Success in real estate investing relies on taking advantage of the right opportunity whenever, or wherever, it comes along. When you buy an investment property, you’ll need to decide how to list and advertise rentals. While both long-term and vacation rentals have pros and cons, a new study from RentHop and AirDNA reveals that focusing on one type of listing in some of the largest U.S. cities may offer clear advantages.
What’s the difference between a vacation rental and a long-term rental?
The average length of stay often plays a role when categorizing a property as a vacation rental versus a long-term rental. The type of renters attracted to the property and how they spend their time in the house also serve to differentiate the way an owner chooses to advertise a property.
Vacation rentals offer short-term residencies for tourists or temporary visitors. As such, vacation home leases typically cover anywhere from one-night stays up to a month. Owners may advertise a vacation rental with a nightly or weekly rate.
Long-term rentals charge a monthly rent, and owners may ask for a six or twelve-month lease commitment. Tenants who rent a long-term rental use the space as a home.
Rental Properties and Taxes
With vacation rentals and long-term rentals, property owners can claim tax deductions and must report their rental income and expenses. Owners can deduct their operating expenses, travel expenses, repairs, mortgage interest, and depreciation.
Learn more: A Guide to Rental Income and Expenses
Best cities for vacation rentals
Across the country, certain locations make more sense for vacation rentals. In these areas, a thriving tourist industry results in higher demand for short-term rentals. Geographic location also contributes to vacation rental demand. Milder weather may entice travelers wanting to escape a cold winter for a brief getaway.
According to the recent study of the 50 largest U.S. cities conducted by RentHop in partnership with AirDNA, Nashville and Virginia Beach ranked among the most profitable for vacation rentals. Boston also made the list of large cities with the top vacation rental property performance.
What makes these cities a good choice for a vacation rental? Various factors work together to attract the attention of travelers.
Vacation rentals tend to perform better in cities with an established tourist industry, like Nashville and Virginia Beach. Specifically, the study cited the popularity of Nashville for bachelor and bachelorette parties. Well-known tourist attractions and a reputation for a positive vacation experience create an ongoing demand for short-term rentals.
Within these popular tourist cities, investors still need to find profitable buying opportunities. In a market overcrowded with vacation rentals and fierce price competition, you may search long and hard for a profitable investment in your price range. To identify cities with strong demand for vacation rentals, look for higher occupancy rates of existing vacation rental properties to indicate a need for additional supply.
Larger houses in particular seem to perform better as vacation rentals. Cities like Nashville often attract larger groups of vacationers to celebrate an event together. Extended families may also want to reunite for an annual vacation and spend a week in a larger property. The study noted that four-bedroom vacation rentals outperformed properties listed as long-term rentals in 90% of observed cities.
Best cities for long-term rentals
Renters looking for long-term leases have different housing needs compared to vacation travelers. More residents choose to rent rather than buy in cities with higher-priced housing, such as New York and Los Angeles. Typically, in these areas with a higher cost of living, property owners generate higher margins from long-term rentals than vacation rentals. Additionally, towns with a less active tourist industry would also attract more renters seeking long-term leases.
According to the RentHop/AirDNA study, the following cities rank as some of the best large cities for long-term rental properties:
Some, such as Louisville, do not offer enough tourism to attract a large number of short-term rentals. In other large cities, the cost of living and a higher demand for rental housing may increase profit margins. According to the latest RealtyHop Affordability Index, Miami has the most affordable housing market nationwide, creating a higher rental demand.
If you’re looking to purchase a property to list as a long-term rental, it helps to research different neighborhoods within a large city. Location remains a crucial factor in investment real estate purchases; long-term renters may want to live closer to business centers.
Property features make a difference
The type of investment property you purchase also makes a difference in your decision to list the unit as a vacation rental versus a long-term rental. Typically, long-term renters do not want to pay for unneeded space. To save money, they may focus their search on the smallest unit that fits their needs. Alternatively, vacation renters may look for larger properties with space to accommodate additional guests.
Number of bedrooms
The RentHop/AirDNA study noted that the number of bedrooms affected investment property profitability in different cities. One-bedroom rentals produced higher profitability as long-term rentals in 96% of the large cities included in the study. Only Nashville and Virginia Beach, towns noted for tourism, showed a higher return on investment (ROI) for 1-bedroom vacation rentals.
Additional bedrooms often translated into higher profitability for short-term rentals. Four- bedrooms units in cities like Milwaukee, Boston, and Nashville provide premiums of up to 250%.
