Investing in a Long- or Short-Term Rental Property

Thinking of buying a vacation house you can rent out when you're not using it? Or perhaps an investment property to diversify your income stream? You're not alone. According to data from the National Association of Realtors, investors and second-home buyers accounted for a combined 15% of existing-home sales in March 2024.

"Rents and property appreciation both tend to tick up over time, which makes real estate a potentially lucrative income investment and long-term holding," says Devin Heitman, a Denver–based Schwab senior financial planner.

But for those considering an income property for the first time, the choice between renting short or long term isn't always easy. Here are three questions to ask yourself.

Short-term rentals—commonly defined as stays of 30 or fewer days—may give you the flexibility to use the property yourself and allow you to collect attractive per-night rates when you aren't staying there. However, if your stays total more than 14 days or 10% of the days it's rented in a calendar year, the IRS considers it a personal residence and generally limits deductions of expenses to mortgage interest, necessary improvements, and property taxes.

On the other hand, if your rental property is considered a business, you may be able to deduct all eligible rental expenses—including depreciation, maintenance, management services, and even insurance premiums—as well as losses up to $25,000 in the current or future tax years. (Consult IRS Publication 527 for more details.)

Short-term rentals typically require more hands-on supervision and come with higher operating expenses. For instance, vacation property management services that handle client vetting, bookings, and housekeeping can charge from 10% to 50% of your gross rental income, depending on the services they provide, the location of the property, and the availability of property managers. "Remote locations like mountain towns may have fewer property managers, allowing them to charge more," Devin explains.

Additionally, management fees don't include listing fees charged by services like Airbnb or Vrbo. You or your online booking service may also be required to collect and remit lodging or occupancy taxes.

For those seeking more stability and less day-to-day involvement, long-term rentals—usually defined as stays longer than a month—may offer predictable income and fewer administrative headaches. You also have greater control over who's renting your property, and if you do need professional property management, it generally ranges from 8% to 12% of your gross rental income.

Not all locations are conducive to short-term rentals. Many cities have limited or outright banned such properties; others don't boast a strong enough tourism market; and some have become so oversaturated that it may be difficult to maintain a strong occupancy rate. Conversely, offering your property as a long-term rental may expose you to local laws that limit your ability to raise rents or evict problematic tenants.

If the property is in a high-demand city where both types of rentals are viable options, however, you should weigh the income potential against the time you're willing to commit to the rental. "Do your research, think carefully about your desired level of involvement, and work with your financial advisor to crunch the numbers," Devin says.