If you are considering purchasing a rental property, one of the biggest decisions may be whether to utilize the property as a short-term or long-term rental. Both have may have an upside and drawbacks. Below we’ll discuss elements that you as a property owner may want to consider when weighing your options.
According to Bigger Pockets, a social network for the real estate investing community, one thing you need to consider is your cash flow expectations. It goes without saying that long-term renters will provide you with more reliable cash flow than will short-term renters. With the former, you might have reliable income for many months or even several years at a time. With the latter, you could end up with gaps in cash flow due to seasonal demand and dates which you are unable to book.
Depending on the location and the time of year, utility bills can add up to quite a bit. If you choose to rent to people who want to use your investment property for a long time, it’s not uncommon, in most parts of the country, to have some or all of the utilities be placed in the name of the tenant. With short terms rentals, it’s more common to have the property owner handle the utilities.
If you occasionally want to enjoy your investment property with family or friends, long term renters are not likely going to be a good fit. Depending upon the amount of time an owner plans on using the property versus renting it out can impact how your mortgage lender view the property for financing purposes. Why does it matter? Many lenders view vacation homes as less of a risk than investment properties and therefore pricing and downpayment requirements can be more beneficial to the consumer. Be sure to ask your mortgage professional for their guidelines.
The AirBNB Effect
Renting out investment properties is nothing new, but the likes of AirBNB, VRBO, and homeaway, three useful sources for travelers looking for new vacation experiences, have injected new life into an old practice. What they’ve done is help virtually anyone with a property – or sometimes just a furnished room – to rent out their space for short periods of time. Travelers love the concept because they have a more private space and rentals often work out to be less expensive than moderately priced and higher end hotels.
That said, there has been some controversy about the growing short-term rental industry. In fact, Denver, as one example, has proposed policies to regulate and tax anyone engaged in offering short-term rentals. One rule proposes renters be limited to renting out primary properties rather than investment properties that are not their primary home.
Financing Rental Properties
At Luxury Mortgage we help home buyers and homeowners from around the country buy and refinance vacation homes and investment properties. We offer a wide variety of products to meet the needs of most consumers including conventional and jumbo mortgage programs. If you have any questions, we’re here to help. Give us a call for a free, no obligation consultation or click here to fill out our Quote Form to be contacted for more information.
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