Once you’ve decided to rent your vacation home, the most important decision you have to make is whether to rent on the short term market or the long term market. Do you want several groups checking in and out each week or are you looking for a solid long term renter who is going to pay the bills and let you fall asleep at night knowing everything will be just fine? It’s a tougher choice than you may think and the decision you make will influence your rental income and profitability for years to come. Luckily, Mango Vacation Rentals has been doing this since 2017 and we are happy to share the insights we’ve gained after hosting over 2500 rental groups.
In the interest of full disclosure, we are a short term rental company and we love short term rentals. I wouldn’t say we dislike long term rentals but, given the choice, we wouldn’t pick them first for dodgeball. We will sometimes take rentals for more than a month but rarely for more than 2 months and only when it makes sense in the current rental market. Still, long term rentals may make more sense for your property. In this article we will identify the key areas that differentiate short term and long term rentals and help you decide which model is right for you. We’ll also attempt to dispel some of the persistent myths that often weasel their way into this conversation. For clarity, we will define short term rentals as any stay shorter than 1 month and anything longer than a month falls into the category of a long term rental. The vast majority of our short term rentals are in the 2-5 night range.
1. Damage to your Home
Let’s start with the biggest party throwin’est, house ruinin’est, disco suite wearin’est elephant in the room: the belief that short term renters are more likely to damage your property, throw parties, annoy your neighbors and, in general, just be jerks. In our experience, we have simply not found this to be true…except for maybe the part about annoying your neighbors. That part may be a little bit true.
Yes, short term renters are more likely to enjoy some late night beverages by the pool. If you have neighbors close by or strict noise regulations, this might be a problem. They are also more likely to spill cheerios on the floor and leave the remnants of last night’s drunk’n attempt at lemon loaf all over the kitchen. On the other hand, short term renters don’t use the house very much. They eat out most of the time and never, ever use the oven…except in the case of the aforementioned lemon loaf. The fridge is always stuffed with beer so there is no room for smelly leftovers and they couldn’t care less if you don’t have a waffle maker.
On the other hand, long term renters use the house as if it were their own. They use everything in the kitchen including the oven, freezer and every other appliance you have. Understandably, long term guests also need clean clothes from time to time so your washer and dryer will get a workout. If you don’t have laundry facilities, then you can expect wet towels hung over your furniture and laundry drying on your railings. Long term renters are also more likely to move furniture around, repurpose furniture and ask you for furniture you don’t already have. The type of uncleanliness that long term renters generate might not be as, uhhhh, dramatic as what you might find in the sink after a weekend rental but our clients would rather do some extra dishes than have to refinish the hardwood.
For those of you who are still convinced that short term renters bring with them nothing but stains and destruction, please read our post on how we avoid all the horror stories you hear about on the internet. It’s been over 2.5 years since we wrote that post and we still haven’t received that 3am phone call from our neighbour Joe.
One final note on preventing damage to your home; short term rentals allow you to have eyes on your property more often. With daily or weekly check-outs, you have many more opportunities to spot damage to your home and perform maintenance before it becomes a huge problem. Believe me, you’d rather discover your roof is leaking by finding a damp spot during a weekly inspection as opposed to getting a photo of black mold from your long term guests.
2. Rental Income
Both as business owners and homeowners, this is the argument that sealed the deal for us. You can make more money with short term rentals than you can with long term rentals. End of argument. Hopefully, you noticed the word “can” in that last statement. There is some risk involved with the short term market. Your country could be shut down by months of political unrest (see 2018 in Nicaragua) or…oh, I don’t know…a pandemic could shut down tourism for a few years while the virus mutates it’s way through the greek alphabet and everyone in the world is stuck at home practicing yoga and working on their sourdough starter. All that said, we still prefer the economics of the short term market so let’s take a closer look.
