Gross Yields - the Difference Between Long term and Short term Rentals
By: Scott Mears - Aspire PRO Enterprises
When evaluating property investments, understanding the differences in gross yields between long-term and short-term rentals is crucial. Gross yield is calculated by dividing the annual rental income by the property's value, providing insight into potential returns.
Long-Term Rentals:
In New Zealand, the median gross yield for long-term rentals (LTRs) is approximately 4.52%. This means that for a property valued at NZ$500,000, an investor might expect an annual rental income of about NZ$22,600. Yields can vary by region; for instance, Southland boasts a median gross yield of 5.76%, while Auckland's is around 3.3% and Waikato is approximately 4.5%.
Figure 1. LTR Gross Yields in NZ; source: Opes Partners.
Short-Term Rentals:
Short-term rentals (STR), such as those listed on platforms like Airbnb, often command higher daily rates, potentially leading to greater annual income compared to long-term leases. For example one Aspire PRO Enterprises (Aspire) STR conversion - 2/391 Victoria Street - currently enjoys a gross yield of 8.7% versus 3.4% projected as a LTR.
Property Buyer Considerations - LTR vs STR:
Income Stability: Long-term rentals offer consistent income with lower vacancy risks, while short-term rentals usually experience income fluctuations due to seasonal demand and market dynamics. Aspire is well positioned to manage these short-term fluctuations by using its proprietary model to increase occupancy and the daily rate.
Management Effort: Short-term rentals require more intensive management, including frequent guest turnover and maintenance, whereas long-term rentals involve less frequent tenant changes. Aspire has an in-house team to easily deal with cleaning and key handovers.
Regulatory Environment: Short-term rentals may face stricter regulations and zoning laws, potentially impacting their profitability and legality.
Conclusion:
While short-term rentals have proven potential for higher gross yields, they come with increased management demands and potential income variability, although these can be easily outsourced to a company like Aspire PRO who will maximise the property’s yield.
In contrast, long-term rentals provide more predictable returns with less operational complexity and consequently lower yields.
Therefore potential investors should assess their financial goals and risk tolerance when choosing between these two investment strategies.
If you would like to know more about STRs and want a confidential discussion about your own property (or a target property), please click here to set up a time to talk to Lara McCormick, the founder of Aspire PRO Enterprises.
Alternatively, if you would like a free no obligation STR appraisal, please fill in this form.