Do you own or consider buying an apartment for investment?
If so, you may wonder whether to rent it out over the long term or convert it into a short-term rental, such as an Airbnb.
Many individuals who start out investing in real estate make blind guesses on whether to rent out via the traditional long-term route, or as a short-term rental.
In reality, the most profitable rental strategy for a property always depends on the neighborhood, building, and the unit in question.
You can’t say that a short-term rental is always more lucrative than a long-term rental and vice versa.
In this article, we discuss how to know whether a short-term or long-term rental strategy is most suitable for any given property.
Let’s assume you own or plan to purchase a one-bedroom apartment in Dubai.
And you would like to know whether it is more profitable to rent it out as a short-term or long-term rental.
First, let’s look at the main differences between short-term and long-term rentals.
By renting out over the short term, you can achieve significantly higher nightly rates.
An apartment that rents out for 100 thousand dirhams for a full year, may fetch nightly rates of 1000 dirhams or more during peak seasons such as Christmas and new year.
Depending on the property, the achievable nightly rate for a short-term rental may be up to twice as high as the nightly rate for a long-term rental.
The main drawback of short-term rentals, on the other hand, is the higher vacancy rate.
While the nightly rate may be higher, it is unlikely you will be able to rent out your apartment throughout the year.
Especially during Dubai’s hot summer period, you may struggle to find guests even if you lower your nightly asking price.
While long-term rentals have vacancy rates of 5-10%, and oftentimes, even lower, short-term rentals can experience annual vacancy rates of up to 50%, especially if you are not careful when it comes to selecting the right property and marketing it properly.
This brings us to the next major difference.
If you decide to run a short-term rental, you will have to invest a significant amount of time and money in furnishing your apartment.
Long-term rentals, on the other hand, are usually rented out unfurnished.
You may handle the furnishing process yourself, or hire an external interior designer or staging company.
Similarly, you, as the investor, will be responsible to pay for utility and internet charges, as short-term guests expect utilities to be included in the price of their stay.
If you rent out long term, you will not have to arrange or pay for utilities or internet.
Guests of short-term rental properties also expect good guest service.
They may reach out to you before placing a booking, or contact you in case they can’t find the property’s address, want to book an airport pick-up, or need urgent fixing of a non-working wifi connection.
Unless you, as the investor, want to perform all of these tasks yourself, you may want to hire a professional property management company.
Due to the additional work a short-term rental creates, property management fees for short-term rentals are up to 20% of the total rental revenue.
In comparison, for long-term rentals, property management fees usually hover around the 5 to 8 percent mark.
Similarly, short-term rentals have to be cleaned after every guest. And while cleaning fees may be passed on to guests, the extent to which this is possible will depend on the prices of nearby hotels, which always include cleanings for free.
Lastly, but just as importantly, if you run a short-term rental in Dubai, you will have to register your property with Dubai’s Department of Economy and Tourism, as we discuss in detail in our article on running a short-term rental in Dubai.
And while Dubai does not charge income or property taxes, short-term rentals are subject to Dubai’s tourism taxes.
While these taxes are fixed at a certain level and never exceed AED20 or 5USD per night, you should take them into consideration when assessing the potential profitability of your rental property.
Return Calculation
Now that we have assessed all the different ways short-term and long-term rental properties vary in terms of revenue and expenses, we can look at how to calculate their returns.
Let’s create a matrix.
In the first column, we cover our standard long-term rental scenario.
100 thousand in rent.
An 8% average vacancy rate.
And property management fees.
After subtracting a variety of other fees such as building service charges we end up with a 4.5% net return.
The business case for a short-term rental property is a bit more complex.
Here, we cover a range of vacancy rates, from 20% to 50%.
We also need to take into account fluctuations in nightly rates over the year.
Short-term rentals will incur furnishing expenses, utility- and internet bills.
Property management and repair charges are also higher.
As we can see, the net income generated from a short-term rental strategy will vary based on the vacancy rate and nightly rate.
As long as the property achieves a certain minimum occupancy level and nightly rate, a short-term rental strategy will be more profitable than a long-term strategy.
So how do you know what nightly rate and occupancy rate a particular property will achieve?
This is where in-depth analysis comes in.
Here at The Dubai Navigator, we estimate vacancy rates, nightly rates, property management fees, and even furnishing expenses.
For any property of your choice, we can analyze and calculate whether you should rent it out on a long-term or short-term basis.
Alternatively, we can identify properties that are uniquely suited for Airbnb.
But that’s just the beginning. Here at the TheDubaiNavigator.com we are Dubai’s only 100% independent real estate advisors who have never earned a commission.
We also offer a variety of complementary services, from international business and residence relocation, to tax-optimized stock investment strategies and advanced multi-country estate plans.
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