Why STR? Comparing Financials (and Work) of Long-Term and Short-Term Rental Strategies

You’ve got a living space you want to rent out..now what? The long-term rental option sounds like a simple way to go; find a tenant, sign a year-long agreement, and let the cash roll in every month. But now you’re considering this whole STR thing…and I’m glad you are. In this post we’ll break down the difference in return possible from a short-term rental vs. a long-term one, and the work required to get it.

The Profit Potential

It should be no surprise that the nightly rate in a short-term rental is higher than the nightly price of a long-term lease agreement for the same property. People pay a premium for the convenience of being able to reside in a place for a few days, whether it’s for vacation, business, or personal reasons. Plus, the homeowner is taking a risk by having more renters coming in and out of their home and expects to be paid for this risk. Many STR owners say that they expect 2-to-3 times the income of a traditional rental strategy.

Example

One of my rental homes is in an area where the monthly rent I could charge is probably $825 at the time of writing this post. In this model, I would leave the tenant in charge of all utilities; gas, electricity, water, and internet service.

Now, using the home for short-stays, my nightly rate averages out to $120. I expect an occupancy rate of 65% of the year (there are sites like Airdna that can help you estimate your occupancy rate and average nightly billing rate). This brings the average monthly revenue of the home to $2,372.50. Subtracting Airbnb’s 3% fee brings us to $2,301.33. Of course, keep in mind that we pay utilities for the homes in this model. My monthly utilities are averaging somewhere around $350 per month, bringing my takeaway to $1,951.33 per month, on average.

“But what about the cost of regular cleanings between guests?” I knew you were going to ask that. If you’ve stayed at an Airbnb an paid attention at the time of booking, you likely noticed a “cleaning fee” line item. This fee is used for, you guessed it, paying for the home to be cleaned after your guests check out. Now depending on the price your cleaning service charges you (all the cheaper if you’re doing the cleaning yourself) and the acceptable cleaning fee rate for the area, you may even be able to make profit from the fee you charge your guests. I have heard stories of people doing just that. Some break even. Some have to shell out a little extra to cover the difference for each stay. For this example, let’s assume we break even with cleaning fees.

This same home, which would have brought in $825 per month as a long-term rental, is bringing in an average of $1,951 per month as a short-term rental property. That is 2.4 times the monthly income, or $1,126 extra per month. Now, of course, a long-term tenant offers a little more comfort to the owner – You know you have heads-in-beds every night, generating you money. The 65% percent occupancy that I used in my example is just an estimate – It may be higher some years and it may be lower in other years. The STR business has a higher risk and, as we’ve learned, a chance for higher reward.

Note: I didn’t mention lawn care in my service calculations for the STR because the owner likely would pay for this service in either model. So, in comparing the 2 options, I decided to ignore it.

What Effort to Expect

You can see how the short-stay strategy can make for a lucrative investment. But, with all of those people coming and going, how much extra work should you plan to put in on maintaining your business?

Furnishing

In another post, I explain how I get this done quickly.

Guest Communication

You’ll want to thank your guests for choosing your place for their trip. Then, you’ll need to tell them how to check in, share recommendations for the area, instruct them on how to check out, and then remind them to leave you a review…and repeat these every time somebody books your home. Several guest touchpoints should be part of your hospitality gameplan. In a future post I’ll add more detail on my communication strategy and even share tools that you can use to automate the touchpoints.

Cleaning

A thorough cleaning of virtually every surface in the home is necessary, especially in today’s fixation on germ safety. Right now, people want to be assured that their retreat is one to a sanitized environment with no trace of contamination from other living beings…I definitely recommend hiring a professional for this but you’re certainly welcome to take on the cleaning process yourself. Finding a cleaning company or person in your area that specializes in quick turnaround for a short-stay business, is a task in itself.

Paying the Bills

Autopay, autopay, autopay. Right off the bat, I put all utilities on autopay. I don’t want to have to think about logging into different websites every month just to pay the bills. Do yourself a favor and automate these payments right away. Check in every now and then to make sure you aren’t being charged any unusual amounts – You may find a mistake or an opportunity for energy efficiency upgrades to the home.

The Takeaway

Is the extra return on a short-stay investment worth the extra work? For me, the answer is a very clear YES. This may not be the case for everyone. You need to consider the following:

  • Long-term rent rates vs. short-term nightly rates in your area
  • How much time you have to dedicate to an STR strategy
  • The resources available to you (cleaning professionals you can trust, property management companies in the area, etc.) that may make one strategy more convenient for you

I hope you found this post useful. As always, feel free to contact me with questions or suggestions for future posts.

Happy hosting!

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