This article is written from the perspective of pre-acquisition. Once you own a property, the decision is a bit different.
Which one makes more money?
In most situations, short-term rentals will make more than long-term.
Which one takes less time to manage?
On the surface, long-term rentals are much more passive than long-term rentals. With Airbnb, you have to communicate with prospective guests, communicate with existing guests, constantly market the property, constantly turn the property, maintain utility contracts, replenish consumables, maintain the property, and maintain the furniture. All of that on a fairly consistent basis.
With long-term rentals, you have to do many of these processes, but most of them are on an annual or quarterly basis.
With good systems, the management starts to approach parity on a per-unit basis.
Do you like dealing with people?
Short-term rentals are a hospitality business as much or more than a real estate business. As such, you will be interacting with people more and in more interesting ways.
Do you have time for a Longer setup?
With long-term rentals, you can pretty much get a place habitable and then lease it out. The level of required amenities is quite low. I don’t recommend offering a bottom-of-the-barrel product as a rental, but it is possible. With Airbnb, there is much more setup involved. You have to meet certain community standards at a minimum. The property must be furnished, clean, and guests are going to expect a nicer fit and finish than a long-term renter might.
These things all take time. Lots of time.
How Important is Scalability?
If you plan to add capital to your real estate investment pool quickly, then scalability might be essential. If you grow your portfolio at a few units per year, scaling short term probably will not present any major management problems.
To keep a handle over the STR business as you scale, you will need to implement robust business processes much earlier in the cycle than long-term rentals.
If you handle cleaning yourself, the time commitment of an SFR is more than 10x that of a long-term rental. However, if you delegate cleaning, it is still probably about 5x that of a long-term rental. This actually can be an advantage, though.
Because each unit has higher expenses, you can hire a quality employee to help quicker. For example, if the analysis for hiring a full-time manager shows you need 100 units to justify it, the number of STR is closer to 10-20.
The short term requires higher startup costs.
It’s probably no surprise that renting a place completely furnished with a few sets of linens and a stocked kitchen would have higher startup costs.
On a total asset basis, it might not seem like a big deal, but it can be huge compared to equity. Consider this example:
Purchase price: 100k
Equity: 20k
Furniture/STR startup expenses: 10k
In this example, the STR would cost an extra 10k out of pocket to get started. This is because most loans are not going to lend on furniture.
Difference in headaches
I am sure you know the broken toilet at 2 am objection that most people have to real estate investing. While I have actually never had that particular issue come up, there are fires that the owner or manager has to put out on a routine basis.
The hiccups that come along with a short-term rental are usually different. By the nature of going in and cleaning between each stay, fewer maintenance items build up over time. However, there are a lot of communication-related tasks which require work.
Property Management
The property management industry for long-term rentals is fairly robust. Therefore, a reasonably well-networked investor should be able to find a few well-recommended property managers with an extensive track record in their asset type.
In many markets, full-service STR managers are much harder to come by. In my market, the options seem to be nationwide companies or individual real estate agents.
It would seem much easier to convert self-managed long-term rentals into professionally managed ones than it would be to turn over the reigns to an STR management company.
Other Income Opportunities
Going the other direction in from hiring 3rd party management. If you are grinding and looking to earn more money in a field, you now have experience. You can expand your company into property management. With long-term rentals and the way market compensation for property managers are, you need many units to make a healthy amount of income. This will come with lots of work as well. It is challenging work to do, and the market for property management companies is pretty tough.
With an STR, you can offer cohosting or property management services. You can also grow quickly by doing rental arbitrage, where you lease a place on the long-term market and then create a business around renting it short term. Both of these seem to compensate much better per hour of work.
So which should it be? Short term or long term?
On a small scale, I definitely see the value in the short term. Especially if you are comfortable leveraging some of your time for the added returns. STR is a great vehicle to make additional money, which can help grow an investment portfolio.
On the larger scale, or if you do not desire to leverage time, the long term is probably the way to go.
If you are looking to build a business in real estate that can offer more options for growth than only from acquiring more units, then STR may be for you.
