Short-term ‘AirBnb’ rentals vs. long-term rental properties is a debate that has sparked attention among investors in recent years. Both are lucrative options with pros and cons, but the question every investor wants to know is – which offers the best net rental yield?
Many first-time investors believe that AirBnb rentals are a way of generating a higher yield. But typically, people overestimate occupancy and under-estimate costs, which can be considerably higher with this property type.
This guide will compare the occupancy, rental returns and costs of each investment type in Manchester city centre, exploring the pros and cons to answer the ultimate question – what is the best investment?
Short-term vs. long-term rentals
What is a short-term rental?
A short-term rental refers to a property listed on a holiday home portal like AirBnb or Booking.com to be rented for a vacation or weekend getaway. Occupancy varies considerably depending on key factors like location, quality, and day of the week, but generally demand is higher over weekends. There are some exceptions in global tourist cities such as Paris and New York, which are far more likely to achieve higher occupancy throughout the week.
What is a long-term rental?
A long-term rental refers to the typical residential rental model – the property owner lets out their property to a tenant for a contracted rental value and time period (typically a year). In prime city centre locations like Manchester, rental demand is at an all-time high, with an all-time low of just 51 unoccupied rental properties left on the market at one point this year.
Pros and cons of short-term vs. long-term rentals
Pros of investing in short-term rental property
- Strong gross rental yields due to higher average daily rate
- Option for investor to use the property themselves for short-term periods between lettings
Cons of investing in short-term rental property
- Inconsistent income dependent on tourism
- Listing sites take a considerable percentage of rental income through bookings (typically 20%)
- Deep clean, laundry service and toiletry replacement needed in between each booking – if demand is high this is very regular
- Capital growth is typically lower as developments which allow short-term lets tend to be in less central locations
- Higher turnover of residents is more likely to lead to excessive wear and tear, leading to higher maintenance costs
- Investor is responsible for utility bills, which are more likely to be higher as the short-term renters are less conscious about conserving energy
- Investor is responsible for Council Tax bills
- Someone needs to be on site to manage check-ins, potential issues and building management, meaning hands-on investment or employing a management service
- Can attract undesirable tenants as there are no or little vetting processes, which can in turn negatively impact the reputation of the building
- More comprehensive (and more costly) contents and host insurance is very advisable
- Any negative reviews are directly associated with the hosts (the investor) and can impact reputation, demand and returns.
Pros of investing in long-term rental property
- Strong rental yields driven by supply and demand (rental yields of up to 8% achieved in Manchester currently)
- Consistent cash flow in the form of regular rental payments
- Chronic undersupply of rental homes in prime city centres – up to 100% occupancy
- Strong capital growth projections over time
- Long-term rentals protect the residential brand’s reputation, building a community rather than a transient flow of temporary guests – encourages retention year on year
- Hands off, hassle-free investment with full tenancy and building management options available
- Tenant pays for utility bills
- Tenant pays Council Tax
- Any potential issues are associated with the residential brand rather than the investor personally.
Cons of investing in long-term rental property
- Usual risks associated with any investment.
Based on the pros and cons above, long-term lets are the more favourable option for investors seeking a hassle-free investment with consistent cash flow income, especially in a market like Manchester where the demand for long-term tenancies significantly outstrips supply.
The next section will compare the net yield forecasts for each investment type to investigate rental income vs. costs.
Net yield forecast for each investment type
To compare the net yields for each investment type, we have calculated an accurate estimate based on a one-bedroom apartment within One Port Street in Manchester city centre.
In this example, we have estimated average annual occupancy of 52% for the short-term let, based on market research within Manchester. This equates to an average of 3 days of occupancy per week, reflecting a typical week within an AirBnb in a city like Manchester – occupied on Thursdays, Fridays and Saturdays.
Short-term rental property net yield forecast
|Rental Rate per Night||£200|
|Gross Rental Income per Year||£37,960|
|Gross Rental Yield||11%|
|Rental Management (20%)||£7,592|
|Guest Management (10%)||£3,796|
|Building Insurance (0.75p per sq ft)||£405|
|Service Charge (£3.50 per sq ft)||£1,893.50|
|Cleaning, Laundry & Toiletries (£60 per change)||£3,796|
|Host Insurance (per year)||£700|
(Overseas investors need specialist cover)
|Utilities Bills (conservative estimate of £150pm)||£1,800|
|Council Tax (Band D estimate)||£2,150|
|Net Rental Income||£15,826.75|
|Net Rental Yield||4.5%|
Long-term rental property net yield forecast*
*Based on a realistic estimate of 100% occupancy per year, as is the case across Select Property’s operational Manchester residential developments (accurate as of September 2023).
|Gross Rental Income per Year||£20,729|
|Gross Rental Yield||6%|
|Rental Management (12%)||£2,487|
|Building Insurance (0.75p per sq ft)||£405.75|
|Service Charge (£3.50 per sq ft)||£1,893.50|
|Net Rental Income||£15,461.88|
|Net Rental Yield||4.6%|
Which is the better investment?
In conclusion, based on the calculations above, given the high costs associated with short-term lettings, the net rental yield is marginally higher (0.1%) on long-term lettings. Paired with the extensive list of pros, including a hands-off investment experience and more control over tenancy management, long-term rental properties prove to be the more attractive investment option.
However, it is worth noting that if AirBnbs can achieve higher occupancy than 50% (as can be the case in major tourist cities), while laundry and turnover costs will also increase, net yields will be higher and have the potential to offset high operational costs.
From our first-hand experience, the bottom line is this – investors typically overestimate occupancy and underestimate costs when it comes to short-term lets, and are then disappointed with the net rental yield and the hands-on investment experience.
At Select Property, our residential brands don’t allow short-term lets as we believe it compromises the overall resident experience. For example, Affinity Living is built around community, amenity and encouraging the resident to see the whole building as an extension of their home. With a constant turnover of tourists or business travellers, this wouldn’t be possible.
Our luxury aparthotel brand, CitySuites, on the other hand, is solely for short-term lets and is directly targeted towards tourist and business travellers – an entirely different model.
Select Property offer an end-to-end investment experience for investors, providing a hands off, hassle-free approach from start to finish. Our in-house brokerage can also sell your property on your behalf when the time is right, offering peace of mind and an easy exit strategy.