leave us a rating and review. I would greatly appreciate it. I read them all and I will thank you in advance. And that is it for today. Thanks for listening. I will see you on our next episode.

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