Landlords’ Dilemma – short-term vs long-term rentals

This analysis by the Alan Boswell Group.

It’s more critical than ever for landlords to be strategic, as the choice between short-term and long-term rentals can be a key factor in optimising yields. 

With short-term rentals increasing by 31% in the UK over the last three years, is it beneficial to join the trend now?

To help landlords make informed decisions, rental statistics experts Alan Boswell Group  has analysed the pros and cons of both short and long-term rentals to assist landlords in achieving their investment goals.

Key findings:

• Short-term rentals offer more lucrative income for quick gains while long-term lets provide stability with property appreciation over time.
• London, Edinburgh and Manchester lead UK cities in short-term rental bookings with the highest number of nights reserved.
• The average tenancy length stands at 4.3 years in England, giving long-term landlords greater peace of mind.

Pros of short term rentals

1. Greater income potential with flexible pricing

Short-term rentals can yield up to 30% more profit for homeowners compared to long-term leases. The ability to adjust prices based on market conditions enables landlords to take advantage of demand fluctuations, especially in tourist hotspots or cities hosting major events. A recent study highlighted Cornwall to be the highest-earning short-term rental location, generating over £40 million from 476,910 booked nights, averaging £117 per night.

As of June 2024, the top cities for short lets rental bookings by nights reserved) were London, Edinburgh and Manchester. Compared to pre-COVID figures, Liverpool (6th) and Manchester (3rd) both climbed two spots in the rankings, while Birmingham, York, and Norwich entered the top ten, and Oxford, Cambridge, and Cardiff fell out.

2. More convenient upkeep

With short-term rentals, landlords have the opportunity to regularly inspect and maintain the property between guest stays. This frequent turnover allows for consistent upkeep and early detection of potential issues before they escalate into costly repairs. Additionally, the increased access to the property makes it easier to implement upgrades and improvements, boosting the property’s value and appeal to future tenants.

3. Tax benefits

One of the most significant tax advantages of having a short-term (and long-term) rental is the ability to deduct various property-related expenses, reducing your taxable rental income. Common deductible expenses include mortgage interest, council tax, utilities, repairs, insurance, and professional fees. Some authorities also offer tax breaks for short-term rental properties, with potential local relief for providing affordable housing or renovating historic properties. Tapping into these benefits can greatly enhance the financial viability of your short-term rental venture.

Cons of short term rentals

1. Higher running costs

Nearly 30% of landlords find property management ‘very stressful’. Short-term rentals, in particular, demand continuous management and come with higher running costs due to the rapid turnover of tenants. This increased workload includes more frequent spending on cleaning and maintenance, as well as the time-consuming tasks like handling guest communication, managing bookings, and coordinating check-ins and check-outs. 

2. Inconsistent occupancy and income gaps

Short-term rentals are highly dependent on seasonality and market demand, leading to fluctuating occupancy rates and potential extended vacancies, especially during off-seasons or economic downturns. This unpredictability can complicate budgeting and financial planning, with rental income often varying month to month. Besides, property owners may need to invest more time and effort into marketing their property to attract guests and maintain occupancy levels.

3. Regulatory and insurance challenges

Navigating short-term rentals can be a legal minefield, due to ever-changing regulations that could restrict your rental duration, such as the 90-day rule in London. Securing the right landlord insurance for short-term lets is also more complex and costly than long-term rentals, due to the higher risks posed by transient guests who lack a vested interest in maintaining the property. This can increase the likelihood of incidents, such as pool accidents to damage of furniture and fixtures like doors and windows. Without proper insurance, you could face substantial financial responsibility for medical bills or repairs.

Pros of long-term rentals

1. Stable income stream

Private renters typically stay for an average of 4.3 years. This translates into predictable monthly cash flow for long-term rental landlords, allowing effective budgeting and the handling of recurring expenses like mortgages and maintenance. Long-term leases lock in tenants for extended periods, ensuring a steady revenue stream and minimises the stress of frequent vacancies. Once you secure a tenant, rental payments become adependable source of passive income with minimal ongoing effort required.

2. Easier to manage

Long-term rentals offer a more straightforward and less demanding management experience.  Once a tenant is in place, the hassle of frequent advertising and regular screenings is greatly minimised. This stability allows for more strategic planning of maintenance projects and reduces the need for daily oversight. Landlords can take amore hands-off approach which means fewer worries and unexpected demandscompared to the constant upkeep required by short-term rentals. 

3. Appreciation potential

One of the compelling advantages of long-term rentals is the potential for property value appreciation. Real estate generally increases in value over time, especially in high-demand areas. This long-term growth not only boosts your returns upon selling but also helps build significant equity over the years. Unlike short-term investment strategies that focus on immediate gains, long-term rentals benefit from sustained market growth, providing a steady path to wealth accumulationthrough both consistent rental income and rising property value.

Cons of long-term rentals

1. Stricter regulations and limited flexibility

Recent regulatory changes, including those in the Renters Rights Bill, introduce tighter tenant protections by restricting ‘no-fault’ evictions and enforcing tougher repossession rules. While these measures aim to enhance tenant security, they can significantly constrain landlords’ ability to reclaim their properties quickly in case of disputes or problematic tenants. This increased regulatory burden can lead to longer periods of non-payment, impacting landlords’ rental income stability and operational flexibility.

2. Potential for extended wear and tear 

Long-term tenants often treat a rental property as their home, which can result in gradual wear and tear over the years. Unlike short-term rentals, where frequent turnover typically prompts regular maintenance and swift issue resolution, long-term tenants may delay addressing minor repairs, leading to more substantial problems later on. From worn carpets to chipped paint and aging fixtures, this can necessitate costly repairs and renovations when tenants move out, potentially diminishing the property’s appeal and affecting your return on investment.

3. Fixed rental income limits earning potential

Long-term rental agreements typically lock in rental rates for the duration of the lease, capping your ability to benefit from market fluctuations. If the rental market in your area experiences a surge and property values rise, your income remains fixed until you can renegotiate terms at the lease’s end. This means missing out on lucrative opportunities to boost revenue during market booms – opportunities that could have been seized with more flexible, short-term rental agreements.