Should I Invest in a Short-Term Rental or Long-Term Rental? [Ask Coach]

 

 

About This Episode

Episode #236 – Which type of investment property – short-term rentals or long-term rentals are best for you? They both have their pluses and minuses. Coach Carson will tackle that question and more in this edition of the Ask Coach podcast.

Episode Transcript

[00:00]

Short Term Rentals Airbnb Vacation Rentals by Owner you’ve probably heard of them and you’ve probably heard they produce a lot of cash flow. But which should you invest in? Should you invest in a short term rental or maybe a more traditional long term rental? That’s the question I’m going to tackle in this edition and of Ask Coach, and we’re getting started right now.

[00:25]

Welcome to the Asked Coach edition of the podcast. If we haven’t met yet, I’m your host, Chad Carson. You can also call me Coach. And this is a show all about helping you get out of the financial grind so you can do more of what matters in the Asked Coach podcast series is where I do my best to answer your burning questions about real estate investing and personal finance. Today’s question came in by email from Nicholas Gross.

[00:45]

And by the way, if you want to have your questions consider for a future episode, you can send an email to [email protected] Nicholas Questions says, thanks for all the great work you do. We just built our first short term rental property and are starting to plan for our next rental property. We’re deciding between additional short term properties which have higher income ceilings and long term rentals which have higher income floors. How do you balance your portfolio of rentals? Thanks, Nick.

[01:13]

So, Nick, this is a great question. And short term rentals are such a hot topic right now in 2022. There are so many benefits. I want to unpack it a little bit, though, and explain just some definitions of what a short term rental is and what a long term rental is, in case people haven’t heard of that. So a short term rental in general means you’re renting either on the platforms, Airbnb Vacation Rental by Owner.

[01:34]

There might be some others out there for more niche type products, but you’re looking for people who rent by the night, rent maybe by the week, sometimes by the month. There’s kind of different variations on short term rentals, like maybe nurses are coming into town, traveling nurses staying for one to three months, maybe you’re running to rotating medical students or something like that. The point is, this isn’t your traditional, hey, let’s do a twelve month lease and stay for two or three years. That is more of a long term rental where you’re trying to get someone to stay in the property for as long as possible. Short term rental, you’re charging higher rates, but they’re staying for shorter periods of time.

[02:07]

So there’s pluses and minuses of each. The big plus and really what it comes down to with Airbnb with short term rentals is that it has a potential higher income. Nick described it really well. There’s a higher ceiling of what you can make. Just as a rough example, I might have a property here in town that could rent for $1,500 as a long term rental per month for somebody to stay for a year or two or three.

[02:28]

It is a short term rental that might be able to rent for $3,000 up to $5,000 if I really optimize it and had a really good short term rental market. So 3000 $5,000 versus $1,500, that’s your ceiling. Now, the negative of a short term rental business is that it’s more like a hotel. That’s the best way I can describe it. It’s like a hospitality business.

[02:49]

There’s more turnover. You have to make sure the sheets are changed, you have to make sure the towels are there. Is there toilet paper? Is there all sorts of other things that someone is going to expect when they’re staying in a short term rental. So there is more operational costs where if you’re doing it yourself, that’s just more time from you.

[03:06]

You got to go over the property more, you got to do more things. And also if you hire somebody out, the cost for your manager is higher. Like I have one short term rental these days. I’ve dabbled a little bit. It’s not my main niche, but I’ve done some and we pay somebody 25% of our gross rent of our total rent in order to do all of those things.

[03:23]

And it’s worth it to us because we don’t want to do all those. So whether you do it yourself or whether you pay somebody, it’s a more costly operation. So you need to build those numbers in and just understand that your margins aren’t going to be exactly what you think they are because you’re going to have some of those costs. You’re also going to pay utilities, you have to pay for some of the supplies. There’s going to be more upfront furnishings of the property.

[03:43]

So those are some just realities of it. But the bottom line is you probably can make more money if it’s a good property to do a short term rental. Now what’s the benefit of a long term rental? Long term rental is just more stable. The negative is you won’t quite make as much cash flow as I’ve already talked about.

[04:00]

But you have less time involved. And the way I really think about this, Airbnb, short term rental is a business. It really is a business. You might own a property and turn it into a short term rental and you have a kind of a hybrid business, Airbnb, and then the long term property is going to go up in value. Hopefully, maybe you’re paying off a mortgage.

[04:19]

So it could be both, it could be an investment in a business. But whereas a long term rental after you get it bought and stabilized and rented is pretty much an investment, you’re not having to mess with it day to day. I have multiple rental properties and even the ones I manage myself, it’s like 30 minutes per week at most. Sometimes you’re doing more bookkeeping if you’re doing tax returns, things like that. So it’s a much more passive business doing long term rentals.

[04:41]

So now we need to get back to the question that Nick is asking, what should you do next? So now I want to get back to the original question from Nick, which was twofold, one, what should you invest in next? And also I think the bigger question was how do you balance your portfolio between short term rentals and long term rentals? So I want to give you kind of a big picture objective, like why are we doing real estate investing? Why are we even getting into this?

[05:04]

And at least the audience that I’m talking to here, most of you know, financial independence or getting to a place where your investments pay for your day to day costs, so they pay for your bills so that you have work optional. You don’t have to go and work a job in order to pay your bills. I’m betting that for most of you that’s the objective. You might not want to leave your job, but having your investments pay for your lifestyle is really why you’re doing this, right? So in the big picture, and this is what I wrote my book, Retire Early with Real Estate, all about what are the different ways you can get there when the big picture?

