So you’ve bought your first investment rental property, and are now wondering whether to offer long-term or short-term rental options to potential tenants.
Online platforms like Airbnb allows property owners to put up their property for lease for very short-term periods. What makes more money sense? A short-term lease or long-term one?
Both have their own sets of benefits and drawbacks, so it is important to weigh in and consider which options best works for your financial situation and goals.
What are the differences?
The long and short of rental
Many landlords prefer a long-term leases as there is more security when a tenant signs on a fixed-period lease, which typically spans from six to 12 months. Long-term lease arrangements also mean less worry about vacant units and less work to scout for prospective tenants. The long-term period also provides a steady flow of income for the landlord and relieves stress about meeting a mortgage payment for the property.
However, having a fixed-period arrangement also means there will be fewer opportunities for the landlord to make higher profits. For example, if rental rates for the area were to go up, the landlord will not be able to raise their tenant’s rent or adjust the rate to match the market price until the existing lease with a tenant expires.
For the landlord, a short-term rental arrangement will come with higher tenant turnover and thus vacancy rates. Tenants, on the other hand, have been known to favour short-term rental as many do not want to be tied to a longer fixed period.
For the vacationer, short-term residential property rental may make more money sense, as sometimes it can cost a lot less than a hotel.
For example, three nights at Georgetown, Penang for four people (two deluxe rooms) can cost about RM1,678.80 at Sunway Hotel Georgetown.
Taken from Agoda’s website.
However, getting a three-bedroom apartment in the same area only cost about RM631 on Airbnb.
Taken from Airbnb’s website.
While landlords who offer a long-term lease tenure could have a harder time securing a tenant, landlords offering short-term rental find themselves in a growing pool of competition. For example, concepts like couch surfing are becoming more popular than ever and rental properties are cropping up in popular vacation hotspots, so landlords with properties in these areas may just have to double up their efforts to stand out the crowd to snap up potential tenants. While your potential tenant market is wider, so is your competition!
The upside to short-term rental deals however, is that landlords are often able to charge more to make up for the lack of security in these arrangements. While the tenant often has to pay more for short-term rental, they do not have to worry about maintenance fees and has the flexibility to pick their stuff up and leave in a jiffy.
The same type of apartment is being a charged a rental of RM3,500 a month for long-term, while on Airbnb, it costs about RM4,999 for a month.
Taken from Airbnb’s website.
It is also easier for the landlord to make any necessary adjustments to the terms and conditions, as well as to raise the rent without having to wait for an existing tenant’s lease term to end. This will benefit the landlord, who will be able to ensure a healthy profit margin and to even out any fluctuations in market prices or increased expenses.
However, landlords who offer short-term rental will have to ensure their rental is enough to cover utility bills such as water, electric and Internet. Another drawback of short-term rental is that there is a potential loss of revenue if the landlord cannot fill the unit quickly. Short-term rentals depend on the season, as non-peak seasons may see a drop in tenancy.
Also, each time a tenant moves out, the property owner will have to advertise the unit and get it ready for the next tenant. This can include cleaning, painting, replacing fixtures, carpeting and fixing any wear and tear, all of which will incur additional costs.
What are the costs?
There are various factors to consider when it comes to deciding which rental arrangement will work best for you. Short-term rental deals do not offer the security of a long-term lease, but if your property is at a location that appeals to vacationers, a short-term arrangement can be lucrative for you.
On the flipside, you will have to put up with the recurring cost and process of putting up a rental ad. Services like Airbnb charge hosts a 3% host service fee every time a booking is completed on their online platform. The fee covers the cost of processing guest payments and comes out of the house payout.
Taken from Airbnb’s website.
While the service fee may not seem like much, the amount can add up to quite a fair bit if you engage their services on a regular basis.
Meanwhile, if your property is situated near a college, or parked at a commercial areas, a long-term lease can make your property more desirable and you can already expect a steady stream of income in the long run.
Landlords can put up an ad on sites like Propwall at rather affordable rates.
* Rates in Ringgit Malaysia
Landlords may also enlist the help of a real estate agent to secure a tenant, but it will not come for cheap. Many real estate agents charge a standard one month’s rent as commission of finding a tenant. Real estate agents also prefer being paid upfront to avoid being shut out of a commission after a tenant has been found.
There are no hard and fast rules as to whether a long-term lease or short-term rental will work best for your property, but it will help for you to understand the demographic around your area before you start looking around for tenants. For example, should you target expatriates, students, young professionals, vacationers or corporate tenants?
With the right arrangement, in the right location and managed right, the investment rental experience can be extremely rewarding.
Contributed by iMoney.my, Malaysia’s leading financial comparison website, you can view the original article here. To compare and apply for the best financial products, such as fixed deposits, home loans, personal loans and credit cards, visit www.iMoney.my.