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Short-term Rentals Vs. Long-term Rentals
As a property owner, one of the most critical decisions you’ll face is whether to rent your property on a long-term or short-term basis.
Both rental types have grown in popularity, but choosing the right one depends on your financial goals, risk tolerance, and lifestyle preferences.
In this guide, we’ll explore the pros and cons of each rental type, discuss which option might be best for different properties and owners, and offer some final thoughts to help you make an informed decision.
Long-Term vs. Short-Term Rentals: Pros and Cons for Property Owners
Long-term Rentals:
Long-term rentals typically consist of leases that last for six months or more, often extending for a period of a year. Tenants sign an agreement that outlines the terms and conditions of their stay, and usually pay a security deposit along with monthly rent.
Key points and Figures
- The Canadian rental market is carrying strong momentum into 2023, driven by robust labour market conditions, record high population inflows, and generational lows for homeownership affordability.
- It is expected that rents for units available in the market will increase by an average of about 5% in Canada during 2023, which is more aligned with current rates of income growth and the long-term historical average for rent inflation.
- Impact on Long-Term Housing: The research also indicates that long-term housing for residents is being converted into de facto hotels, which is a concern for the housing market.
Pros of Long-term Rentals
- Stable Income Stream
- Lower Turnover Rate
- Less Time-Consuming
- Lower Operational Costs
Cons of Long-term Rentals
- Less Flexibility
- Lower Earning Potential
- Increased Risk of Problem Tenants
Short-term Rentals:
Short-term rentals, often referred to as vacation rentals, are properties that are rented out for shorter durations, typically ranging from one night to a few weeks. They cater to tourists, business travelers, and individuals seeking temporary accommodation.
Key points and Figures
- Regulations: Short-term rentals (STRs) are not currently permitted in the City of Toronto. New regulations were introduced in 2017 and 2018, limiting STRs to a host’s principal residence. These regulations are pending approval from the Local Planning Appeal Tribunal (LPAT) as of August 2019.
- Market Overview: As of April 30, 2019, there were 21,000 active STRs in Toronto, an 11% increase from the previous year. Toronto has the most STR listings of any city in Canada, and its 14,000 STR hosts earned $208 million in revenue in the previous year.
- Listing Distribution: STR listings in Toronto are heavily concentrated in the downtown area. The STR market is dominated by entire-home listings, which represent two-thirds of active listings and five-sixths of host revenue.
- Revenue Distribution: STR revenue in Toronto is highly unequal. More than two-fifths of all revenue was earned by just one in twenty hosts, and the top ten percent of hosts earned 56% of all STR revenue.
- Commercial Operators: Nearly two-fifths (38%) of active listings were commercial multilistings, which earned 53% of total host revenue.
- Housing Loss: STRs have removed more than 5,500 housing units from Toronto’s long-term housing market, a 24% increase from the previous year. This is equivalent to the number of housing units vacant and available for rent.
- Violation of Regulations: Approximately 40% of Toronto STR listings are likely in violation of the STR bylaws’ principal residence requirement. These 8,700 listings would not be permitted if the bylaws come into effect.
- Short-term rental market in Niagra Falls, Mississauga, Toronto, and Blue Mountains reveals an increasingly concentrated, commodified landscape. A few large players are making significant amounts of money, while small-scale home sharing is a modest and shrinking piece of the market. Journal article
Ref – Short term rentals in Canada Overview – Short-term rentals in Toronto:
Pros of Short-term Rentals
- Higher Earnings Potential
- Dynamic Pricing Opportunities
- Property Accessibility
- Lower Risk of Problem Tenants
Cons of Short-term Rentals
- Higher Operational Costs
- Inconsistent Income
- Increased Time Commitment
- Legal Restrictions
Long-Term vs. Short-Term Rentals Comparison
Flexibility and Operational Management
Short-Term Rentals: Enhanced Flexibility
One of the primary advantages of short-term rentals, often listed on platforms like Airbnb or Vrbo, is the flexibility they offer. Property owners can visit their property during vacancies, allowing for regular maintenance checks and personal use. This flexibility is particularly beneficial for seasonal maintenance tasks like air conditioning tune-ups or appliance replacements, which can be scheduled without disturbing guests.
Long-Term Rentals: Stability Over Flexibility
In contrast, long-term rentals typically involve lease agreements of six months or more, offering less flexibility. Once a long-term lease is in place, property owners are legally bound to honor the terms, granting tenants exclusive use of the property for the lease duration. This means that personal use of the property is limited, which may not suit owners who wish to use the property occasionally.
Financial Considerations
Short-Term Rentals: Higher Cash Flow Potential
Short-term rentals often generate higher cash flow compared to long-term rentals, especially when managed personally by the property owner. The ability to set dynamic pricing based on demand, special events, and seasonality can significantly increase overall revenue. However, it’s important to note that if you hire a property management company, the net cash flow may not differ significantly from that of a long-term rental.
Long-Term Rentals: Predictable Income Stream
Long-term rentals provide a more predictable and stable income stream, which is particularly appealing for property owners seeking financial security. With long-term tenants, you can plan your finances more effectively, knowing that you have a consistent rental income over an extended period. This stability allows you to budget for property maintenance, future investments, and potential upgrades with confidence.
Legal and Tenant Considerations
Short-Term Rentals: Fewer Legal Disputes but Limited Screening
The transient nature of short-term rentals generally results in fewer legal disputes compared to long-term rentals, where prolonged tenant-landlord relationships can lead to disagreements. However, one of the downsides of short-term rentals is the limited tenant screening process on platforms like Airbnb. While basic verification measures (e.g., email and ID checks) are in place, they don’t delve into a guest’s background, rental history, or financial stability. This can increase the risk of property damage or problematic guests.
