Short-Term vs. Long-Term Rental? How Much Does it Really Cost? | The STRR Podcast #56 | Tim Hubbard

Is a long term rental and a short term rental really that much different? Well, yes and no. We have a lot of the same expenses, but we also have quite a few that are new or different. And then there's probably some that you might not be considering with your long term rentals. So let's jump into that this week. Let's break it down and see how different and how they really do compare. Welcome to short term rental riches. Quick, actionable ideas to help you along your real estate investment journey, but with a specific focus on short term rentals. Well, I was thinking the other day, you know, I've got long term rentals and short term rentals and I think they both have their place and certain properties work better for one than they do the other. But when you have a vacancy with a long term rental, are we really considering how much that's actually costing us? A lot of times when we think about a short term rental, we think that there's just way more expenses. Right. So I wanted to break that down this week and just kind of compare the two. We'll talk about some of the expenses that you're going to have, whether it's a short term rental or a long term rental, but then some that are unique to each. And then just a real brief example with some numbers. I'm going to try not to bog you down too much, but just to break it down like on a year lease comparison, what the actual cost might be. So let's jump into that. There's some obvious expenses with short term rentals that we don't have with long term rentals. And now this isn't 100% across the board, but in general, in general, we do not pay for our long term tenants. Utilities, maybe we include Internet sometimes these days if it's in an apartment building. But if it's a single family home, we're usually not paying for any utility utilities there. Right. So that's one that's gonna be more unique to your short term rentals. And then of course, if we have a long term tenant and a property for a year, we're not doing housekeeping. That's definitely unique to short term rentals. And that's a bigger expense, that's a bigger piece of the puzzle. And I've talked in prior episodes about the different options that we have for that. And really your housekeeping costs could range from 15 to 30%, maybe more to just depending on your setup. So those can really vary. We also have some costs that kind of go along with housekeeping that you're not going to find with the long term rentals. And those are supplies, cleaning supplies, but also toiletries, toilet paper and paper towels and soaps and bath soaps and linens and towels. So we're not going to have those with a long term rental either, right? Those are strictly for short term rentals. Now you may have a long term guest that's staying multiple months, but I'm not considering that for these purposes as a long term tenant. We also have some different startup costs, right. For our short term rental, big one is furniture. We're not furnishing our long term rentals unless we're catering just to a guest that's staying over 30 days usually. And then we could consider them maybe a long term rental. But for the purposes of this podcast, I want to break down a typical short term guest less than 30 days and a typical long term tenant usually about a year long lease. So that's what we're talking about. And these costs are associated with those two different types of guest versus tenant. Those are a few of the short term rental expenses we're not going to have with our long term rentals. Now there's actually a number of expenses we have with our long term rentals that we don't have with our short term rentals. And maybe you haven't considered these yet, but it is definitely worth factoring in and putting it in the picture so you can really compare. If you have a property that you think is prime or in a good spot for a short term rental, consider these costs. Cause after you calculate these in, you might be more inclined to try that short term rental. So what do we have? Well, at least turnover. You know, if we have a tenant that's been in our property for a year or longer, we usually have a big expense when they leave, right? Maybe we have to paint the whole apartment or the whole house. Maybe we have to redo the carpets. Hopefully you guys are putting vinyl plank or tile your units, it's so much better. But if you have carpet, we're going to have to have it cleaned. Maybe we have to have it changed or maybe we are going to change all the flooring. And this is a big expense usually at one time, you know, on a typical size apartment, one, two bedrooms, if you have a property manager doing it especially, I mean you could spend three to five thousand dollars factoring in all of those different costs and that's different than a short term rental. In the past I've talked about having an extra budget for wear and tear on a term rentals, but maybe $100 per bedroom per month. So one bedroom, maybe $1,200 per month. Whereas if you have a year long lease and you got to redo the whole thing and go in and paint, you know, you could be spending quite a bit more than that. So really consider that. And now we also have our lease up fee. What is that? So if, if we have a tenant in there and we have a professional property manager helping us, they're going to charge us to find a new tenant. Sometimes it's half the first month's rent, sometimes it than that just depends on where you're at and what's typical in your market. Now we do have leasing fees with our short term rentals through Airbnb or vrbo. Those are really the commissions that we're paying to the listing companies. So you could say that's kind of the same, but it's not really a big chunk like it would be with a long term tenant lease up. Now this one's going to be totally unique to long term rentals. And that is if we run into a situation where our tenant is not paying us or for whatever reason we need to evict them. Well, that could set you back quite a bit. Not only with frustration and the time that it takes, but financially. I mean, what if they're there for three months? Depending on the state that you're in or where your property is, these time ranges are going to be different. But what if you've got a tenant in there for three months that's not paying you rent? And actually, with all this Covid stuff going on, I don't even believe you can evict someone. You'll want to double check that. Regardless, we don't have these eviction fees with guests that have stayed less than 30 days because they don't have tenant rights, we can call the police and we can have them kicked out of the property. If they don't have a contract to stay at our property for more than 30 days and if they're breaking some sort of house rule. So that is unique to