Short-term vs long-term investment property?

What is a Short-term let?

A short term let is a property which is rented out on a short-term basis under 6 months. However, it regularly refers to vacation and short stay properties, even if this just means a 1-night stay.

Or it could be a property in an area which requires large amounts of temporary workers, this could for example be a regeneration area with a lot of construction work. In this instant construction companies will be looking to house there workers for a short period of time.  We refer to these properties as Serviced accommodation. 

What is a long-term let?

A long term let is a more traditional form of renting and refers to a property which has a tenant over 6 months. This can refer to a family renting for years or just a single occupant who is staying for 12 months.

Pros of Short-term let

• When done right you can make higher yields
• You can be flexible when the property is rented meaning you could use it for your own personal use.
• The online portals for letting a property are far easier than long term portals such as Rightmove. Airbnb as an example allows anyone to let out their own property
• If you have a troublesome tenant, you are not stuck with them
• There are more tax deductions

Cons of Short-term let

• As the landlord you are responsible for all utility bills
• Yields can be less consistence as your property may go through vacancy periods
• With a higher turn-around of tenants more work is involved
• Higher costs in maintenance, cleaning, and overall management
• More marketing/advertising is needed to keep the property tenanted

Pros of Long-term let

• You do not have to be responsible for the utility bills unless you decide to include it
• Long term tenants provide a more stable yield throughout the year
• You may not have to find a new tenant for years (less advertising and marketing required
• Lower maintenance also means lower management fees
• There are more long-term let opportunities than short-term let investments

Cons of Long-term let

• If you have a troublesome tenant it may be difficult for you to evict them
• Yields will typically be lower than short-term lets

How much higher can yields be on short-term lets compared to a long term let.

Yields can vary greatly, and it is also important to be aware that you are not guaranteed higher yields with a short-term let, it merely provides the opportunity to earn more. This will depend on the location and competition of other properties in the area. If you own a high-end property in a popular holiday location then chances are your property will be tenanted most of the year at a high rental value.

As a like for like example as a company we offer one of our investments on a long term and short-term basis. With the long term we are seeing Net yields of 6% whereas the short term lets in the same development are seeing yields between 8%-10%, so that’s a massive difference of 4%. Ask us about "I Quarter".

What are the additional cost of short-term lets compared to long-term lets

The primary additional costs on a short-term let can be attributed to all the extra work involved. If you have a management company in place then they will take control of this for you but simply adjust their fee. For a long term let expect a fee between 8%-10% but with a short-term management fee expect fees of 12%-13% and maybe higher depending on the level of management. The extra costs from the management side can be broken down as per below…

• More maintenance with more tenants coming and going
• Cleaning regularly between tenants
• Advertising and marketing of the property on a regular basis

Another additional cost to a short-term let is the landlord is responsible for the utility bills and the council tax. The extra costs are in most of the investments we offer are well worth the extra income. Its also important to consider costs can be made tax deductible.

One other additional cost which will not be included as a management fee is renovation and property updating. If your property is a holiday-let then this will be vital to ensure you keep up with competition. People expect modern luxury décor when on holiday. Long-term tenants will either agree with whatever is already in place or may take the property unfurnished.

What risks are there with short-term lets compared to Long-term lets

Risks are a natural part of all investments, and risks can depend largely on your specific scenario. Short-term let risks

• Regular vacant periods could build up to a lot of loss to income
• COVID was largely an unforeseen risk prior to 2020 but proved to be the biggest upset to the market since the world has seen in decades.
• Holidaying tenants can be risky, with people taking stuff (furnishings) or damaging property
• You must pick your location wisely as some areas do not do well with short-term lets.

  Long-term let risks

• It can be harder to evict your tenant and gain access to your property if you have issues with them.
• Short-term let’s will mostly have to be paid upfront whereas long-term tenants may find it easier delaying rental payment.

What locations do short-term lets work better compared to long-term lets

As short-term lets operate mostly as holiday and short weekend breaks the obvious place to own a short-term let investment is a holiday destination. This could be a popular seaside resort which work well in the summer or an area of natural beauty such as the Lake district or any other national park. Other places can also do well in the winter months, such as Bath with its famous Christmas markets. However, another consideration is the competition and price in some of these locations can be far higher than average.

As an investment company we look at places where prices are still below the national average yet are either attracting a lot of visitors or going through a lot of regeneration to attract more tourism. One such example of this is Blackpool. Famous for its beach, ballroom, and theme-parks yet the property prices are well below that of many other locations. 

Alternatively areas of large regeneration projects where contractors are needing Service Accommodation. these locations may be difficult to find, however at Fabrik this is one area we currently specialise in.

What kind of Investor will short-term lets suite compared to long-term lets.

To understand if you are better off with a long or short-term investment model will depend on several factors. The risks are more weighted towards the short-term let market but currently we are also seeing more success than ever before. The amount of work involved is also weighted towards the short-term let market. If you are looking to get involved in the property industry on a more professional level and are looking to build a portfolio then a short-term let will be more likely to give you the funds you need to roll profits into your next purchase.

With risk and perhaps more work comes greater reward. A long-term let investment is a more stable income with less hassle. These often suite hand off investors who mostly wish to buy property as a way to either leverage their own assets or just to ensure they do not lose out to inflation. We also see a lot of investors who just want to invest passively into their own son or daughters future with as little effort as possible.

With either one of these investments you are still the owner of the property, and therefore responsibility will ultimately be with you. Management companies are set-up to shoulder the bulk/all of the work but not the legal responsibility.

What are the legal differences between a short term let and long term let

There are really no differences in terms of your own responsibility. There is a common misconception that a long-term tenant has more legal standing, however other than what is stated in a contract with the period of the tenancy this is not strictly true. This can make it harder to evict tenants but this is more of a process issue than a legal one. There are some rare exemptions, for example if a tenant has been their since 1988 then they have more rights relating to the Rent Act 1977, but that is incredibly rare. The ultimate answer to this question is the tenants only has extra rights if they have been in the property a very, very long time (decades).

Do have more liability with short-term tenants or long-term tenants

Again this is a legal question which often has the wrong misconception. As a landlord of any property, you are responsible for maintaining a liveable dwelling with basic standards for your tenants, and any issues that arise from fault of the property you will be liable regardless of tenancy agreement.

Finding tenants for short-term lets compared to long-term lets

A huge part of your investment is ensuring you have a paying tenant. Short-term lets have in recent years become far easier to let out for yourself. With online portals such as Airbnb where you can do your own advert and find a tenant without any help.

How do contracts between long-term and short-term lets differ

Other than the length of the tenancy nothing should be different.

How do I know if I am allowed to rent my investment out as a short-term let

The real question is should you let your property as a short-term let, but from the information above you should have a clearer picture on this. Short-term letting is a decision made by the freeholder of the property. So if you own the freehold then it is in your own control.

However, if your property is on a leasehold then you will need to check if the freeholder will allow short-term letting. The leasehold is not the only factor that can determine the ability to rent your property on a short-term let basis. Different cities and towns can have different restrictions/ planning permission in allowing a property to operate on this basis, and this may also be tied to a certain number of days a year. You will need to check the regulations in your properties local council to see what the rules are. These rules and regulations are also subject to change.

Conclusion

The primary and almost only reason people chose short-term lets over long-term letting as an investor is the opportunity to achieve much higher yields.