Short-Term vs Long-Term vs Mid-Term Rentals: An Essential Guide for Real Estate Investors

An indepth guide to the various rental property strategies

Introduction

The landscape of real estate investing offers many avenues; indeed, many real estate investors may find themselves considering various opportunities at different times during their tenure as owner of a property. In my consulting business, I'm often asked to analyze a property and report on short-term vs long-term vs mid-term rental strategies. This article is intended to provide the owner/investor of the various considerations for renting a property short-term to long-term. A key understanding must start with the fact that there is a lack of standardized definitions across different jurisdictions - be it federal, state, or locality, the rules and definitions may differ which complicates this task further. This comprehensive guide explores the implications of these rental categories through the lens of net revenue balanced against operations, regulatory considerations, and income drivers. It remains the property owners responsibility to verify the regulatory requirements, and as always - I'm not a lawyer, accountant, or tax specialist and those experts should always be consulted specific to your property and circumstances.

Section 1: Rental Classifications and Market Overview

Lacking any federal definitions barring one, what IS a short-term, mid-term, and long-term rental may be defined at the state or local level. What is that one federal definition? The IRS considers short-term renting if, in the preceding year, the average stay (so total number of rented nights divided by the total number of check-ins) equals 7 or less days. Everything else is considered long-term. So let’s talk about the various strategies in more general terms, understanding it may vary and that it is incumbent upon you, as the property owner, to understand what laws and regulations apply.

Short-Term Rentals: Typically lasting less than 30 days, these rentals - typically furnished, serve vacationers and business travelers seeking flexible accommodations. Cities like Las Vegas and Orlando, thriving on tourism, exhibit high demand, driving substantial revenue despite stringent regulations. However, the dynamic nature of the market requires constant attention to regulatory changes, which can dramatically affect operational viability and revenues depend strongly on marketing and actively managing the unit well for achieving its income potential. Short-term renting is always a great way for vacation home owners to offset the costs of owning a second home while still enjoying the asset themselves.

Mid-Term Rentals: Bridging the gap between short and long-term, mid-term rentals cater to people like seasonal workers, interns, medical stays, displaced homeowners or seeker, and workers on assignment. Urban centers and university towns show a rising trend in this segment, providing property owners with opportunities to tap into a market that offers more stability than short-term rentals without the lengthy commitment of traditional leases.Mid-term rentals are typically furnished rentals, but not always.

Long-Term Rentals: These typically involve leases of a year or more, but some localities define them as 6 or more month leases as well. Long-term rentals offer stability and predictable cash flow. In residential leasing, long-term rentals are preferred by families and individuals seeking permanent residence. They are less management-intensive but require careful tenant selection and compliance with local housing laws to ensure smooth operations.

Section 2: Regulatory Environment and Legal Challenges

Navigating the regulatory environment is critical for rental property owners. Many localities will require landlords or short-term rental Hosts to provide proof that the residence is safe for habitation, and many locations have rental registration requirements for any type of renting. It is not uncommon, however, for those requirements to be specific to only long or short term rentals, or for those regulations to be completely separate and not at all connected causing an owner to have to got through two different registration and inspection processes for the same property.

For example, New York City, strict regulations were imposed on short-term rentals in 2023, effectively shutting down over 30,000 units with an aim to preserve housing stock. San Francisco’s approach involves a registration system that balances the need for tourist accommodations with housing availability. Short-term rentals in North Carolina are regulated by state-level requirements in addition to some localities having strict regulations.

Mid-term and long-term rental tenants are offered federal protections; these rental strategies typically do not find push back in their local markets like short-term rentals may, but do open a landlord up to the potential for evictions which cost time and money. Any of these strategies may assume risks associated with squatters, including short-term renters refusing to leave.

Some markets are well suited for short-term rentals; these are tourist markets that have mature regulations and offer a stable regulatory environment. Conversely, smaller more rural markets are struggling to adjust to having short-term rentals within their jurisdiction and often finding themselves hosting township meetings that are highly polarized on the topic.

Compliance costs can vary significantly, with larger cities generally requiring more extensive documentation and higher fees, impacting the overall profitability of rental properties. Understanding these legal landscapes is essential for developing a strategy that minimizes risks and maximizes returns.

The best approach is to review the requirements published by the locality and/or talk with the zoning administrator.

Section 3: Financial Models and Revenue Implications

Financial success in rental properties depends significantly on the chosen duration model. Short-term rentals can generate high revenue per day but incur higher operational costs, including frequent maintenance and marketing expenses. Conversely, long-term rentals offer lower daily income but benefit from reduced management costs and longer tenant commitments, providing a more stable income stream. Below are some considerations for each type of rental.