Cities without strong tourism rank high for long-term rentals, regardless of the number of provided bedrooms. Louisville led the pack for all bedroom counts for long-term rentals. In the low-bedroom count categories, San Jose made the top five in all four categories (1-4 bedrooms) and New York in three of the four categories. Houston and Atlanta made the top five list for smaller long-term rentals, while the California cities of Oakland and Los Angeles appeared at the top of the list for four-bedroom long-term rentals.
While the study did not consider amenities such as swimming pools, it’s important to note that some home features attract vacation renters. Travelers and tourists may look more closely at properties offering close proximity to tourist attractions, walkability, and other features, such as a pool, that give the home a resort-like feel.
Popular amenities for long-term rentals may include proximity to public transportation, on-site fitness centers, or interior features such as newer bathrooms and kitchens. Long-term tenants may also look for units that allow pets.
What type of property do you want to manage?
How you prefer to utilize and manage a rental may also affect your decision to list the property. Have you always dreamed of owning a small vacation cottage by the sea where you may one day spend your retirement? Or do you want to invest in a second property with no intention of ever using it as a personal residence?
Everyone has a budget. The amount you have available to invest in a property may limit the type of home you can afford to purchase. If you want to start with a small investment and gradually build a real estate portfolio, you may buy a one-bedroom while learning more about the business. The study indicated that most one-bedrooms in large cities work better as long-term rentals.
Dependability vs. flexibility
Long-term rentals may provide a more dependable income stream as tenants usually stay for a full year or more. Alternatively, vacation rentals turn over more often and may sit vacant during the off-season. On the plus side, vacation rentals can give you more flexibility. If your vacation rental resides in one of your favorite travel areas, you can easily decide to take a trip and stay at your property.
Short-term leases also allow owners to shift pricing quickly to take advantage of changes in the market, while long-term rental owners might need to wait until the next lease renewal. Property owners should include advertising costs in their rental profitability calculations and find a reliable source of leads, such as RentHop, which supports both short-term and long-term listings.
Long-term tenants treat the property they’re renting as their home and tend to accept a greater share of the responsibility for cleaning and upkeep. However, they’ll need help with larger fixes like broken appliances, pest complaints, and standard living conditions. Property owners with a long-term rental may need to higher a property management service if they have a larger building.
Vacation tenants come with a different mindset where they view the property more like a hotel than a home. A vacation mindset may mean that a tenant expects a higher expected level of service from the owner or property manager. A vacation rental landlord may therefore decide to hire a different type of property management service for this specialzed type of rental.
A closer look at investment property expenses
Although the RentHop/AirDNA study assumed 50% operating expenses for both vacation and long-term rentals, property investors and buyers should look closely at projected costs prior to making a purchase. Some key points to consider:
Typically, owners cover the costs of utilities for vacation rentals, while tenants pay a greater share of these expenses for long-term leases. Don’t forget to calculate any estimated monthly expense for water, sewer, cable, electricity, and gas and deduct it from your rental income when determining profitability for a unit.
Move-in / move-out expenses
Vacation homes turn around much more frequently than long-term renters. This translates into higher cleaning costs and can also mean increased maintenance and repair expenses in order to keep the property looking its best for each new tenant.
Property management expenses
If you don’t live in the same city as your rental property, you may need to engage a management company to assist with marketing, paperwork, and facilitating repairs. These management company charges can put a dent into your profitability. Long-term rentals tend to have fewer ongoing expenses due to less turnover, which could mean lower management costs.
As a rental property owner, you must plan for the typical expenses of owning a home. Additionally, you now run a rental property business and may need to pay for a license and local business taxes. Some townships or cities also require an inspection between tenants.
Know the rules and regulations before listing a property for rent
Before you buy an investment property, research local laws and neighborhood requirements. The recent proliferation of short-term rentals in more widespread areas has caused some pushback from residents. Before you purchase a vacation rental, check the city or town’s rules about rentals to make sure you can offer short-term leases. Likewise, many condo associations and HOA have enacted rules about long-term rentals, requiring a minimum of a one-year lease. Condo associations may also limit the number of rental units within a complex.
Ultimately, your decision on how to list a rental property depends on various factors. Although you may consider a rental propertyan investment, you’ll likely need to devote some amount of personal time to property management.
Work toward building a portfolio of profitable units that meets your investment goals. Closely look at pricing and set a short-term or long-term rental strategy based on each property’s ROI. You may find it more profitable to rent a property weekly during vacation season, then look for a longer-term rental of six months or more during the off-season.
You may also want to consider the time you have available to commit to property management. If you’re not at a point where you can manage the frequent comings and goings of vacation renters, you may prefer to work with one long-term tenant. While you may earn a lower ROI in some locations, long-term rentals can still help you build equity and value through price appreciation.