Long-Term Rentals: Tenant Rights and Legal Complexities
Long-term rentals are subject to various tenant rights laws and regulations, which can be challenging for property owners, especially in eviction scenarios or disputes over security deposits. These laws prioritize tenant protection, making it essential for property owners to approach any issues with care and adhere to strict legal guidelines. While long-term rentals offer stability, they also require a thorough understanding of tenant rights to avoid legal complications.
Maintenance and Operational Costs
Short-Term Rentals: Higher Maintenance Due to Frequent Turnover
Short-term rentals experience more wear and tear due to the frequent turnover of guests. This increased usage leads to a higher risk of accidental damage to furnishings, walls, and flooring, requiring more frequent maintenance and refurbishment. Additionally, linens, towels, and other amenities must be replaced regularly to meet guest expectations, further increasing operational costs.
Long-Term Rentals: Strategic Maintenance Planning
Long-term rentals, with their reduced turnover rates, allow property owners to plan maintenance more strategically. Vacancies can be used to conduct significant repairs, renovations, or upgrades without the pressure of back-to-back bookings. This planned approach to maintenance not only saves on costs but also helps in maintaining the property’s condition over time.
Market and Legal Risks
Short-Term Rentals: Unpredictable Market and Legal Challenges
The short-term rental market is known for its unpredictability, with demand fluctuating due to seasonal variations, travel trends, and economic factors. Property owners must be prepared for these shifts and develop contingency plans to navigate them successfully. Additionally, many cities have implemented specific regulations on short-term rentals, including restrictions on the number of allowable rentals, duration of guest stays, or even outright bans in certain areas. Staying informed about local laws and regulations is crucial to avoid potential fines or legal challenges.
Long-Term Rentals: Reduced Market Volatility
While long-term rentals are not immune to market shifts, they are generally less volatile than short-term rentals. The consistent demand for long-term housing provides more stability, making it easier to weather economic downturns or changes in local regulations. However, property owners must still stay updated on tenant rights laws to ensure compliance and avoid legal issues.
Conclusion: Which Rental Type is Best for You?
Deciding between short-term and long-term rentals requires careful consideration of your financial goals, time commitment, and risk tolerance. Short-term rentals offer higher cash flow and greater flexibility but come with higher operational costs and legal risks. On the other hand, long-term rentals provide a stable income stream and reduced vacancy periods, though they require a greater understanding of tenant rights and legal complexities.
Ultimately, the best choice for your property depends on your individual circumstances. If you seek stable, predictable income with minimal involvement, long-term rentals may be the better option. However, if you’re willing to invest more time and effort into managing your property and want to maximize revenue, short-term rentals could be the way to go. Whichever option you choose, staying informed about local laws and market trends will help you make the most of your investment.
Need Help?
Are you seeking a top-tier, luxury property in Toronto, Ontario to transform into a profitable short-term rental? Interested in offering your guests high-end amenities like a gym, a pool, private parking, and all-new appliances? Look no further than Full Home, your premier Airbnb management company in Toronto. We specialize in managing luxury properties, ensuring they provide all the comforts of home and more.
At Full Home, we help you showcase your property’s best features and amenities, attracting guests who appreciate the finer things in life. Whether your property is in a specific neighborhood, ZIP code, or the best area in town, we can help you maximize its potential.
Full Home is here to make your property management journey seamless. We offer comprehensive services, from marketing your property and managing bookings to providing round-the-clock guest support. No matter where your property is located, we’re committed to turning it into a successful investment.
In Niagara Falls, ON? Let Full Home help you navigate the world of luxury short-term rentals. We’re ready to assist you in creating an exceptional experience for your guests while ensuring your peace of mind. Your journey to successful Niagara Falls Airbnb property management starts here.
Long-Term vs. Short-Term Rentals: FAQS
- What are the tax implications of short-term vs. long-term rentals?
- Short-term rentals may incur higher taxes due to being classified as business income, while long-term rentals often benefit from lower tax rates as residential income. Consult a tax professional to optimize your tax strategy.
- How do seasonal trends affect short-term rental income?
- Seasonal trends significantly impact short-term rental income, with peak seasons offering higher revenue and off-peak seasons resulting in vacancies. Plan your pricing and marketing strategies accordingly to maximize earnings.
- What insurance coverage do I need for short-term rentals?
- Short-term rentals require specialized insurance that covers both property damage and liability. Standard homeowner’s insurance may not cover short-term rental activities, so consider vacation rental insurance.
- How do I screen tenants effectively for long-term rentals?
- Effective tenant screening involves background checks, credit reports, and verifying rental history. This process reduces the risk of problematic tenants, ensuring a stable and secure rental experience.
- What should I include in a rental agreement for long-term tenants?
- A comprehensive rental agreement should include terms like rent amount, payment schedule, property rules, maintenance responsibilities, and lease duration. Clearly defining these elements helps prevent disputes.
Sources
- Rentals.ca January 2023 Rent Report
- – Source: 7 Pros and Cons of Owning a Short Term Rental (https://shorttermrentalmanager.com/7-pros-and-cons-of-owning-a-short-term-rental/)
- Long-term vs. Short-term Rentals: Which Is A Better Investment Strategy? (https://blueprinttitle.com/long-term-vs-short-term-rentals-which-is-a-better-investment-strategy/) –
- 3 Benefits of Owning a Short-Term Vacation Rental (https://goodnightstay.com/blog/3-benefits-of-owning-a-short-term-rental/)
- Short-term Rental Vs. Long-term Rental: 12 Things To Know (https://www.goodlifemgmt.com/blog/short-term-rental-vs-long-term-rental/)
- Why Canada’s short-term rental hosts are in for a harsh winter