a long term rental and that can really set you back. If someone's not paying and they're in there for three months, and let's just say the lease is $1,000 a month, well then you've got $3,000 you just missed out on and all your court fees. So that's kind of a n scenario, I gotta say. Investing. For over 10 years, there's only been one tenant that I've had evicted and it actually didn't even make it all the way through the eviction process. They left before the court closing and all that stuff. So we're able to work that one out. Depends on the type of rentals that you have. The lower income rentals, you might find that the evictions are going to be a little higher. But that is definitely unique to long term rentals. And we don't have that expense with our short term rentals unless we're renting for over 30 days and that guest becomes a tenant. So those are some of the main differences. Now when we talk about vacancy, when that tenant moves out at the end of their long term lease, whether, let's say it's a year, sometimes it takes a while to find a new tenant, right? Depending on the season you're in too. If you're coming up on winter and the lease ends at a bad time and it might take you two months or something at least that out, and during that time your property is 100% vacant. Now with short term rentals, I got to say, and again, knock on wood, even during COVID we're like never 100% vacant. I mean, maybe we get down to 60% in really bad time of the season. With COVID happening as well, the chances of just having a whole month where you don't get any short term rents is not as common. Again, these are generalizations. If you're in a country or a city in the world where Covid shut you down 100%, then that's possible. But we are in a special year, right? Normally when we get through this, that's not going to be very common that you're 100% vacant with a property. Otherwise you turn that one back into a long term rental because there's not a short term demand there. You know, if your long term lease is vacant for a while, that can really add up. One example of a short term rental versus a long term rental. And I'm not going to get into the nitty gritty numbers here, but we're just going to talk about one year operation and I'm going to try to make it as simple, straightforward as possible. Let's say you've got a lease, a one year lease for $1000 a month. Tenant at the end of the lease wants to move out and it takes you a whole month to lease up the property. And when you lease it up, your property manager charges you 500 bucks to lease it up for the next tenant. They had to run their background and do all that and then let's say that your turn, your property turn, painting and patching holes from where they had shelves or cleaning the carpet or putting in new flooring. Let's just say that cost you 2,500 bucks. I think that's kind of conservative. So all in, you've got about $4,000 in costs at that 13th month after they left because you had $2,500 for the apartment turn or the property turn, you had $500 for the lease up. And we've got an account for the month that was 100% vacant at $1,000. So that's $4,000 in cost as I would calculate it on a, on a 12 month lease. In that 13 month period, that long term rental basically earned $8,000. And now that's very rough. You know there's going to be likely some other costs and things that have gone into there, some maintenance and stuff like that. But I just wanted to give like a very, very basic breakdown of how much money you're actually maybe making with that, that long term rental. Just gross. This is gross right now. Let's take a short term rental that rents for. And this is again, this can be very conservative. I'm going to say $2,000 a month accounting for vacancy already. So over a 13 month period, 26 grand. Not too shabby. These properties are all over the place. They're still out there. And we're talking gross again. Now if we deduct the 100, I'm calling this a one bedroom. There's one bedroom places all over the place that can make this kind of money. So one bedroom, I'm going to deduct that $100 a month for general wear and tear per bedroom. So it's a one bedroom. So there's 1300 bucks. Now I'm going to go ahead and I'm going to deduct 30% from this right off the top to account for housekeeping and for utilities. Now again those costs are going to vary depending on your property, depending on how your management set up. Let's just deduct it in half, let's say it's 50%. So you've got a gross $24,700 after your $100 allowance per month divided into what is that? $12,350 compared to 8,000 with the long term rental. Now this is assuming that you have a property in a good market, one that makes sense. We've talked about that in prior episodes that you had demand and that you also didn't have any crazy maintenance things happen or anything like that. So just to break it down, I mean there's some really, really good potential with short term rentals. Not every property makes sense, not every market makes sense. But you can find great properties out there to give you much better returns than your long term rental and also not have giant upfront expenses at the same time like you would with a long term lease checking out. So those are just, just a recap. Some of the expenses that you're gonna have with your short term rentals that you don't with long term. Those utilities, your housekeeping and your upfront furniture cost as well. So that example is assuming you already had the furniture in there and then some expenses with your long term rentals that you maybe weren't considering or really thinking about that much. And that is your lease turnover, how much it's going to cost to turn that apartment over or that house at the end of their year lease or whenever they move out. The lease up fee from your property manager if you're not doing it yourself. And then potential evictions and eviction fees. And that vacant period during that time is you straighten that out with your resident or your long term tenant. So those are the basic ones. And then the vacancy again, we're never almost at 100% vacancy. It just like doesn't happen. Like even with COVID when your single family home doesn't have a tenant, it is 100% vacant. So keep that in mind. I think both long term rentals and short term rentals have a great place in your portfolio. Hopefully this gave you a little bit of insight. And until next time, have a wonderful day. Want to get on the fast track to financial freedom through short term rentals? Well, it all starts with the properties you acquire. But you want to make sure that you acquire the right properties. I want to give you my ebook that will show you how to do just that. There is no charge. It's my gift to you for being one of our subscribers. Just go to restmethods.com that's R E S T methods dot com.