Short-Term Rental vs. Long-Term Rental: Which Rental Model is More Profitable for Landlords in San Diego?

Evaluating Rental Options: A Landlord’s Guide to Short-Term vs Long-Term

In this article, you will learn more about the specifics of each rental type. We will explore the pros and cons of short-term vs. long-term rentals so that you can make an informed decision about which rental type suits you best based on your preferences, priorities, and business goals. Using the information presented in this article, you should be able to determine which rental strategy you want. Leverage the knowledge provided to start reaping the benefits of increased revenue while building an outstanding portfolio.

What Is Short Term (STR) Rental?

Short-term rental, also known as vacation rental or STR, is a furnished living space that is rented anywhere between one night up to a month stay (depending on the rental market).

If you are a landlord of this type of rental property, you most likely lease it to travelers who are visiting the city for a short period of time. STRs are perfect for tourists on city breaks or for business professionals traveling for work. The guests typically book vacation rentals for a few days. As an owner, you get to decide whether you want to rent out your property on a daily, weekly, or monthly basis. With the rise of online marketplaces for vacation rentals (such as Airbnb or Vrbo), STRs have become a popular alternative to hotels. There are many reasons why guests prefer short-term rentals. Some of them are privacy, solitude, increased space, and residential conveniences, like a kitchenette or a private backyard.

Short-term rentals can be single-family vacation homes, oceanside houses, condos, cabins, casitas, private rooms, city apartments, beachside retreats, backyard cottages, and similar dwelling types.

What is Long Term Rental?

A long-term rental property (LTR) is an unfurnished residence that is leased to a tenant for a long period of time. The duration of occupancy can range anywhere from 1 month to several months, but, in general, LTR is rented out on a 12-month lease at a fixed monthly rental rate, instead of night rates. The majority of contracts are for 12 months at a time, although some laws allow for leases that are even longer. Long-term rental represents a permanent and stable living space solution ideal for individuals or families who plan on integrating into the community. For instance, the tenants are renters with children who will be enrolled in local schools, etc.

Long-term rental properties include single-family homes, apartments, condominiums, villas, fully furnished dwellings, serviced apartments, and multifamily properties.

The Benefits Of Owning A Short Term Rental

STR possesses multiple benefits and various perks for property owners. Below, we have compiled a list of major advantages of investing in short-term rentals:

Maximized ROI

One of the greatest benefits of owning a short-term rental is that you can adjust the price according to current market conditions and tenants’ demands. This way, you will be able to maximize your gross income. Due to dynamic pricing, a vacation rental may yield up to 2 or even 3 times more profit than a long-term rental unit. For this reason an STR is considered a more lucrative option within a shorter time frame. Vacation rentals in destinations like San Diego and across California have enormous income potential because you can charge higher nightly rates than their long-term equivalent.

Growing demand for vacation rental properties

The outlook for the short-term rental market in the United States is expected to continue its steady upward trajectory. In fact, the vacation rental market is anticipated to grow at a rate of approximately 2.9% until 2030. Revenue forecast for 2030 is expected to reach $21.11 billion, according to Grand View Research analysis. A fast-growing market means more demand from individualsseeking STRs in the next few years.

More flexibility

Since short-term rentals are legally bound by specific laws and regulations, this means that you, as a landlord, can enjoy more flexibility and organize your time better. You can decide when and for how long you will lease your property. You have the flexibility to block off days, weeks, or months to use the property yourself. Also, some owners opt for vacation rentals because they want to keep their options open for selling, too. This is because buyers are much more likely to purchase a property without a long-term tenant.

Preserved property value

Since most tenants stay for just a few days at a time, this type of property is cleaned and maintained more often. Not only can you thoroughly clean the property upon every turnover, but you can also prevent major problems from arising by regular maintenance. Frequent inspections and regular maintenance keep your property in healthy condition, contribute to better reviews from the guests, and help you establish an advantage over the competition.  

Real estate appreciation

Vacation rentals in hot tourist destinations have an increased potential for appreciation in value over time. This means that you will be able to make more profit when you decide to sell your property. If you continue to update, maintain, and keep your unit in good condition, it will most likely increase in value gradually over time.

What Are the Disadvantages Of Owning a Short-Term Rental?

While there are a lot of advantages to owning a vacation rental, there are also several challenges you will need to address. Some of major disadvantages of leasing STRs are mentioned below:

Inconsistent income  

Although a short-term rental has the potential of producing more revenue than its long-term counterpart, the income fluctuates. This is because the majority of vacation rentals are seasonal. They are mostly booked during the weekend, or for about 5 days, during the summer or holidays. What this means is that there is always the possibility of vacancies, even for longer periods of time, when you will not be generating income. In contrast, with long-term real estate it is much easier to predict rent amount and income is more consistent.

Increased operating expenses

Real estate that is rented short-term is generally fully furnished and must be well maintained in order to keep up with today’s guests’ requirements and market trends. Typical cleaning and upkeep duties on turnover, including restocking amenities (toiletries, cooking supplies, cleaning supplies, etc.) represent an additional expenses you have to incur if you want to keep your guests satisfied.  

