Short-Term vs Long-Term Rentals: Which is More Profitable in Today’s Market?

November 1, 2024 by Mark Ferguson

Over the last 20 years, I’ve bought and managed hundreds of rental properties. While most of my experience is with long-term rentals, I’ve also dabbled in short-term rentals and helped many other investors analyze both strategies. In this article, I’ll break down the key differences between short-term and long-term rentals to help you determine which strategy might work better for your situation.

Quick Overview: Short-Term vs Long-Term Rentals

Before diving deep into the analysis, here’s a quick comparison:

Short-Term Rentals:

• Higher potential monthly income
• More hands-on management required
• Higher operating costs
• More market volatility
• Often better in tourist areas

Long-Term Rentals:

• More stable monthly income
• Less day-to-day management
• Lower operating costs
• Generally more predictable
• Work in most residential areas

Analyzing the Numbers: Real-World Example

Let’s look at a real example using a 3-bedroom, 2-bathroom house worth $300,000 in a decent area. I’ll break down the potential returns for both strategies using my rental property calculator.

Long-Term Rental Numbers:

• Monthly Rent: $2,000
• Annual Gross Income: $24,000
• Vacancy Rate: 5% ($1,200)
• Property Management: 8% ($1,920)
• Maintenance: $2,400
• Insurance: $1,200
• Property Taxes: $2,400
• Net Operating Income: $14,880

Short-Term Rental Numbers:

• Average Nightly Rate: $150
• Occupancy Rate: 70%
• Annual Gross Income: $38,325
• Cleaning Fees: $4,800
• Property Management: 25% ($9,581)
• Utilities: $2,400
• Maintenance: $3,600
• Insurance: $2,400
• Property Taxes: $2,400
• Net Operating Income: $13,144

While the short-term rental generates significantly more gross income, the net income is actually lower in this example due to higher expenses. However, these numbers can vary dramatically based on location and market conditions.

Advantages of Long-Term Rentals

1. Stability

Long-term rentals typically provide more predictable income. When you have good tenants on a yearly lease, you know exactly how much you’ll make each month. This makes it easier to plan for expenses and calculate returns.

2. Lower Operating Costs

With long-term rentals, tenants usually pay utilities and handle yard maintenance. You also don’t need to furnish the property or pay for regular cleaning services. This significantly reduces your operating expenses.

3. Less Management Intensive

Once you place good tenants, long-term rentals require minimal day-to-day management. You might only hear from tenants occasionally for maintenance issues. Learn more about how hard it is to be a landlord.

4. Easier Financing

Traditional lenders are more comfortable with long-term rentals. You’ll typically find better interest rates and down payment requirements compared to short-term rental properties.

Advantages of Short-Term Rentals

1. Higher Revenue Potential

In popular areas, short-term rentals can generate 2-3 times the gross revenue of long-term rentals. This higher income potential can lead to better cash flow in the right market.

2. Property Condition Control

With short-term rentals, you can regularly inspect and maintain the property between guests. This helps prevent major damage and keeps the property in better condition.

3. Personal Use Flexibility

If you want to use the property occasionally, short-term rentals offer that flexibility without violating any lease agreements.

4. Tax Benefits

Short-term rentals often qualify for additional tax benefits as a business rather than an investment property.

Key Challenges to Consider

Short-Term Rental Challenges:

1. Regulations: Many cities are implementing strict short-term rental regulations or outright bans
2. Market Volatility: Income can vary significantly by season and during economic downturns
3. Higher Time Commitment: Managing bookings, cleanings, and guest communications requires more time
4. Initial Costs: Furnishing and setting up a short-term rental requires significant upfront investment

Long-Term Rental Challenges:

1. Problem Tenants: Bad tenants can be costly and time-consuming to remove
2. Property Damage: Less frequent inspections mean damage might go unnoticed longer
3. Market Constraints: Rental rates typically can’t be adjusted until lease renewal
4. Lower Income Potential: Monthly income is generally lower than successful short-term rentals

How to Choose the Right Strategy

Consider these factors when deciding between short-term and long-term rentals:

Location Matters Most

• Tourist areas → Short-term rentals often perform better
• Residential neighborhoods → Long-term rentals usually make more sense
• Business districts → Either can work, depending on specific market demands

Time Availability

• Limited time → Long-term rentals are usually better
• Flexible schedule → Short-term rentals might be manageable
• Full-time investor → Either could work well

Financial Goals

• Steady income → Long-term rentals
• Maximum revenue potential → Short-term rentals (in the right market)
• Building equity → Either strategy works

My Recommendation

After managing both types of rentals, I generally recommend starting with long-term rentals unless you have a property in a prime tourist location or significant experience in hospitality management. Long-term rentals provide a more stable foundation for building wealth through real estate with less risk and time commitment.

For those interested in short-term rentals, I suggest:

1. Starting with one property to learn the market
2. Choosing a location with year-round demand
3. Building a reliable team (cleaners, maintenance, etc.)
4. Having significant cash reserves for seasonal fluctuations

The Bottom Line

Both short-term and long-term rentals can be profitable investment strategies when executed properly. The best choice depends on your specific situation, including:

• Available time
• Market location
• Risk tolerance
• Management experience
• Financial goals

I’ve found that most investors do better starting with long-term rentals and potentially adding short-term rentals to their portfolio later as they gain experience. Whatever strategy you choose, make sure to thoroughly analyze the numbers and market conditions before making your investment.

Want to learn more about rental property investing? Check out my guide to building a rental property empire or try my rental property calculator to analyze potential investments.

You might also be interested in learning about how to get started in rental properties or understanding the risks of rental property investing.