Short-term rentals. Short-term rentals may incur higher acquisition costs and set up costs, such as to furnish and style a property if it isn’t already an active short-term rental. While it is possible to purchase a functioning short-term rental inclusive of all furnishings etc, its notable that at this time selling a short-term rental is typically based on residential real estate values, not commercial values accounting for rental revenue and operating costs. Some sellers and investors may agree on a premium for selling the furnishing and related business assets, but that is not yet mainstream. Its also important to note short-term rental listings on platforms such as Airbnb are not transferable; so transitioning management will result in a ramp up period due to starting over marketing the property.

Operational costs include any regulatory fees and taxes, management fees - typically 15% to 30% or higher, depending on the services provided, cleanings - turn over and regular deep cleans, maintenance, repairs and upgrades. Marketing expenses like platform fees, websites, and social media management may add additional costs. Short-term rental insurance is typically more expensive than landlord and homeowners insurance as well.

It’s worth noting, short-term rental set up and styling also ties to guest expectations within the market; a premium nightly rate will require having the amenities and finish level of other comparable premium properties in the marketplace.

Mid-term rentals. Functionally, mid-term rentals are often furnished. Some owners may, in a year, have both short-term and mid-term rentals as a way to keep the property occupied and producing income year round in seasonal short-term rental markets. Other properties may, for operational or regulatory reasons, be set up exclusively for mid-term use. Mid-term rentals can strike a balance, offering moderate revenue with manageable turnover rates and operational costs. Income generated for mid-term often falls in between short-term and long-term rental rates in a given market place. Mid-term rentals should have a specific rental agreement to protect both the landlord and tenant. Operational costs lower considerably compared to short-term rentals, but still have marketing costs and operational costs however those will be lower in terms of turnovers, but most midterms the owner is paying the utilities, typically including providing internet as well. Unlike short-term rentals, however, the rental agreement may provide some parameters for utility consumption to help keep the bills reasonable and create a pathway to recoup funds in the event of high usage.

The acquisition and set up costs for mid-term rentals typically would be lower than those rentals in short-term rental markets. Like short-term rentals, these are often sold as residential homes and not valued commercially. Mid-term rentals also may have an audience for folks who want to live at the property seasonally and rent it out the rest of the year without the hassle of short-term renting it.

Long-term rentals. Long-term rentals, typically defined as leases extending beyond one year, offer a contrasting financial landscape to their shorter-duration counterparts. The financial model for long-term rentals is generally characterized by lower daily income but significantly reduced operational and turnover costs, providing a more predictable and stable revenue stream. Here are some critical considerations for long-term rentals:

Lower acquisition costs relative to mid- and short-term counterparts, as they are not furnished and would not have any premiums. They may also be found in markets not well-suited for short- or mid-term renting at a lower cost as well.
Lower operational costs. Both in terms of typically having lower regulatory hurdles and fees (but not always!) as well as having fewer (or no) turn-overs a year, it costs less to operate. Management fee’s for long term rentals reflect this as well, ranging to 8% to 12% of monthly rent in many markets. Marketing for new tenants, which typically happens far less often, is far less costly than mid and short term rentals. Renters typically assume responsibility for paying utilities.
Maintenance and repairs. As there are not furnishings, most maintenance and repairs can be planned and scheduled.
Lower insurance costs are more inline with typical homeowners costs.
Stable income stream. Vacancies are rarer, and given housing shortages in many markets, easy to fill and market adjustments can be built into rental agreements to account for inflation.

Tax Implications. For any rental property, rental income is required to be reported unless it is under the minimum threshold of renting it for less than 14 days a year. Rental income for long term rentals is reported as income; much of that may be offset by expenses, and taxed as ordinary income. Short-term rentals often have additional taxes assessed, depending on the locality. Some states require specific additional taxes, and in addition there may be other taxes assessed by the township or county.

The IRS considers all rental income to be passive income, but the short-term rental loophole has tempted some investors to jump into short-term rentals as there can be significant tax benefits for some individuals in specific situations. I’ve previously written about this HERE.

Section 4: Strategic Management and Market Adaptability

The ability to adapt rental strategies to market conditions is a valuable skill for property owners. For example, during an economic downturn, converting short-term rentals into mid-term or long-term properties can help maintain occupancy rates and stabilize revenue streams. Similarly, during a tourist boom, owners might convert long-term rentals into short-term properties to capitalize on higher daily rates.