Utility expenses

Short-term rental occupants don’t typically expect to pay for utility bills (gas, electricity, water, trash, cable TV, Wi-Fi, etc.). Although you, as an owner, may incorporate these costs into the rent, you must make sure you always keep track of expenses and pay your utility bills on time. This means more obligations and day-to-day responsibilities for you.

Tax implications & strict local laws

Many municipalities will require you to pay extra taxes such as occupancy tax, on top of property taxes. Rules and regulations are often stricter for STRs than for long-term properties. Landlords may be obligated to pay for special licenses, application fees, platform hosting fees, etc.

Property management

When it comes to property management, vacation rentals require a lot of involvement. As an owner, you are responsible for advertising, handling the bookings, guest communication, arranging check-ins and check-outs, housekeeping, coordinating maintenance with contractors, inventory monitoring and restocking, compliance with local laws and regulations, and many other tasks. Furthermore, running your rental will require a lot of traveling if your STR is far from your residence. Thankfully, you can hire property management companies that can take care of all day-to-day rental operations for a fee, which may be considered a tax deduction in the end.

The Benefits of Owning a Long-Term Rental in San Diego, CA

Below, you can see the main benefits of running a long-term rental property:

Reliable income stream (when tenant occupied)

Since tenants typically sign a 12-month lease, income from long-term rental properties is predictable and steady throughout the year. Steady rental payments over an extended period will provide you with a sense of security.

Knowing the exact amount of income that you will be collecting next month makes it easier for you to coordinate and budget various management operations or repairs. Moreover, you can plan your next real estate investment or distribute funds for property updates with more confidence.

Lower management expenses

Long-term rentals are typically cheaper to maintain due to several reasons. Firstly, the property does not have to be furnished, which saves you a lot of money from the beginning. Next, tenants are usually responsible for utility bills or basic maintenance upkeep, like mowing the lawn or yard work. Lastly, you will be spending less money on advertising and ad listings since the property will be occupied for a long period of time. You don’t have to worry about restocking amenities either. All in all, there are quite a few savings in long-term management.

Easier to obtain financing

Properties that are occupied by tenant on a long-term lease are easier to finance because real estate investors appreciate the long-term rental market. Lenders usually offer favorable loan terms and attractive interest rates for individuals who are looking to buy or refinance this type of rental property because it is considered less risky. This means that the process of obtaining a loan will be smooth and simple.

Less turnover

Since long-term tenancy means signing one-year lease contracts, you will not have to don’t have to deal with the hassle of constant marketing, listing your property, answering inquiries, vetting new tenants, and other administrative and preparation responsibilities. Plus, you will be in complete control over the tenant screening process. A lot of landlords contract a property management company to help with tenant screening and placement, which includes income verification, credit checks, background checks, and rental history.

Responsible tenants caring for the property

Long-term tenants tend to preserve good condition of the property because they see it as their home.  Typically, these occupants are responsible and loyal, and are more likely to care for the property, which means less wear and tear, prompt reporting of maintenance issues, and well-maintained living space. The reason why they are motivated to keep the premises in immaculate condition is due to the fact that they feel emotional attachment to what they envision as their long-term residence.  

Long-Term Rental Disadvantages

Although LTR have better passive income potential, there are also risks and challenges you will need to consider before deciding which business strategy suits you best. Here are several drawbacks:

Less profit

While you get to enjoy collecting steady rent every month, the trade off is that you will have to lower your profit margins. You cannot charge the same night premiums as in short-term rentals, even if they are in the same category as your real estate. Unfortunately, the cap prevents you from raising the rent and keeps your revenue from growing quickly. Lease contracts usually state that the rent price remains unchanged throughout the term of the contract.

Solving tenant-related issues

Resolving disputes with long-term tenants is typically more complicated than dealing with short-term occupants due to the ongoing relationship between landlord and tenant. Addressing concerns that occur during this time may require more intricate negotiation and problem-solving skills.

Complex laws & regulations

There are numerous laws and regulations you have to comply with if you want to operate a long-term rental property. You must follow strict guidelines concerning security deposits, rent increases, eviction, tenant privacy, and so on. In order to evade legal consequences, you have to make sure to approach any disputes carefully and follow due processes. Ensure you are well-informed about tenant rights to be able to establish a fair and honest rental relationship.

Risk of problematic tenants

When you are signing a contract with tenants who will be occupying your property for a whole year, you must make sure you perform tenant screening diligently. Even with the best process in place, there is a risk of problematic tenants who don’t pay the rent on time or who do not act responsibly towards your property. Eviction is a time-consuming and expensive procedure, so you would have to come up with other creative ways of resolving issues.

Security deposit

It is customary common to collect security deposit before the tenants move in. It is used to cover expenses should occupants cause damage to the property. If there is no damage and the property is in the same condition as before moving in, they can get their money back. Security deposit offers a sense of security by easing your worries about potential damages.

How To Choose Which Type Of Property Is Better For You?

Deciding which rental strategy is right for you requires serious contemplation of various aspects, such as financial targets, market trends, risks involved, time commitment, and so on. As a property owner, you must assess your preferences and goals before selecting the best rental option for your needs. Try to think of your lifestyle, financial stability, and commitment levels you are comfortable with. When managed effectively, both types of rentals can be profitable. Here’s some helpful advice that can help you decide easier.

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