Do furnished short term rentals make more money?

Furnished short-term rentals have emerged as a popular avenue for generating income from real estate. The allure of potentially higher nightly or monthly rates compared to traditional long-term leases can be enticing. However, it's crucial to delve beyond the surface and analyze the nuances of both investment strategies to determine which might be more financially rewarding based on your individual goals and circumstances.

It's important to clarify the distinction between furnished short-term rentals and vacation rentals. While some overlap exists, furnished short-term rentals typically cater to stays longer than a month but shorter than six months. Think of individuals relocating for work, traveling professionals, or those needing temporary housing for various reasons. Vacation rentals, on the other hand, are generally associated with nightly or weekly bookings for leisure travelers. Notably, the seasonality of vacation rentals can significantly impact their income potential. For instance, in regions like Florida, the "snowbird" season from December to April sees a surge in demand for multi-month stays, commanding premium rates. Conversely, the off-season often experiences lower occupancy and significantly reduced rental income.

Interestingly, some furnished short-term rentals can occasionally transition into longer-term leases, often attracting individuals new to the area or those in the midst of a more permanent relocation. However, based on practical experience, this scenario tends to be less frequent, occurring roughly 15% of the time.

To gain a comprehensive understanding of the financial implications, let's compare the key factors associated with furnished short-term rentals and traditional long-term rental properties.

Initial Capital Investment: Setting the Stage

Both investment types necessitate initial capital outlay for a down payment, closing costs, and utility setup deposits. However, furnished short-term rentals carry an additional significant expense: the cost of fully furnishing the property to a "turnkey" standard. This includes all essential furniture, linens, kitchenware, small appliances, and electronics, ensuring a guest can move in seamlessly with just their personal belongings. Depending on the size and quality of furnishings, this investment can range considerably, from $20,000 to upwards of $50,000.

Ongoing Costs: The Day-to-Day Expenses

Both rental models incur ongoing costs for general maintenance, cleaning, and utilities. However, the nature and magnitude of these expenses can differ significantly.

Traditional Long-Term Rentals:

• General Maintenance: This encompasses both preventative measures to avoid future issues and reactionary repairs when things break down. Implementing a proactive maintenance schedule is crucial for cost-effectiveness. While reactionary maintenance is inevitable, a well-defined process can help minimize expenses and maximize cash flow.
• Cleaning: Typically occurs before a new tenant moves in and potentially between tenants if the property remains vacant for a period.
• Utilities: Ideally, utility costs are only the owner's responsibility during vacancy periods, covering essential services like water, gas, and electricity.

Furnished Short-Term Rentals:

• General Maintenance: While preventative and reactionary maintenance still apply, the overall costs tend to be higher due to the increased turnover of occupants and the resulting wear and tear. Furthermore, maintenance extends to the upkeep of the furnishings themselves. Not all damage or wear can be charged back to guests, necessitating a budget for repairs and replacements.
• Cleaning: Requires more frequent attention between guest stays. While cleaning fees are typically charged to guests, these may not always cover the cost of deeper cleaning required periodically, such as carpet or upholstery cleaning.
• Utilities: The owner is generally responsible for maintaining and paying for utilities at all times. While some booking structures might allow for guest reimbursement or capped allowances, all utility expenses (water, gas, electricity, cable, internet, and potentially streaming services) should be factored into your financial projections.

Important Note on Property Upkeep: Regardless of the rental type, it is highly recommended that the owner consistently manage and pay for landscaping, lawn care, pest control, and pool service. Neglecting these aspects can negatively impact the property's appeal and value. These costs can, of course, be factored into the rental rate.

Comparing the Numbers: A Three-Year Perspective

While analyzing a single year's income and expenses is a common practice, a more accurate comparison involves projecting cash flow over a three-year period to account for potential fluctuations and periodic expenses.

Traditional Unfurnished Rental Property:

• Rental Income: Calculated by multiplying the monthly rental rate by 12 months.
• Vacancy Rate: The average vacancy rate for single-family homes is approximately 5%.<sup>[Citation Needed]</sup>
• Annual Expenses: Include HOA dues (if applicable), insurance (estimated at 1% of the purchase price), and property taxes (also estimated at 1% of the purchase price, keeping in mind potential adjustments for new construction or changes in exemptions). Be aware of potential Community Development District (CDD) fees in some communities, which should be factored in as a separate expense or by adjusting the property tax estimate.
• Leasing and Property Management: To calculate a three-year average, consider that tenants often lease for two years. This means you might incur leasing fees (e.g., 50% of one month's rent) twice within that period. For property management (e.g., 10% of one month's rent), calculate for the expected occupied months over three years (36 months minus 5% vacancy = approximately 34 occupied months). Averaging these costs over the 36-month period provides a more realistic monthly expense. In the example provided, this calculation resulted in an average of 12% of the monthly rent allocated to leasing and management.
• General Maintenance: Estimated at 5% of the effective net income.
• Reserves (Capital Improvements): Allocate 5% of the effective net income for significant future expenses like roof replacement, HVAC system upgrades, or exterior painting. Separating maintenance and reserves allows for better financial tracking.

Furnished Short-Term Rental Property:

• Rental Income: Requires factoring in both high and low season booking probabilities. A conservative estimate might assume 3 months of high season (at double the standard monthly rental rate) and 6 months of low season (at the standard monthly rental rate), resulting in 9 months of occupancy. This model effectively assumes a 0% vacancy rate when calculating potential gross rental revenue.
• Leasing and Management: Often bundled into a single fee, which in the provided example is 18% of the rental income.
• Utilities: Calculated based on property size (e.g., $0.15 per square foot monthly). Adjustments should be made for properties with additional high-consumption features like heated pools or electric car chargers.
• Maintenance: Increased to account for more frequent cleaning and the upkeep of furnishings. In the example, this is set at 7.5% of the effective net income (an increase of 2.5% compared to long-term rentals).

Conclusion: A Multifaceted Decision

Determining whether furnished short-term rentals generate more income than traditional long-term rentals is not a simple yes or no answer. While the potential for higher per-night or per-month rates exists with furnished short-term rentals, this is often offset by increased operating costs, more active management requirements, and the inherent volatility of occupancy rates, especially when seasonal fluctuations are significant.

Traditional long-term rentals offer more predictable income streams and typically involve lower ongoing management and maintenance demands. However, their earning potential per month might be lower.

The optimal choice depends heavily on your individual investment goals, risk tolerance, available time for management, and the specific characteristics of the property and its location. If you prioritize consistent cash flow and less hands-on management, a traditional long-term rental might be a better fit. Conversely, if you are willing to actively manage the property, handle more frequent tenant turnover, and absorb potentially higher operating costs for the possibility of greater revenue, a furnished short-term rental could be a viable option.

Ultimately, a thorough financial analysis, considering all the factors outlined above and tailored to the specific property and market conditions, is crucial to making an informed investment decision.