Short-term or Long-term Rental: Which is a better option for your new ADU?
Building an ADU can be a wise investment in your home: it can significantly increase its value, and by renting the unit, you can generate extra income. If you plan to rent your ADU, you have an important decision to make — whether to rent it on a short-term basis, possibly on vacation rental platforms like Airbnb or Vrbo, or to a long-term tenant who intends to live in the unit.
Here are the advantages and downsides to either option, as well as rules and regulations you’ll need to know:
Short-term rentals (STRs) through platforms like Airbnb or Vrbo can be a great way to maximize rental income from your new ADU. However, the profitability of using your ADU as a vacation rental largely depends on whether your home is in a high-demand area for vacations and special events. A good way to get a sense of this is to think about whether people visit your city or neighborhood in significant numbers, or whether you live in close proximity to a major tourist attraction or events venue, like a concert hall or sports arena. To get more specifics on how much you might expect to generate in nightly rent from a short-term rental, we recommend reviewing listings on Airbnb and Vrbo in your neighborhood, to see whether units are listed in your area and how much they typically rent for.
If you’re in the right location, a steady stream of vacationers can make renting your ADU on a short-term basis a very lucrative option. Make sure to estimate your area’s demand before building an ADU with the expectation that you’ll be able to do this, however.
Additionally, many cities have rules governing how and whether you can rent your ADU on a short-term basis. We have experience navigating these local rules at Revival Homes, so be sure to reach out to us before you start your ADU project.
Short-term Rental Laws in the City of Los Angeles
Since 2019, the city of Los Angeles has had a short-term rental ordinance. The ordinance only allows a homeowner to rent part of their property as a short-term rental only if it’s the homeowner’s primary residence. In other words, if you don’t live full-time in the home you’re building an ADU on, it’s illegal for you to rent it on a platform like Airbnb.
A quick summary of the City of Los Angeles’ laws governing short-term rentals:
- If you don’t live on the property full-time, you’re not eligible to rent your ADU out short-term
- Any short-term rental must be registered with the City of Los Angeles
- When advertising your short-term rental ADU, your listing must include your rental registry number
Be sure to review the City of Los Angeles’ rules governing leasing of short-term rentals. Airbnb also has a good summary of Los Angeles’ short-term rental ordinance.
Short-term Rental Laws in Santa Monica
Santa Monica’s short-term rental ordinance is similar to the City of Los Angeles’ regulations. In Santa Monica, it’s legal to rent your ADU on a short-term basis, but only if the ADU is located on your primary residence.
Most homeowners rent their ADU on a long-term basis (at least 12 months). This can involve less work and lower costs than managing an Airbnb, and provides more stable, predictable rental income. Long-term rentals are also a great choice for homeowners building an ADU in Southern California who don’t live in cities or neighborhoods with much tourism.
While long-term tenants are typically reliable, you always run the risk of having a tenant who fails to pay rent or causes damage to the unit. Be sure to learn how to vet long-term tenants by checking out our blog post with essential tips for new landlords, and familiarize yourself with local rules governing relationships between tenants and rental property owners.
Ultimately, the decision whether to rent out your ADU on a short-term or long-term basis depends on your city’s rules, local factors, and personal preference. While short-term rentals can be more profitable than long-term rentals, they often require more work, attention, and time. Additionally, short-term rentals are only practical if your area has a good amount of tourist traffic. Long-term renting provides a steady source of income, but also exposes you to the risk of having an uncooperative long-term tenant.
Got questions? Revival Homes’ ADU experts have answers. Book your free consultation with a Revival Homes advisor today!