Short-Term Rentals vs. Long-Term Leases in Nigeria: Which Offers Better ROI?

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Investing in real estate is a proven way to build wealth, but deciding between short-term rentals and long-term leases can be challenging. While short-term rentals like Airbnb can generate higher income per night, they come with increased maintenance costs and unpredictable occupancy rates. Long-term leases, on the other hand, offer stable income with lower upkeep but may yield lower overall returns. In this article, we will dive into the pros and cons of both portfolios and help you make an informed decision based on location, demand, and management style.

Understanding the Basics: Short-Term Rentals vs. Long-Term Leases

Short-term rentals, popularized by platforms like Airbnb, involve renting out properties on a nightly or weekly basis. These properties are often marketed as vacation homes or temporary accommodations and generally attract tourists, business travelers, or those in need of transitional housing. On the other hand, long-term leases typically involve renting out residential or commercial properties for extended periods, usually six months to a year or more, offering stability and a fixed monthly income.

Return On Investment: Which Portfolio is More Profitable?

The most compelling advantage of short-term rentals is their potential for significantly higher income compared to long-term leases. According to Omer Rabin, Managing Director, at Guesty, short-term rentals can generate about 30% more profits than long-term rentals.

For example, in Lagos, Nigeria, a two-bedroom apartment on Victoria Island could earn around 150,000 NGN per night. With an average occupancy rate of 70%, this translates to about 1,470,000 NGN per month. On the other hand, the same property rented on a long-term lease might only generate ₦15,000,000/year.

However, while short-term rentals can offer impressive gross revenue, they also come with higher expenses which can be unpredictable such as:

1. Occupancy Fluctuations: Demand can vary based on season, local events, and economic factors. For example, tourism dips or travel restrictions can leave properties vacant for weeks.

2. Management and Maintenance Costs: Regular cleaning, restocking, and utility bills can quickly erode profits. On top of that, property management fees—typically ranging from 15% to 20% of rental income—can significantly cut into net earnings.

3. Legal and Regulatory Challenges: Across Nigeria, cities like Lagos are introducing regulations to manage short-term rentals, reflecting a growing trend toward stricter oversight. In Lagos State, specific zoning laws determine where short-term rentals are permi ed, and some Local Government Areas (LGAs) require operators to obtain permits for properties listed on temporary housing platforms. Tax compliance is also becoming increasingly important, with rental operators expected to pay Value Added Tax (VAT) and adhere to other tax obligations. As the regulatory landscape evolves, short-term rental hosts in Nigeria must stay informed and comply with local laws to avoid penalties and ensure smooth operations.

Stability and Predictability of Long-Term Commitment

Long-term leases offer consistent cash flow and significantly lower management demands. Once a tenant signs a lease, the income remains stable for the duration of the agreement, often ranging from 6 months to 2 years.

Advantages of long-term leases include:

1. Steady Income: Regardless of market fluctuations or tourism trends, rental income remains constant throughout the lease term.

2. Reduced Operational Costs: Unlike short-term rentals, landlords are not responsible for frequent cleaning or providing amenities. Tenants often cover utility bills and minor maintenance.

3. Lower Turnover: High tenant retention rates reduce marketing and vacancy expenses, resulting in more predictable revenue.

However, long-term leases generally have a lower earning potential compared to short-term rentals, especially in prime locations. For example, while a property in Lekki might generate 1,000,000 NGN per month on a long-term lease, it could potentially earn over 2,000,000 NGN through short-term rentals during peak periods.

Key Factors to Consider When Choosing an Investment Portfolio

1. Location
   The property’s location significantly affects profitability. Tourist hotspots and business districts, such as Victoria Island or Lekki, are ideal for short-term rentals. In contrast, residential neighborhoods like Yaba and Surulere are more suited for long-term leases.

2. Occupancy and Demand
   High occupancy is crucial for short-term rental success. According to Statista, the global average occupancy rate for Airbnb properties in urban areas is around 65-75%. In Lagos, prime areas may experience even higher rates during holiday seasons or major events.

3. Administration and Upkeep
   Running a short-term rental requires ongoing effort, including guest communication, cleaning, and property care. Hiring a property management company can ease this burden but typically costs 15-20% of the rental income. On the other hand, long-term leases require minimal oversight once a reliable tenant is in place, with administration fees usually around 10%.

4. Legal and Regulatory Compliance
   Local laws can directly impact profitability. For example, some areas have strict regulations on short-term rentals, requiring special licenses or limiting the number of nights a property can be rented annually. It’s crucial to stay informed to avoid penalties.

5. Financial Goals and Risk Tolerance
   Short-term rentals may offer higher gross returns but come with increased risks and operational demands. Long-term leases, while offering lower returns, provide stability and less hassle. Understanding your financial goals and risk appetite will guide your decision.

Case Study: Short-Term Rental Success

To illustrate the potential earnings difference, let's analyze a scenario involving a luxury two-bedroom apartment in Victoria Island, Lagos.

Listing a Shortlet Apartment on PropertyPro at ₦250,000 per night with an average occupancy rate of 75% (approximately 23 nights per month). This setup would generate a gross income of:

₦250,000 × 23 nights = ₦5,750,000 per month

However, it’s essential to consider expenses such as administration fees, cleaning, utilities, and upkeep—typically accounting for 30% of the revenue. Additionally, hiring a property management company for a short-let can cost around 20% of the rental income.

After deducting these costs, the net income would be:

₦5,750,000 - (30% + 20% of ₦5,750,000) = ₦3,450,000 per month

In contrast, the same property rented on a long-term lease could generate around 800,000 NGN per month. While the long-term lease offers consistent and predictable income, it falls short of the potential earnings from short-term rentals, despite the la er's higher operational demands and variability.

Conclusion

The decision between short-term rentals and long-term leases ultimately boils down to your investment goals and risk tolerance. Short-term rentals offer the potential for higher earnings but come with challenges like high turnover and management demands. Long-term leases provide predictable income and lower maintenance but may yield less profit overall.

One strategy to maximize returns is to adopt a hybrid approach, utilizing short-term rentals during peak seasons and switching to long-term leases during slower periods. This way, investors can balance income potential with stability.

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