An investment property in San Diego is usually going to fall into one of two categories. Either it will be a long-term rental, with a tenant signing a lease agreement of a year or more, or it will be short-term rental, which is often the same as a vacation home.
There are pros and cons to owning either type of rental property, and the ownership experience is different in each case. You might want to think about that old tale of a race between the tortoise and the hare. The vacation rental would be the fast-paced hare while the long-term rental would be the slow and steady tortoise. It’s not as glamorous a runner as the hare, but it reliably gets to where it’s going.
There are three main differences to long-term rentals and short-term rentals, and we’re exploring those today.
San Diego Rental Income for Short-Term and Long-Term Rental Properties
Rental income is the first thing you’ll want to think about. Vacation rentals have a larger upside in this area because they earn more. Sometimes, the income per night or per week is double what you’d earn on a long-term lease.
But, with that upside comes a lot of extra risk to your income. The risk is political in some cases. The San Diego City Council is currently talking about banning or limiting vacation rentals. There could be a situation like the COVID-19 pandemic, where no one is traveling and vacation homes aren’t in demand. There can be an economic recession, causing your income to fluctuate wildly.
What you’re able to earn on a vacation property will also depend on your home’s location and condition. We have seen homes of the same size just a few spots away from each other having different views, different conditions and different parking setups. Those things lead to a large variance in what the owner earns.
Long-term rental properties have a more consistent income stream. There isn’t a seasonality issue, and there’s a low risk of vacancy. In San Diego, there’s a high demand for long-term properties. At Penny Realty, we’re averaging 11 or 12 days of vacancy. There’s a lot less risk to your income stream.
San Diego Rental Property Maintenance
Vacation rentals are going to have a higher standard for maintenance and repairs. You’re going to have to maintain your home in a condition that’s similar to a hotel suite. That’s what your renters are going to expect when they stay in the short term. You’ll need to have the property inspected and cleaned between each renter. Long-term properties are going to have a much lower maintenance risk and expense.
San Diego Property Management Fees and Expenses
Your short-term rental properties are going to come with higher management fees because there’s more work involved. You can expect to pay 20 to 25 percent of your income in San Diego for management. Some companies charge as much as 30 percent. You can self-manage, but that’s even harder to do with a short-term rental than a long-term property. You’ll need a lot of free time because it’s going to turn into a part-time or even a full-time job.
There are higher expenses as well. Vacation property owners need to cover the gas and electric bill as well as the water bill, cable, and Wi-Fi. With a long-term property, these expenses shift to the tenant.
Management fees are also lower with long-term rental properties. You can expect to pay eight to 10 percent of your rental income. There’s less maintenance and work. Your property manager doesn’t have to continually advertise and market the home. There’s lower tenant turnover.
Are You Hoping to Use the Property?
It doesn’t always come down to money. One of the main reasons people purchase a vacation home is so that they have a place to stay themselves. It serves as a vacation home for their families, so the decision is often emotional.
It’s our recommendation that if you have an oceanfront or a bay front property or your home is a couple of blocks from the water with a good water view, then you make it a vacation rental. That’s going to be the highest and best use of your investment. Anything else should be a long-term rental.