Short Term Rental vs Long Term Rental: Which one is right for you?

The Short Term Rental (STR) market has found mainstream appeal across the UAE. With prime markets identified in areas such as Palm Jumeirah, Dubai Marina and Downtown Dubai, Dubai landlords have expressed renewed enthusiasm for Short Term Rentals, as they scramble for alternatives to struggling long term rents. Though Short Term Rentals have many potential upsides, it is difficult for some to envision a change from the tried and tested model of long term rental contracts. This post will outline the Pros and Cons of both Long Term and Short Term Rental contracts to help you decide what is right for you.

Long Term Rental Contracts

Pros

Less Management - Effectively managing a single tenant can be relatively straightforward, involving negotiations, tenant screening, and regular rent collection. However, when scaling to handle multiple properties, property owners may face significant challenges. According to recent industry data, property management companies that oversee multiple units have reported up to a 30% increase in efficiency and profitability.

These companies leverage streamlined processes, advanced technology, and professional expertise to handle tenant onboarding, rent collection, maintenance requests, and lease renewals seamlessly. By entrusting property management to experts, landlords can focus on strategic growth, while benefiting from reduced vacancy rates, improved tenant retention, and higher overall returns on their real estate investments.

No Furnishing - In the vast majority of long term rental arrangements, the tenant is expected to furnish the property (including appliances). Subsequently, there is no cost to the landlord for purchasing and maintaining the furniture in the property. This is not the case when implementing a Short Term Rental strategy.

Predictable Income - One of the biggest advantages of an annual lease is income predictability. Your income is unlikely to fluctuate (for better or for worse) and you know exactly when you will be receiving your money and can budget accordingly.

Cons

Tenant Related Problems - Unforeseen circumstances, especially in a fluctuating job market, can see long term tenants getting evicted or absconding - causing numerous problems for landlords. Finding a new tenant - or worse, spending time in court - can sometimes take months, leading to untold financial losses due to lost rental income / attorney fees.

Landlords in the UAE have seen an increasing number of bounced checks, so much so, that it is now no longer illegal for a check to bounce due to insufficient funds in the UAE. This can further be attributed to the tumultuous times we find ourselves in and requires landlords to carefully screen their tenants and/or diversify their risks (more on that later).

3-Year Rent Freeze: In June 2021, Dubai Land Department implemented a 3-year Rent Freeze, effectively eliminating the option for landlords to increase their property’s rent for the next 3 years. The regulation was implemented in an effort to stabilize what has been a volatile Long Term Rental market for the last several years.

For landlords who are already struggling, the rent freeze has caused many landlords to consider Short Term Rental, given there is no cap on rental income.

No Flexibility - In the real estate market, achieving both financial gains and personal use of one's property is often perceived as a challenging balance to strike. However, Short Term Rentals (STRs) present an appealing solution, offering unparalleled flexibility compared to long-term rentals. Recent statistics indicate that property owners who opt for STRs experience up to a 40% increase in revenue compared to traditional long-term leases. This makes STRs an attractive option, particularly for individuals with strong connections to Dubai, as it allows them to capitalize on their property's potential for financial gain while having the freedom to use it whenever they visit the city. The ability to maximize income during periods of absence and enjoy personal use when desired creates a win-win scenario for property owners seeking the best of both worlds in the dynamic Dubai real estate market.

Short-term rental contracts

Pros

Higher Income - We’re in the business, we see the trends, short term rental all but guarantees a higher income when looked at from a yearly perspective (for most properties). Let’s look at an example of short term rental vs long term rental returns.

A 5-bedroom Palm Jumeirah villa under a Long Term Rental contract can make around AED 1,000,000 per year. However, in our experience, similar properties can earn AED1.3 million every year leveraging a Short Term Rental strategy! There are some additional costs, which can drag this number down by a small amount. Payments need to be made to cleaners, maintenance managers and Online Travel Agents (OTAs - like Airbnb). However, even after deducting costs, MANY properties tend to make significantly more with short term rentals.

Flexibility - The Short Term Rentals model offers unrivalled flexibility, especially if you live in a different emirate or country. For many of our clients, the flexibility to use their property as and when they like, is the deciding factor to implement a Short Term Rental strategy.

Improved Property Maintenance - This may come as a surprise given how much press there is around wild parties at some Airbnb Properties (read our post on host protection), but a well run Short Term Rental property will have far better upkeep than a Long Term Rental arrangement in the vast majority of cases.

The average length of stay in a Short Term Rental is 5-7 days. Every time a new guest arrives, the cleaning and maintenance team does a 10-point check of the property (supported by over 30+ photos taken every turnover). Everything from leaks under the sink, to problems with the AC are checked quite literally every week.

It may be counterintuitive, but a well run Short Term Rental is kept in tip-top shape and is almost always in better condition than a Long Term Rental.

Pro Tip: If you’re a landlord looking for reputable property management companies in Dubai, be sure to check-out the reviews of your prospective Operator on Airbnb. Any sign that guests aren’t happy is likely an indication that your property may not be kept in ideal condition.

Cons

Requires Management - Let’s be honest, Dubai is a major tourist destination and the Short Term Rental space in Dubai has become extremely competitive. In fact, As of 2023, the Active number of units as mentioned or AIRDNA is upwards of 28,000! It may seem easy to snap a few photos and create an Airbnb listing - and in some ways it is. However, guest communication, turnover management, revenue management (critical to maximizing your rental income) and various other day-to-day tasks can become a real slog. For this reason, it's almost always beneficial to hire a professional, reputable operator. Your pocketbook (and your sanity) will be grateful you did.

Requires Furnishing - Furnishing a property can be super time consuming and tedious! The process can take up to 3 weeks, and it almost always implies several trips to Ikea (or other furniture stores). Luckily, most reputable Short Term Rental Operators will offer the interior design, furniture procurement and outfitting free of charge (the owner obviously pays for the furnishings and any maintenance costs).

Pro Tip: Make sure you look at an operator's portfolio of properties to get a sense of their design aesthetic. The last thing you want is a property full of furniture you’re not a fan of!

Local Laws & VAT - The Short Term Rental space is highly regulated in Dubai - check out our post on the Legal Requirements of STR here. Without a professional operator, understanding and complying with local laws can be quite overwhelming and time consuming.

The Bottom Line

The Short Term Rental market has remained remarkably resilient throughout the pandemic, and with several major events scheduled in Dubai, the future of STR has never looked brighter.

In some cases, STR can earn an investor as much 100% more rental income when compared to a traditional LTR contract.

However, finding a professional, reputable STR operator is critical to realizing your Real Estate investment goals, if you choose to shift to a STR model.

If you'd like to learn more about why the Short term rental market is set to thrive in Dubai, check out our blog post on the topic here