If you’ve spent any time looking into real estate, one often touted advantage of opting for short-term rentals is that they yield higher returns. As a result, many newbie investors are eager to buy a house, spruce up the home’s design, and put it on rental listing sites in hopes of turning a profit in a few months. However, the sad reality is that behind the glossy listings and bigger profits is a trail of rising maintenance costs, regulatory crackdowns, and market oversaturation. That said, we’ve put together this article to give you a glimpse into why short-term rentals may be a bad investment option.

Impact of Short-Term Rentals on Today's Housing Market

Reduced Housing Supply

Before getting into why short-term rentals may be bad for your pocket, let’s dissect how they affect today’s housing market. For starters, they can cause housing shortages for locals who need long-term and affordable accommodation. The proliferation of short-term apartments and Airbnb listings often requires owners to convert properties that primarily housed long-term tenants to short-term rentals in favor of quick cash. As a result, there’s often a shortage of long-term rentals, and that makes the available ones more expensive. Thus, even existing tenants face the risk of being priced out of their homes due to higher rent prices.

Impact on Communities

Another way short-term rentals negatively affect the housing market is by converting traditional homes into tourist hubs. In the long run, an influx of short-term accommodation can displace long-existing communities who are priced out of their homes or no longer fit into the neighborhood. As a result, short-term rentals indirectly force residents out of their homes and erode housing stability.

Common Expectations from Short-Term Rentals

Passive Income

Despite these growing concerns, investors still turn to short-term rentals because it present an easy way to earn passive income. Since short-term rentals have a wider profit margin, most investors can afford to outsource the property management aspect while enjoying sufficient returns on their investment. Think about it, a proactive Carroll County rental manager can handle the day to day operations of your business and provide added peace of mind.

Flexibility on Lease Terms

Some investors aren’t always looking to make a profit off their rental. Some property owners turn their second home or vacation property into short-term rentals, which gives them the freedom to block some time off for personal use. Added flexibility on lease terms is appealing to property owners who like to use their rentals as a holiday home or serving as an extra accommodation when they need it.

Lower Barrier to Entry

Thanks to mainstream rental platforms like Airbnb, the barrier for entry to be a short-term rental landlord is low. With minimal effort and upfront cost, you can furnish a space and upload photos that attract potential tenants. Since the lease terms are also shorter, landlord-tenant laws are a lot less strict, allowing landlords to avoid the detailed due process that comes with a long-term lease. For instance, if you run a long-term rental, you have to go through the trouble of screening tenants closely to ensure their income can support continuous payment. On the other hand, most short-term tenants pay upfront, and there’s generally a lot less need for scrutiny because of the duration of their stay.

Why are Short-Term Rentals a Bad Investment?

Unpredictable Income Stream

With so many perceived perks, why are short-term rentals sometimes a bad investment? The most obvious answer would be that their income stream is unpredictable. Yes, long-term landlords need to scrutinize their prospective tenants more, but when you find a high-quality renter, you can be sure of monthly income for the next year or more. In comparison, short-term rentals experience more frequent vacancies due to the higher turnover. Thus, property owners often have more volatile cash flow, which can make it harder to meet their regular payments, like the mortgage, utilities, or wages.

High Operating Costs

Another drawback that’s rarely mentioned when talking about short-term rentals is that their operating costs are high. Prepare to restock on supplies, pay more for utilities, and replace your furniture more frequently when you invest in such properties. After all, with your house getting more traffic, the wear and tear is bound to put a burden on the house, increasing your operating costs in the long run. When you combine that with a prolonged dip in vacancy, these inflated maintenance costs could quickly eat into your profits. Thus, the added expenses can turn what looked like a profitable venture into a financial burden.

Security Camera Liability

A higher tenant turnover means you’re more likely to encounter problematic tenants. Besides, some renters tend to have little regard for the property since it’s not their home, unlike long-term tenants who share more responsibility in the property’s upkeep. Thus, most landlords have to go the extra mile to protect their investment by installing surveillance footage. However, it's a challenge for property owners to install security cameras in a rental without violating privacy. That means you may not be able to place cameras where you need them the most, while having to legally disclose that guests are under surveillance on certain parts of the property. As a result, the latter may deter future bookings, and if the footage isn’t handled properly, you could end up with a suit.

Conclusion

In theory, short-term rentals offer investors passive income and the flexibility to use their property for personal use whenever they want. Fewer regulations also mean there’s a lower barrier to entry. However, short-term rentals aren't an automatic pass to high profit margins and passive income. They also have their drawbacks to your wallet and the general housing market. For the latter, they reduce the supply of long-term rentals and force locals out of their homes as the community changes. Property owners also have to balance higher operating costs with unpredictable income due to higher vacancies, and that can be a major financial burden. Now that you’ve seen both sides, you can make a more informed choice.

Disclosure: This is a collaborative post.