[05:35]

The strategy to do that is by owning enough wealth so having enough net worth, enough equity in your investments such that the income from those investments pays your bills. Now investments like long term rentals have a little bit lower cash on cash return or yield on the amount of equity that you invest versus a short term rental. Or any business, businesses tend to have the most cash flow. So if you look at real estate, there are more business like real estate investments like Airbnb, but there are also other ones like flipping houses. I’m in the student rental niche, which is a little bit more of a turnover business.

[06:11]

It’s not quite like Airbnb, but people stay an average year and a half in my properties, so they’re not staying four or five years. Like I have some of my single family houses where they stay much longer. But again, the plus of these more business like investments is you can get there and have cash flow sooner. So my question for Nick and for all of you when you’re thinking about this, which one you should you do next? The question is, what’s your timeline?

[06:34]

So let’s say you’re making a lot of money as a doctor or some other profession and you have like a ten year time horizon, but you have zero time right now. You’re so busy with your work, you’re making a lot of money, but you’re so busy with your work. And anytime you have after work, you’re just trying to be with your family, do other hobbies you have. You might have a little bit of time to buy a rental property or two unless somebody else manage it. But a long term rental would make more sense for you in that case.

[07:00]

But if you’re somebody who says, look, next two to three years, I would like to be work optional. I want to replace my income as fast as possible. If you tell me that, then a business like piece of real estate or maybe just another business altogether is what you need to focus on. And so Airbnb short term rentals are a good way to replace your income. I’ve seen lots of people do that with three or four properties, three or four properties focusing on short term rentals.

[07:24]

Now they got it. That’s the question for you, Nick. What’s next is really about your objectives and your timeline if you want to do it sooner. And this is what I did with my business. I didn’t do it with short term rentals.

[07:35]

I did it more with lower income properties that had higher cash flow ratios. They were a little bit more management intensive, and we started with those. And that’s how we were able to have some freedom. That’s how I was able to travel. In 2009, in the middle of the recession, we had cash flow coming in from those properties.

[07:50]

But ultimately we decided we want to get out of the more management intensive business. And we moved into the more passive business, hiring property managers, having properties a little bit more stable long run. And so you can do both. You can do the short term rentals in the short run, and then over the long run, you can start diversifying into more long term rentals. And as your base of wealth, your equity gets bigger and bigger and bigger, then you might lean more heavily on the long term rentals, which is what I do now.

[08:16]

I could do short term rentals. It’s an interesting niche, and I would just say you can make a choice at that point and you can be opportunistic. If in your local town, there’s tons of great opportunities for Airbnb short term rentals, that’s the best deals in town, then maybe you do that and you hire a property manager, which is what I’ve done with my one short term rental. But you have that choice at that point because either way, you can pay your bills with a more passive business or with a more active business. But early on in your career, I know a lot of you are trying to get there quickly.

[08:45]

That’s where you focus on either short term rentals or think about other businesses, too. Sometimes I have multiple side hustles that I could do. I have my real estate license. I could do that part time and make a little bit of money. I’ve always been intrigued by businesses like coin laundries or laundry mats or washing car washes, things like that, which are there’s some operations there.

[09:07]

You’re basically buying a business, but it can also produce pretty high cash flow compared to the lower cap rates and cash flow of true long term rentals. So I said a lot there, but hopefully that helps you think about the portfolio, Nick, and how I think about it too. It’s a lot about timing. If any of you have your own questions, either follow up questions to this episode, leave them in the comments on YouTube. I would love to hear from you and if you want to have your questions considered for a future episode, be sure to send an email to [email protected] or just leave a question in the comments on YouTube and let me know.

[09:37]

That’s a question you’d like for a future episode. We get more questions than we can typically answer. So if you want to increase your chances of having your question answered, be sure to keep them brief and to the point. And then number two, also keep them on topic, either real estate investing or personal finance. That’s what the show is all about.

[09:51]

But I would love to hear from you. If you like the show, I’d like to invite you to subscribe to my free email newsletter at coachcarson.com/REIToolkit. In addition to weekly updates, articles and behind the scenes tips from me, my email newsletter subscribers get my real estate investing toolkit, which includes a property closing checklist that I actually use when I buy properties, a real estate deal worksheet, a tenant screening criteria checklist and other spreadsheets and goodies that will help you on your journey to financial independence using real estate. You can get it all for [email protected].

[10:23]

/REIToolkit I also want to take this time to thank the people behind the scenes who make this podcast possible each and every week. This includes my podcast editor extraordinaire Michael Nguyen, my amazing virtual assistant Megan Thompson, my wife Kari who helps me behind the scenes and is my partner here at Coach Carson. And of course, thank you to all of you, the listeners of the show who make everything possible. This show exists for you. It exists because of you and I really appreciate you being here for another episode.

[10:48]

Everything I’ve shared with you in this episode has been for general education purposes. I have not considered your specific situation or risk before buying your own investments, be sure to consult a financial real estate and or a legal professional. Until next time, I’m Chad Carson. You can also call me Coach and this is a show all about helping you get out of the financial grind so you can do more of what matters. See you next time.

 

Help me reach new listeners on Apple Podcasts by leaving us a rating and review! It takes just 30 seconds. Thanks! I really appreciate it!

Links & Resources

Get My Free Real Estate Investing Toolkit!

Enter your email address and click "Get Toolkit"

NO Spam. Unsubscribe anytime with 1 click. Powered by ConvertKit

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.