Real estate investment offers various opportunities, with owning and managing rental properties being a popular choice. Residential real estate can be categorized as short-term or long-term rentals, each serving a different purpose:
- Short-term rentals are typically leased daily, weekly, or rarely monthly to accommodate vacationers. Examples include vacation rental homes and single-family properties rented out with spare bedrooms.
- Long-term rentals involve leasing to tenants with fixed 12-month agreements at an annual rent rate. While most residential leases follow a 12-month term, some landlords offer month-to-month lease agreements.
Property management software can be a valuable asset for efficiently managing any rental property. Embracing technology simplifies the management process, ensuring a seamless experience for landlords and tenants alike.
Short-Term Rental Occupancy and the Impact of Inflation
Inflation has emerged as a key factor contributing to the decline in short-term rental occupancy across the United States. Recent data from the consumer price index report highlights an alarming spike of 8.6 percent in inflation during May. The escalating gas prices, averaging over $5 per gallon nationwide, further exacerbate the situation. Additionally, disrupted supply chains have made it increasingly challenging for short-term rental owners to maintain adequate stock levels, which were once readily available in previous years.
Despite the 8.6 percent decrease in occupancy for Airbnb and VRBO nationwide, both platforms have witnessed a net increase of 57,000 listings this year. This suggests that investors continue to show interest in Airbnb rentals.
The reality is that the ideal time to invest in short-term rental properties was three years ago, before the disruptive effects of the COVID-19 pandemic and the subsequent wave of regulations implemented by cities nationwide. These regulations have curbed the profitability of the short-term rental market, altering its landscape compared to its previous lucrative state.
Whether opting for short-term or long-term rentals, leveraging property management software optimizes operations and helps maximize the return on your real estate investment.
Should You Invest in Short-Term Rental in 2023?
With the summer travel season underway, many people are typically eager to hit the road and explore popular destinations like Portland, Seaside, and Beaverton. However, the current economic conditions, marked by high gas prices and inflation, have significantly impacted the demand for short-term rental properties.
As of November 2022, the average Airbnb occupancy rate in the US was 48%, and this downward trend is expected to continue throughout the summer. Despite the desire of consumers to travel and take vacations following the lifting of lockdowns, the rising costs of flights, goods, and gas, along with inflationary pressures, have deterred many from choosing short-term rentals as their accommodation option.
For investors considering short-term rental properties, preparing for potential challenges, such as low occupancy due to the prevailing economic environment, is crucial. It is important to assess the specific dynamics of your market and the type of rental you are operating, as occupancy rates can vary significantly based on these factors. Consider what aligns best with your long-term business objectives.
Stay vigilant about the potential economic fallout and changing regulations related to short-term rentals. Many local governments are focusing on implementing stricter measures to address housing availability concerns, which can impact the profitability and feasibility of short-term rentals. By staying informed and proactive, you can avoid being caught off guard by sudden shifts in the industry.
While short-term rentals experienced a period of growth during the pandemic, the current landscape demands careful consideration. Be prepared for both favorable and challenging scenarios as you navigate the dynamic nature of the short-term rental market in 2023.
Benefits and Drawbacks of Short-Term Rentals
Increased Nightly Rates
As mentioned, short-term rentals often offer landlords the advantage of higher nightly rates. Due to their temporary nature, renters are willing to pay a premium for shorter stays. For example, let's consider an apartment that typically rents for $1,000 per month, equivalent to $33.33 per night. By offering it as a short-term rental, the owner could potentially charge $50 or $60 per night, depending on the market.
This higher rate helps offset the possibility of occasional vacancies since short-term rentals may not be occupied every night.
Flexibility in Rental Rates
With short-term rentals, landlords have the benefit of adjusting rates more easily. Short-term rentals allow landlords to set different rates for each night. Use the Rentability Report to gain valuable insights into your local market, including vacancy rates, real estate trends, and market saturation.
