3 Reasons I Don’t Invest in Short Term Rentals (Plus 2 Reasons I Should)

Selenid and I love investing in real estate. But we don’t invest in short term rentals. This isn’t just a coincidence. Instead it’s something we’ve thought a lot about.

However, the debate rages on as to which is better: to invest in short term rentals (STRs) or long term rentals (LTRs). And many of the potential physician real estate investors that I talk to ask why and how we made this decision.

Well…here’s why!

Some caveats

Let’s get these out of the way first…

1. Yet. We don’t invest in short term rentals yet. We don’t have plans to. But we can never say never.

2. This post is not to say that investing in short term rentals is bad or the “wrong” way to do it. There are tons of ways to invest successfully in real estate. This is what works best for me and Selenid.

3. Things and markets change. I’m writing in the regulatory climate of early 2024. Just for perspective.

3 reasons I don’t invest in short term rentals

For me, the first reason is the biggest.

1. Unstable regulatory environment

The year is 2021. The pandemic rages on. Meaning that lots of physicians find themselves in a more perilous professional and financial situation than ever before. More and more doctors look for alternative streams of income outside of medicine to supplement or replace their clinical income.

Meanwhile, the real estate market is taking off. Historically low interest rates combined with yet rising prices and an upward rental market make real estate investing a super attractive path to financial freedom.

As the market evolves, short term rentals become very popular and lucrative. Palm Springs is one of the hottest markets out there. Those that find good deals make a ton of money.

But then, in November 2022, the Palm Springs City Council passes new regulations that severely limit the ability to STR investors to rent out and profit from their properties.

All of a sudden, margins become tighter, especially as interest rates rise in a less friendly lending environment.

This is not an isolated story

Unfortunately. And while does not mean that all STRs have struggled due to this, it does give me pause.

The regulatory environment for STRs is still very new and young. Meanwhile, the environment with regards to LTRs is much more mature and stable. Plus, the general opinion (whether right or wrong) is much more favorable for LTRs that are viewed as a necessity to provide housing. On the other hand, STRs tend to be seen as an imposition on neighborhoods.

All of this leads me to favor the decision to invest in long term rentals.

2. More turnover

Easily my least favorite part of being a hands-on real estate investor is turnover. Turnover is also one of the biggest expenses with our LTR properties.

That’s why we spend so much time and energy choosing the right tenants. Our hope is that they stay for multiple years, decreasing turnover and its inherent cost and inconvenience.

I haven’t calculated it exactly but anecdotally, our average turnover per unit is greater than 1 year. And that’s how I like it.

Meanwhile, for STRs, turnover is usually once every week or so. Stays are shorter by design. And that means a lot of turnover.

Of course, it’s rare that the STR owner is doing the turnover. Usually a company is hired to do this. But this is very expense and cuts into income significantly. Plus, ask anyone and they will tell you that no one will take care of your place like you would. And they can just drop you as a client at any time.

Knowing myself, this is just not something I want to be a bigger part of my investing…

3. Less pride

For my long term rental tenants, my property is their home. Certainly with exception, but for the most part they take good care of it as a result.

In contrast, in a short term rental, your guests are…well, your guests. Your property is a hotel to them. Sometimes it’s a family that takes great care of it. Sometimes it’s a spring break party. In fact, Ian Cook of Carpe Diem MD famously says in his STR online course (more info here) that the #1 rule of short term rentals is “Guests will break your sh*t!”

That would drive me nuts. It also costs a lot of money.

Not a reason not to invest in short term rentals, but enough of a reasons to lean me towards LTRs.

2 reasons I should invest in short term rentals

But it’s not all cloudy for short term rentals. There are some nice advantages that Selenid and I do consider moving forward…

1. Higher rents

Ever gone on a vacation like this?

People are willing to pay way more for a week in a hotel than they are to pay rent for one month in their home. An STR leverages this to generate way, way higher rents and incomes compared to long term rentals.

And this helps offset the higher expenses that I discuss above.

There’s no denying it, for a well put together and wisely chosen STR, the returns can be much higher. And I think that makes sense…because the risks as laid out already are higher.

2. Easier path to massive tax advantages

While I am adamant that doctors should not invest in real estate just for the tax benefits, the tax benefits are great.

One of the biggest ways to reduce taxes with real estate is to use passive real estate losses to offset W2 active income. Within the LTR world, this is only possible via achieving REPs. This post goes in full detail on how that works. But it’s tough. You need at least 750 hours of material participation. It’s not something you just “do.”

However, within the STR world, the thresholds to meet criteria to offset active income with passive real estate losses is much, much lower. You or your partner just need 150 hours of material participation.

For many potential physician investors and their partners, this is a much easier target to hit. And, as long as the investment in the STR otherwise makes sense, may influence them to favor an STR.

The verdict

Like so many things in finance, there is no absolute dogma. There are only two main ways that investing can go wrong:

• You don’t invest or
• You don’t educate yourself and make bad investment

You are on this blog, so you are already making sure that both of these things don’t happen!

So the next step is working with your partner if you have one to see what fits best into your unique personal, professional, and financial situation. I know investors who have made both short and long term rental investing work spectacularly well. And you can too!

Here are some other great resources on real estate investing for doctors:

• Real Estate Investing: Why the Tortoise Beats the Hare
• 7 Steps to Visualize the Big Picture in Real Estate Investing
• 3 Ways To Turn Real Estate Losses into Gains

What do you think? Do you invest in short or long term rental properties? Why or why not? What’s the biggest advantage? Disadvantage? Let me know in the comments below!