These days, investors in rental property have a number of options available to them when it comes to the type of rentals that can be achieved, but for a newbie looking to invest in their first rental property, the choice of whether to go short or long-term might be one to ponder.
The arrival of Airbnb has everyone thinking that they can make bags of cash, but it is not that easy and sometimes going long-term or mixing the two might deliver more sustainable returns, said Paul French, operations director of the Coastal Property Group.
French says that with urbanisation rising rapidly, there is ever higher demand for rental accommodation in the cities and a coastal city such as Cape Town benefits further from holiday and short-term accommodation demand.
Generally speaking, there are two options – long-term rentals which tend to be for periods of 12 months and longer and short-term rentals, which are usually for shorter periods ranging upwards of a day to a week, month and sometimes up to 6-8 months.
Certain areas are popular for short-term rentals which can achieve much higher rental returns for landlords. In some cases, property investors are even looking at achieving a mix of both long and short-term rentals. French says further that in holiday areas, you may find that you can rent out your holiday home when it is not needed for your own or family purposes and so achieve some returns on your investment.
Despite the hype of Airbnb, French warns that not all areas are suitable for short-term letting on a year-round basis and it is best to investigate carefully as there are risks associated with this type of letting.
As with any investment, it is therefore important to weigh up the pros and cons of each rental type before making a final decision. French gives some guidelines:
This type of rental allows you to rent out your property for anything upwards of a day to a week, a month and as much as 6-8 months. Rentals could be for holiday or business purposes and there are also gap rentals where people come for a period of time on a work contract or move to an area and rent for a period of time before deciding where and what to buy.
Although the returns on short-term rentals tend to be much higher, this type of rental does come with more risks and requires more time commitment. There is also usually more maintenance as you have tenants/guests coming and going all the time.
- PROS – flexibility and higher rental returns. If you for example want to use the property for a period of time for your own use, you have the flexibility to do so and can then then put short-term tenants in for the rest of the time.
- CONS – occupancy risks and higher costs. You are not always guaranteed of occupancy and this type of rental requires more financial commitment as the unit needs to be furnished and equipped including basic services such as television and Wi-Fi. Maintenance costs also tend to be higher as you would constantly have new occupants.
While the rental returns on a long-term contract may be lower, it does provide more security and stability for the property owner. To secure a good tenant that looks after your property might be worthwhile in the long run and most contracts come with a renewal option as well.
- PROS – Stability and financial consistency. Ensuring good management of your property and tenants would mean that you can basically bank on your monthly rentals. Securing a good tenant who looks after your property provides peace of mind to the landlord.
- CONS – Lower rental returns and the potential risk of delinquent tenants. The biggest risk with rentals, is delinquent tenants as it is has become quite onerous to evict. Ensuring thorough tenant vetting and regular inspections of the property will go a long way in mitigating the risks.