For instance, a beach rental might command higher rates during holiday weekends such as Memorial Day, the 4th of July, and Labor Day, when demand is typically higher among vacationers. On the other hand, rates will be lower in quieter months like October, when beach demand tends to decrease.
Building Equity in Vacation Homes
Many investors purchase rental properties that can also serve as vacation homes. Through platforms like Airbnb and VRBO, owners can block off specific periods for personal use while renting out the property for the remainder of the time.
This approach offers a dual benefit. Firstly, it provides owners access to a vacation property for themselves. Secondly, by renting out the property when not in use, investors can have the rental income contribute towards paying off their mortgage. Each payment made by the renters helps build equity in the vacation home, offering long-term wealth accumulation through an amortizing loan. Consider implementing online payments to efficiently manage your vacation homes without having to ride to the property every time.
A Stronger Investment Choice with Long-Term Rentals
Recently, there has been a noticeable shift in guest preferences within the short-term rental industry. Longer stays are gaining popularity among travelers, with bookings for 28+ nights accounting for 21% of the total nights booked on platforms like Airbnb. This trend remained steady throughout 2022, indicating a growing demand for extended stays.
This change in guest behavior creates a favorable opportunity for holiday rental hosts to leverage this increasing demand by offering their properties as options for extended stays.
Adopting a long-term rental strategy allows you to tap into this emerging trend and expand your reach to a wider audience. Embracing a long-term rental strategy and utilizing property management software can be a winning combination for landlords and property managers.
The COVID-19 pandemic initiated a significant uptick in people moving to a new location, with many leaving cities for more suburban or rural areas. This shift in lifestyle preferences, coupled with the rise of remote work, has created a strong demand for long-term rentals in these desirable locations.
Remote work impacted the need for better technology in rental properties as individuals sought high-speed, reliable internet connections, including fiber optic cable, and even flexible, connected work areas for conducting business. Many potential tenants are looking to rent in a more suburban or rural area and find a way to escape the city lifestyle.
Investing in long-term rentals offers numerous advantages for both tenants and landlords. For tenants, it provides stability and a sense of belonging in a community. It offers long-term investment opportunities and a reliable rental income stream for landlords.
Keeping a close watch on trending areas and regions allows investors to enter the market early and optimize their rental property investments for long-term success.
Benefits and Drawbacks of Long-Term Rentals
Financial Stability and Planning
Long-term rentals offer investors a high level of stability. With a long-term lease, landlords can accurately predict the rental income they will receive throughout the lease period. This allows for better financial planning and budgeting, enabling investors to forecast long-term cash flow and make informed decisions about future investments. In contrast, projecting revenues for short-term rentals can be less accurate, making planning for future returns and investment strategies challenging.
Ease of Financing
Lenders place importance on the reliability of borrowers when considering financing options. Having a proven track record as a successful landlord with long-term leases can make securing financing much easier. This is particularly beneficial for strategies like the BRRR (Buy, Rehab, Rent, Refinance), where refinancing a property from a hard money loan to a traditional mortgage is a key step. Long-term leases give lenders more confidence in approving these types of loans for investment properties.
Reduced Management Burden
Long-term leases significantly reduce the day-to-day management responsibilities of landlords. While property maintenance and finding tenants still require attention, the frequency is much lower than short-term rentals. Once a quality, long-term tenant is secured, management-related headaches are greatly minimized. TenantCloud offers a wide variety of top features for landlords and property managers to establish operating procedures contributing to smoother property operation.
Assistance with Future Home Purchases
Implementing a long-term rental strategy can also benefit investors regarding future home purchases. When applying for a mortgage, lenders assess the borrower's overall debt-to-income ratio, which includes mortgages associated with other investment properties. Many lenders recognize a portion of the rent from long-term leases (typically around 75%) as income to offset the debt. In contrast, without a signed long-term lease, lenders often do not consider rental income, making it challenging to meet the debt-to-income requirements for future home purchases. While some lenders may accept a percentage of short-term rental revenues supported by tax returns, having a long-term lease simplifies the process.