Having passive streams of income is a way to reach economic independence, which is a goal many of us share. And often, investing in real estate is a stable way of generating this additional income. 

 

Residential property investment is an option commonly explored by first-time investors. In a regular market, investors who are in it for the long term will see the value of their investment climb. And in this instance, long-term stays in either renting or leasing is what you want to secure. 

 

There are benefits and drawbacks that come with investing in long-term rentals, so you’ll need to align this with your long-term strategy before you take the plunge and invest.

What does it mean to invest in a long-term rental property?

There is a range of short-term and long-term property investment options that can suit various buyers and investment needs. Holding a property for longer than five years is considered a long-term buy and hold. 

 

These properties are also rented or leased to tenants on a long-term contract, often on a monthly or yearly basis. 

 

Historically, residential real estate is less affected by economic downturns, with tenants remaining in rental properties even when the economy is down. The demand can be even higher for rental properties when tenants are pushed out of the buyer’s market. 

Advantages and disadvantages of investing in long-term rental property

There are some pros and cons of investing in long-term rental property. So, you’ll need to consider these factors when deciding if it’s right for you but keep in mind this isn’t an exhaustive list of factors.

Advantages

1. Steady demand

No matter the location, time or even market conditions, people will always need a roof over their heads. There is always a demand for rental properties and this demand is only rising as time passes.

 

Real estate prices continue to increase significantly and as purchasing a property is becoming unobtainable for some, renting has become the go-to solution. 

 

In areas where the tenancy is high – steady, stable and predictable income is assured, which can see you earning profits over time. Receiving this consistent income will also make it easier for you to understand your financial position and budget and plan your expenses. 

1. Less risk of turnover

Residential properties are rented or leased to individuals, couples or families as their private residence. 

 

Turnover is significantly less than with short-term rentals as you can keep the same tenants for months or even years as long as they follow property rules. And unlike short-term rentals, you can be confident that your occupancy rate will be much higher. 

 

Short-term rentals can fluctuate in their demand, for example during the stay-at-home orders of COVID-19, short-term rentals experienced a drastic decline in occupancy, with some investors undergoing financial hardship and forced to sell. 

1. Cheaper maintenance

Cleaning in short-term rentals is needed on a regular basis given the high turnover of tenants. Necessities such as clean towels, linens, coffee and tea will need to be replenished. Opting to do this yourself can be challenging if you have a full-time job, so cleaning services are an extra expense.

 

Short-term tenants are also known for causing more damage to properties. They don’t go through a stringent screening process and you may only have a rating or review to work with. They’re often away for leisure or celebratory occasions, which can lead to big clean-ups and potential damage that can set you back in repairs. 

 

However, in long-term rental properties, you can conduct a thorough screening process that can include an eviction check, evaluation of rental history, income verification and background check. Long-term tenants are also more committed to caring for the property as they may be living there for months or even years. Once you manage to get your property rented, you can keep the same tenants for months or even years as long as they follow property rules, providing you with a steady source of income.

Disadvantages

1. Fixed rental rates

Once you have fixed a rental price and a tenant has agreed, you are bound to this fixed rate until the end of the contract. This can be a disadvantage when costs of living continue to rise, as a fixed rental rate can be quickly outpaced by increasing prices.

 

You can raise the rental price after a contract ends, but this is usually done in small increments spread out over several years. Rental prices are also often influenced by the demand of the market. 

 

There is no ‘high season’ you can take advantage of as opposed to short-term rentals that can double or even triple their prices during holiday seasons or special events. 

1. Less flexibility

Another downside is that you don’t have the flexibility of utilising your property at short notice. If you own a holiday house and want to take advantage of it over a weekend or want to offer it to friends or family – this just isn’t possible with long-term tenants occupying the residence.

 

Unlike short-term rentals, you can schedule dates for when you’d like to occupy it or use the property when it isn’t booked. You can also unlist it from being booked and have more freedom to enter the property when you’d like to.

 

If your circumstances change and you want to move into your long-term rental, it’s important that you give your tenants ample notice and that you adhere to the contract that was agreed on. You don’t have the adaptability to use the property, so you need to plan ahead.

 

The reliability and consistency of long-term rentals are strong advantages, but there are also some drawbacks for you to consider. You will need to weigh up these factors to decide whether a long-term rental will ultimately be to your advantage. 

 

If you’re interested in investing in long-term rental properties, contact us and we’ll guide you through the process.