Is it better to invest in Long Term Rentals (LTR) or Short Term Rentals (STR)? This is a question that comes up a lot when considering investing in real estate. The answer really depends on your investment style and goals. Below we will explore the advantages and disadvantages to LTR and STR investing.
Long Term Rentals provide a more stable predictable income. Leases are usually signed for 1 year with a fixed rental amount. This allows for income to be easily calculated and provides stability. However, the monthly income for a LTR is usually less than a STR.
Short Term Rental income is often higher than Long Term Rentals. However, this rental income can vary significantly per month. The best way to adjust for this variance is to average the income over the course of the year.
Tenants sign leases of varying duration and provide deposits. Most tenants will cause no harm but you may get stuck with a difficult tenant. You may have tenants that refuse to pay rent or cause major damage to your property. Sometimes this damage may exceed the deposit amount. In addition, tenants receive certain “renters rights” depending on your State. In this situation you may experience difficulty removing a tenant and be required to go through an eviction process.
In this model, your tenants are temporary. They pay for their stay upfront and place a credit card on file to cover any damages. Things will get broken due to high turnover but most damages are minor. Any major damage will be charged to the tenant via their credit card.
Financing multiple LTR properties may be easier than STR because you can demonstrate consistent income with lease agreements and bank statements. The mortgage for a LTR is not calculated against your debt to income ratio because these properties are investments and the rental income can be proven to offset the mortgage. You can prove income in just a few months and start the process again on a new property.
Due to the highly variable income of STR you need to demonstrate to an underwriter that you can make the payments for your STR. The income you receive from this property will not offset your debt to income ratio in the first year. Your income as demonstrated on your tax returns can be used to offset the mortgage debt when applying for an additional STR after the first year of ownership.
You can increase the value of Long Term Rental properties by increasing income and decreasing expenses. This can be achieved in many ways. You can renovate the properties and increase rent. You can decrease the expenses by decreasing utility costs or billing back the utilities to the tenants. In large multifamily properties small changes can result in significant property value appreciation when the “income method” is used to appraise the property. This is a major advantage of Long Term Rental investing.
Forced appreciation in Short Term Rentals is achieved by finding hidden value. Looking for a property that needs a little work. The easy way is to look for simple cosmetic repairs: flooring, kitchen granite updates, bathroom updates. People that are looking for a resort second property are not often looking to inherit a “project”. Therefore, if you are willing to take on a project you can excel in these markets. The amount of appreciation is limited by the “comparable appraisal method” as the “income method” will not work with most lenders for STR properties.
Long Term Cash Flowing rentals have long-term tenants and are not located in resort towns. You cannot stay at these properties, as they are owner occupied. LTRs will provide an income but not personal use.
Short Term Rentals are located in resort towns, beach communities, ski resorts and can be used at any time. This allows for you to invest in real estate that you can enjoy. Owning a cash flowing STR that you and your family can enjoy is a great experience. You will create a lifetime of memories at these properties while significantly building your personal wealth. You cannot put a dollar amount on investing in life experiences.
In Summary, both STR and LTR investment properties have their advantages and disadvantages. The key to investing is determining your investment style. (click here)
If you are looking to build a massive investment portfolio that you can scale quickly over the next 5 years then Long Term Rental investing may be the best choice for you.
On the other hand, if you are more interested in a Lifestyle form of investing. Then creating life experiences while investing in Short Term Rental properties may be more consistent with your investment style. You will be able to enjoy your property while producing an income. That is a win win.
The third option is to invest in both. This is the strategy that Lauren and I are pursuing. We own both Short Term and Long Term rental property.
Our Short Term Rental property has been a great Lifestyle investment that we enjoy. We spend the winter snowboarding as a family and in the summer we hike and mountain bike. Investing in Short Term Rentals was one of the best decisions we ever made.