Right now, you can rent a 3 bedroom home with a pool and a view in our town for around $1500 to $2000 USD per month. But, you can take that same house and rent it for $200 to $250 per night on the short term market. Even if we use the low end of the nightly price range, this means the house has a potential rental income of $6000 per month. Of course, you are never going to have 100% occupancy with short term rentals so let’s use a modest goal of 50% occupancy. In case you were wondering, our most popular houses rent in the 75%-85% range during the high season and average around 60% for the entire year. Getting back to our example, at 50% occupancy, you have an expected rental income of $2500 per month albeit with some risk attached. What we really like about the short term market is that by accepting this risk you get the chance to increase your income by renting out the remaining nights. On the long term market, your rental income is guaranteed but it is also capped at a lower rate with no opportunity to increase your monthly income.
It’s the classic dilemma of a bird in hand versus two in the bush but, in this case, the birds in the bush are well within reach. In fact, if you played your cards right, I’m sure that you could walk away with all three birds at least some of the time. To be honest, I’ve never understood why you have to let the first bird go anyway. Just hold it under your arm or something while you reach for the other two. If you are out bird hunting with your hands it stands to reason you probably brought along some sort of bird containment device in which to put the birds. Just a bag or even your pocket would do. Seems simple enough to me, but I digress.
3. Costs and Profitability
It’s important to remember that there are some extra costs associated with renting primarily to short term guests. The biggest difference between our short term and long term rental contracts is that electricity is usually included in our short term pricing (up to a point). However, our long term guests always pay the actual cost of electricity. Depending on the number of AC units in your house and your electricity usage policies, this can run over $500 per month if your guests aren’t careful. Of course, these costs should be built into your nightly pricing already but you need to include these additional costs when comparing short and long term rentals. If you are scratching your head about that $500 figure then check out our post on understanding your Nicaraguan electricity bill. You think you’re overwhelmed now…
The second major difference in costs associated with short term guests is you have to clean up after them. You can offset these costs with cleaning fees but you still have to pay someone to clean the house and do the laundry after every stay. Along with wages, you need to pay for all the cleaning supplies and the electricity to run your washing machine and dryer. These costs are going to vary based on the size of your house and the market you are in but, here in San Juan del Sur, cleaning costs run between $12 and $25 per check-out. On the other hand, long term guests are usually responsible for their own laundry and cleaning. We usually include a weekly cleaning with our long term stays so the costs don’t disappear completely but they are definitely lower.
Crunching the Numbers – Warning Math Ahead
Ok, we’ve looked at the differences in rental income and costs so it’s time to put it all together and see what the numbers look like. Using the dollar values from the examples above, let’s compare the expected gross profit if you were to rent the house long term vs. what you would expect from the same house on the short term market. The rental income is based on a house that could rent for $2000 per month or $200 per night. We’ll run the short term numbers at 50%, 60% and 70% occupancy so we can see profitability at the various occupancy rates. The electricity is calculated based on average numbers from a 3-bedroom home we manage and cleanings assume $20 per cleaning including salaries, laundry and supplies. Of course, there are many other expenses involved in running a rental property but today we’re only looking at the major expenses that differ between long term and short term rentals.
|Long Term||Short Term 1||Short Term 2||Short Term 3|
|Electricity Cost to Owner||$0||$275||$330||$385|
|Percent Increase vs. Long Term||—||32%||58%||84%|
Now, before you go running off to buy that leopard print Rolex you always wanted (real thing, look it up), please remember that the gross profit numbers in the table above are not what you are going to see in your bank account at the end of the month. There are many other costs associated with running a vacation rental property including management fees, staff salaries, pool chemicals etc. We are only highlighting the major costs that vary between long term and short term rentals. In order to calculate the money in your watch fund, you’d need to add together all the fixed and variable costs associated with running your rental property and subtract that number from your rental income.
As you can see in our example, even at the modest goal of 50% occupancy there is potential to generate 32% more gross profit through short term rentals. That number quickly increases to 58% and 84% higher gross profit if you are able to increase your occupancy to 60% and 70% respectively. Yes, there is also increased risk if you turn down the guaranteed long term income but, in this case, we believe the potential rewards outweigh the inherent risks. We also like the idea that we have more control over revenue with the short term model. We can run discounts or advertisements to increase rentals. We can change booking policies to drive guests towards orphaned nights in the calendar. We can incent current guests with discounts to come a day early or stay an extra night. In short, we like being in control of our bottom line. This is why we love the short term rental strategy. Don’t get me started on birds again.
