Long term rental property vs short term rental property
Property investors face many important questions when they come to expanding their property portfolio. Where to invest, what type of property should you invest in, what is your budget? Those considerations and others should be at the forefront of your mind.
However, the other pressing question is, what type of tenant and tenancy are you targeting to fit with your financial goals? There is a big difference between long term and short term tenancies. Both fit different types of tenants and both have their advantages and disadvantages.
Read this article to learn everything you need to know about long and short term property investments.
What is a long term let property?
A long term let is the standard for the vast majority of lets in the UK. It is an agreement between the landlord and tenant which lasts for a minimum of six months, and often much longer. A long term let is most commonly organised under an Assured Shorthold Tenancy (AST) agreement.
An AST provides long term stability for both parties and is particularly appealing for tenants who plan to stay in one area for a long period of time.
What are the advantages of a long term let for landlords?
A long term let AST will provide you with a steady, reliable income stream which gives you monthly income and can form the basis of your financial planning. This income is one of the two main ways that you will earn money as a landlord, with the other being capital appreciation.
Once you have a long term let in place it is potentially much less work than a short term let as you have eliminated the need to constantly find new tenants. That turnover is time consuming, and eliminating it is a major advantage of long term let property.
Tenants are also more likely to treat the property as a home if they are there for the long term – and they will look after it accordingly. This limits the amount of maintenance required thanks to wear and tear, cutting your costs when compared to a short term let.
You can reduce this workload even further by appointing a professional lettings and management agent who can take care of all paperwork, maintenance, tenant issues and more. For the cost of a small percentage of the monthly rental income, you can enjoy all the benefits of being a landlord with none of the hassle.
What does the long term let rental market look like, and is it worthwhile in 2023? The rental market was one of the success stories of the last 12 months. In spite of general economic uncertainty including the cost of living crisis, rents continued to increase over 2022 and the beginning of 2023.
Rightmove reported recently that the number of homes available to rent in the UK fell by more than a quarter by the end of 2022. This led to average rental growth of more than 10% over the year according to Savills, and the lack of new incoming supply has led the agency to forecast further growth of 18.3% by 2027. Indeed, rising rents are one of the stories to look out for in 2023.
Finally, it can be easier to secure a mortgage for a long term let as lenders are more familiar with the market and happier to provide finance. Likewise, the number of products available is wider which means you might have a better chance of securing a more favourable deal.
Furthermore, with off-plan city centre investment property, you can agree to purchase now and pay the balance in the future on completion when the mortgage market has returned to more affordable rates.
A short term let property is one let by a landlord to a tenant for a time period as short as a few nights up to six months. Any longer than this requires a long term let AST as described previously.
This sort of let is a great alternative to a long term property rental for renters who only need to be somewhere for a short time. This can include business travellers, people on holiday, international students and more.
It is fair to say that short term let property is more popular than ever in the UK. There is a huge range of property available in towns and cities across the country offering this type of stay, and more people than ever are viewing this as a legitimate, normal option over a long term let. This market is a major opportunity for landlords.
What are the advantages of a short term property let for landlords?
The main benefit of short term property lets for landlords is that you can generally set rents as much as 30% higher than you could with a long term let in the right circumstances. The other side of the equation is that you will generally have to pay for running costs including bills – which you would not with a long term let – and that there is a high turnover of tenants,
This can lead to a greater risk of void periods if you don’t find tenants to fill every gap in the calendar. However, due to the higher potential rents, you may not need to have your property occupied 100% of the time in order to secure a much higher overall yield.
For example, Uswitch analysis shows that a short term let property in Manchester requires only seven nights a month of occupation to cover mortgage repayments. Furthermore, as few as 2,000 nights of occupation in total are required to repay the average mortgage in the city entirely.
There are also benefits to the greater risk of void periods. You will be able to operate more flexibly, and it is only ever a short time before bad tenants will leave again. This is often not the case with long term let property.
If you are looking at short term lets investment, it is also good to be aware that the number of mortgage products for this class of investments is growing. Likewise, there are more and more professional lettings and management agents who are operating specific short term let services – removing the issue of the increased workload which comes with a higher tenant turnover. Short term let property can be a valuable addition to any portfolio with many advantages for landlords.