While the dollar amounts may differ market to market, its a good case study to highlight the cost differentials and strategy for the different rental types.

Section 5: Operations

Operationally, short-term, mid-term, and long-term see the biggest differences. In fact, even the IRS assesses short-term differently if the owner is actively engaged in renting and managing the property (see more about material participation HERE). So let’s talk about some of the key considerations.

Short-Term Rentals. Operationally, short-term rentals fall into hospitality, tourism, and lodging. The job of understanding how to market and deliver an experience versus just renting a house is significant. Understanding potential bookers, how they choose their short term rental, and how to present the rental so as to convince a booker to book your place vs the neighbors requires specialized knowledge and skills. Once booked, delivering a 5-star experience requires ensuring that the home is immaculately clean, as described in the listing, maintained, and that there is someone available to answer questions virtually around the clock. There are vendors to manage with a frequent need for services, and information to ensure the guest has in order to ensure they have a seamless experience. Operations is typically including not just the home, but landscape, outdoor areas, and items like ensuring grills are clean and trash is handled. Outsourcing to a property manager, depending on the scope of work, will run 15%-30% or more. Check out this post HERE about outsourcing vs self managing.

Mid-term Rentals. Mid-term rentals have fewer turnovers, but operationally otherwise would be similar to short-term rentals, with turnover needs, routine maintenance and repairs, and communications. There are fewer people looking for midterm rentals, so the marketing efforts may be more distributed and vetting prospective renters may be more laborious and look more like the process for long-term rentals, with a background check and application process. Operationally, tenants may assume some responsibilities - like taking the trash out each week, but the landlord is still maintaining a high level of responsibility for operations. Outsourcing that work may be a one-time fee per stay or a percentage of monthly rents. The associated fee may be less or similar to short-term management fees.

Long-term Rentals. Long term rentals may have the least involved operations, but turnovers are likely much more substantial given the wear and tear of daily use. Communication expectations can be more controlled - for example, non-emergent maintenance requirements can have expectations of a response time allowing for the work to be assigned and completed rather than responded to immediately. Tenants may assume more responsibility for routine items like changing lightbulbs and even handling lawncare. There is typically higher demand for long-term housing, although some properties may be higher-end and have less demand. Outsourcing management is often 8-12% depending on the scope of work.

Section 6: Pros, Cons, and Risk Assessment

Each rental type presents unique advantages and risks. Short-term rentals offer high flexibility and income potential but come with higher regulatory risks and management demands. It's important to consider the maturity of a short-term rental market and its ordinances in evaluating risk. Mid-term rentals provide a balance, reducing the frequency of tenant turnovers while still offering reasonable returns. Long-term rentals, while less profitable per day, offer the lowest risk in terms of vacancy and operational costs.

Risk management strategies include comprehensive insurance policies, thorough tenant screening processes, and legal compliance checks to mitigate potential issues and ensure a steady income flow. Short-term rental risk management is best managed through rental agreements, insurance, and the overall legal structure of the business.

Ultimately, it comes down to a real estate investor's goals. Many vacation home owners find short-term and mid-term rentals allow them to enjoy use of the property while having it off-set or completely pay for itself, while investors are looking for the best investments balanced against the associated risks. The right strategy is going to vary by owner - and potentially may shift over time.

Section 7: Exit Strategies

Regardless of the rental strategy used, a key consideration if you are considering a property is to have an exit strategy in mind. Short-term rental licenses, if required, may or may not be transferable if there is a property transfer, so understanding the implications of that is an important consideration. Further, some properties well suited for short-term may not cash flow as a long-term property. These are items that an investor should consider in evaluating a property.

But it really has to start and end with the goals of the property owner; as a client of mine once said, “if the property breaks even, I’m still ahead” - because he was no longer paying $15K to someone else for a week-long vacation on the ocean. Everyone's goals and drivers differ, but keeping the exit strategy in mind is a helpful framework.

Conclusion

Understanding the distinctions and operational implications of different rental durations is crucial for property owners aiming to navigate this complex landscape successfully. By staying informed and adaptable, property managers can strategically position their properties to optimize profitability and compliance across various markets.

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Hey Boss! I'm Kate, owner/founder of The CEO Host. If you are interested in taking a leap into short-term rentals - or have some questions about your existing business, my goal - passion, and career, is to help YOU succeed. I've coached hundreds of folks getting started or looking to optimize, analyzed more deals (and duds) than I could count, completed thousands of hours of education and training, attended conferences... So don't be shy. A good CEO knows to bring in expert help - and that's what I'm here for! Lets HOP ON A CALL and chat!

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