It should go without saying but you can’t stay in your vacation rental home when it’s rented to someone else. You might be able to work out a deal for a week here or there when you draw up the rental contract but, once it’s signed, your calendar is set in stone. You may not miss this flexibility right away, but it might be the only thing that saves your sanity next February when that stupid groundhog sticks his head up and calls for another six weeks of winter. I hate that little burrow rat. Instead, give me a nice bird or two all bagged up and ready…goddamnit!!
5. Rental Traction
“But Mango,” you say. “I’ll just do long term rentals in the off season.” This sounds like a decent strategy but it overlooks something we refer to as rental traction. Rental traction is the momentum you gain on listing sites when your property is renting well. Sites like Airbnb, VRBO and Booking.com are in the business of making money. All of them use algorithms to determine how likely your property is to make them money and they put these properties at the top of their search results. The more you rent, the higher you rank, the more money you and the listing site make.
On the other hand, if your property is blocked for months at a time then these rental sites stop paying attention to you because you aren’t making them money anymore. Eventually, you’ll lose traction and find your listing buried on page 22 of the results just below that one bedroom bungalow with views of the sewage treatment plant. Traction can be regained, but not as easily as it is lost and should therefore be carefully guarded once you have it.
All the rental sites keep their algorithms secret but, in our experience, you need at least 2-3 months of strong rentals coupled with 5 star reviews to get your rental traction back once it’s been lost. For example, we manage two identical apartments in the same development. One of them was viewed by 1027 people on Airbnb in the last 30 days. Over the same time period the second unit, which was blocked for 6 months last year due to construction but has been fully open for a few months, was viewed 173 times. That’s rental traction.
6. Management Strategy
The final factor you should consider before deciding whether to go with the long term or short term rental model is fit with your management strategy. If you or your management company aren’t set up to respond to daily emails, meet guests, answer questions and solve problems on the fly then a long term rental strategy may be a better fit for you. You still end up having to do all those things with long term guests; just not as often and not always in a timely manner.
In conclusion, you’d be absolutely nuts to consider long term rentals…Wait, no, that’s not quite the right tone…We think the arguments laid out above paint a pretty clear picture of why we believe the short term rental market is the way to go…yup, much better. That said, we admit there are a few important exceptions.
First, your property may simply not be a good fit for the short term rental market. Short term vacation rental guests in a beach town such as ours are looking for three things; a pool, a great location, and a beautiful home. You may be able to get away without a view but you had better be making up for its’ absence with something else. You don’t have to have be able to see the ocean…as long as your house is close to town, or has an immaculate garden, or is close to a surf break or comes with an in-house chef or anything else that sets your home apart from the hundreds of other three bedroom homes with a pool on the market. If your property doesn’t tick these boxes, then it may be better suited to long term rentals.
Second, if your property is located in a complex with shared facilities or if your Home Owners Association has strict rules regarding noise, then you may have better luck with long term renters. Find some nice people to rent your house, give them some strict rules to follow and hope they never leave.
The third reason you may want to consider long term rentals is if you don’t care about the extra rental income. For some people, investing in a vacation rental property is just a game of buying and selling real estate. In this scenario the renters are only there to pay the bills until the market says it’s time to sell again. If that is your business model, then long term rentals may be right for you. We’d still argue that you’re leaving money on the table but it may be the correct move for your property. If you can put the time and energy you save by not having to answer daily emails about spatulas to better use elsewhere, then you might be a good candidate for the long term market.
In all other scenarios, it’s pretty difficult to argue that short term rentals are not the best way to maximize the rental income from your investment. At least that’s what we here at Mango Vacation Rentals believe.
Happy vacation rentals!