Evaluating the Pros and Cons of Short-Term vs. Long-Term Rentals for Property Investors

Article written by Ryan Hunt from HUNT Properties, our contributing expert on the South African property market.

Investing in real estate is a popular avenue for generating passive income, but choosing between short-term and long-term rentals can be a complex decision for property investors. Each option comes with its own set of benefits and drawbacks that can significantly impact profitability, management styles, and investor lifestyles.

Pros of Short-Term Rentals

1. Flexibility of Use: Owners can use their property whenever it is not rented out, making it ideal for those who also want to enjoy their investment personally.
2. VAT Benefits: If owned by a VAT-registered entity, owners can claim VAT back on renovations and furnishings, optimising tax advantages.
3. High Returns: Depending on location—areas with high tourist traffic often see excellent returns on investments due to higher daily rates compared to monthly rentals.
4. Positive Customer Interaction: Renting to tourists often results in a positive exchange as renters are usually on holiday.
5. Upfront Payments: Payments are generally received upfront, which aids in cash flow management.
6. Higher Rates: Charging daily rates can yield higher overall income compared to long-term monthly rates.

Cons of Short-Term Rentals

1. Risk of Breakages: Short-term rentals often experience more wear and tear due to the higher turnover of occupants.
2. Increased Insurance Premiums: Higher risk of damages typically leads to higher insurance costs. 
3. Neighbour Relationships: Frequent, different guests can lead to disturbances and potentially unhappy neighbours, especially when the property is in a secure estate or block. 
4. Ongoing Management: Requires constant management or potentially high fees if outsourcing to management companies. 
5. Market Volatility: Susceptible to fluctuations from external factors such as economic downturns, pandemics, or natural disasters.
6. Seasonal Variations: Income can be highly seasonal, with peak periods followed by potentially very quiet periods.
7. Unpredictable Income: Fluctuations in tourism and event cycles can make income somewhat unpredictable when compared to a steady rental. 

Pros of Long-Term Rentals

1. Steady Income: Provides a fixed, regular income over the duration of the lease agreement.
2. Lower Risk: Generally involves less risk of vacancies and fluctuating market conditions.
3. Guaranteed Payments: Income is more predictable and guaranteed during the lease period.
4. Reduced Utility and Maintenance Costs: Tenants often pay for utilities, and less frequent turnovers mean lower maintenance costs.
5. Lower Insurance Premiums: Less frequent tenant changes result in lower insurance premiums.
6. Security Deposits: Help mitigate risks of damage or non-payment.

Cons of Long-Term Rentals

1. Lower Income Potential: Typically yields lower returns compared to high-demand short-term rental markets.
2. Perceived Negative Transactions: Payments from long-term tenants are often seen as “grudge payments,” where tenants may feel they are not building equity or ownership.
3. Legal Protections for Tenants: The Rental Housing Act and other regulations often favour tenants, possibly complicating evictions and cancellations.
4. Less Flexibility for Personal Use: The property is usually unavailable for owner use, as it is occupied by long-term tenants.

David Brauteseth from Holland Insurance gave us some valuable insight into the insurance implications when renting out your home – “The saying ‘one shoe fits all’ is certainly not ‘fitting’ when it comes to short-term insurance. 

When buying a home, take a moment to consider the insurance implications. The location, construction type and occupation all play a role in the cover required and the cost of insurance. 

Thatch homes can cost up to three times that of a tiled roof. Short-term letting often attracts additional premiums when purchasing the required covers necessary to protect you against the unique risks posed by paying guests.”

Additional Insights

According to recent studies and market analyses, the vacation rental market is expected to grow significantly, driven by trends in travel where tourists prefer the space and amenities offered by private accommodations over traditional hotels. On the other hand, urban long-term rentals are witnessing a shift, with more renters demanding flexible lease terms and upgraded living spaces, reflecting changing tenant expectations.

Moreover, technological advancements have streamlined the management of short-term rentals, with platforms like Airbnb providing extensive resources to help hosts manage bookings, payments, and customer interactions. However, in major cities worldwide, regulatory changes are impacting short-term rental operations, with stricter rules being imposed to address the concerns of residents and local governments.

In conclusion, both rental strategies offer distinct advantages and challenges. Property investors should consider their personal goals, market conditions, and tolerance for risk when deciding which strategy aligns best with their investment objectives.