Short-term vs long-term letting – Which is the best investment option for you?

South Africa’s rental market is expected to see increased demand in 2024 and beyond, particularly in urban areas and this offers significant potential for investors looking to add property to their investment portfolios.

However, when it comes to letting out a property, investors face a crucial decision: short-term or long-term letting. Each option comes with its own set of pros and cons, and understanding the differences is essential for making informed investment decisions.

For example, investors looking for a hands-off approach may prefer the relative ease of long-term leasing whilst those seeking maximum returns and who are willing to engage more actively with their investment might gravitate towards short-term rentals.

Short-Term Letting:

Short-term letting, often facilitated through platforms like Airbnb, involves renting out a property to guests on a temporary basis, typically for periods ranging from a few days to a few weeks. This option offers investors the potential for higher rental yields and greater flexibility compared to long-term letting arrangements.

Pros:

1. Higher Rental Yields: Short-term letting usually commands higher nightly rates compared to long-term rentals, allowing investors to maximise their rental income.
2. Flexibility: Short-term letting offers investors the flexibility to use the property for personal use or to switch between short-term and long-term letting depending on market conditions.
3. Property Maintenance: Short-term guests are less likely to cause wear and tear on the property compared to long-term tenants, reducing maintenance costs for the investor.

Cons:

1. Higher Turnover: Short-term letting requires frequent turnover of guests, leading to higher management and cleaning costs for the investor.
2. Seasonal Demand: Depending on property location and guest demographic, short-term rental demand may fluctuate seasonally, with peak periods generating higher occupancy rates and off-peak periods resulting in lower income potential.
3. Regulatory Challenges: Short-term letting may be subject to regulatory restrictions, zoning laws, and homeowner association rules, requiring investors to stay informed and compliant with local regulations.

Long-Term Letting:

Long-term letting involves renting out a property to tenants on a fixed-term lease, typically for six months to a year or longer. This option offers investors stability and consistency in rental income, albeit at potentially lower yields compared to short-term letting.

Pros:

1. Stable Rental Income: Long-term letting provides investors with a steady stream of rental income, reducing vacancy risks and ensuring consistent cash flow.
2. Reduced Turnover: Long-term tenants tend to stay in the property for extended periods, minimising turnover and vacancy costs for the investor.
3. Lower Management Overhead: Long-term letting requires less intensive management compared to short-term letting, as there is less turnover and fewer guest interactions to manage.

Cons:

1. Lower Rental Yields: Long-term rentals typically command lower rental rates compared to short-term lets, resulting in potentially lower overall rental income for the investor.
2. Limited Flexibility: Long-term letting restricts the investor's ability to use the property for personal use or switch between short-term and long-term letting arrangements.
3. Tenant Issues: Long-term letting may expose investors to potential tenant issues such as late payments, property damage, and eviction proceedings, requiring proactive management and legal intervention.

There are a number of ways in investors can minimise risk and optimise returns:

Ensure you buy in a prime location: As a rule of thumb, it’s advisable to buy the best property you can afford in the best location as your investment is most likely to not only retain its value but also grow and yield better returns.

Consider sectional title: The upkeep and maintenance required on houses with large grounds can easily eat through returns, so unless you are able to put a portion of the rental earned away as a maintenance fund, low maintenance options like lock-up-and-go properties are a better choice. Additionally, there will be a body corporate with trustees who are responsible for the maintenance of the common property, and the upkeep of the complex - but always check the levy fees before signing on the dotted line as they can be quite high.

Know your market: Research the general demographic of the area and decide which segment of market you will be servicing, especially in the long-term rental arena. For instance, families need to be in close proximity to schools and often prefer homes with gardens whilst students will prefer compact apartments near their campus and a social hub with restaurants and bars.

Familiarise yourself with the relevant legislation: Legislation regarding the rental sector and short-term rentals have been tightened in recent years for both your and your guests’ protection so make sure you operate within these stipulations to avoid potentially costly and stressful pitfalls.

Consider professional management: This is especially important if you don’t live in the area as you won’t be able to easily deal with issues as they arise. And an experienced and professional rental manager could well make the difference between an empty and an occupied property.

Adequate cover: Ensure that you are adequately insured as you don’t want to have to fork out if a geyser bursts or a window is broken. And, in short-term lets with more people coming, accidents and incidents are far more likely.

Also bear in mind that some policies include a clause about vacancy, and properties that are vacant in excess of 60 days, which could introduce limitations in cover, so when shopping around, be sure to read the policy terms and conditions carefully. 

Choosing the Right Option:

Ultimately, the decision between short-term and long-term letting depends on the investor's financial goals, risk tolerance, and personal preferences. Investors seeking higher rental yields and greater flexibility may opt for short-term letting, while those prioritising stability and reduced management overhead may prefer long-term letting.

It's essential for investors to conduct thorough market research, assess local rental demand and regulatory considerations, and carefully evaluate the pros and cons of each letting option before making an investment decision.

By understanding the differences between short-term and long-term letting, investors can tailor their strategies to maximise returns and achieve their investment objectives in the buy-to-let market.