Is Buying or Leasing Better for a Short-Term Rental Business?
The short-term rental industry has exploded in popularity over the past decade, thanks to platforms like Airbnb, Vrbo, and local alternatives like Shortlet.ng.
Entrepreneurs and investors looking to enter this space in Nigeria often face one fundamental question: Should they buy a property or lease one for their short-term rental business?
This decision is crucial as it affects financial commitments, operational flexibility, and long-term profitability.
1. Understanding Buying vs. Leasing
Before diving into the pros and cons, it’s important to understand the fundamental differences between buying and leasing a property for short-term rentals in Nigeria.
Buying a Short-Term Rental Property
Buying a property means purchasing real estate to use as a short-term rental.
Owners have full control over how the property is used, marketed, and maintained. They can benefit from long-term appreciation and have the potential for significant returns through rental income.
In Nigeria, popular locations for short-term rentals include Lagos (Lekki, Victoria Island, Ikoyi), Abuja, and major tourist destinations like Calabar.
Leasing a Property for Short-Term Rentals
Leasing involves renting a property from a landlord and subletting it as a short-term rental.
This strategy, sometimes called rental arbitrage, allows individuals to start a rental business with lower upfront investment since they don’t have to purchase real estate. However, landlords in Nigeria often have strict policies against subleasing, so this model requires careful negotiation.
Both approaches can be profitable, but they come with distinct advantages and challenges.
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Pros and Cons of Buying a Short-Term Rental Property
Pros of Buying
1. Long-Term Investment & Appreciation
One of the biggest benefits of buying is that the property itself is an asset that can appreciate in value. Over time, the property may increase in worth, providing additional returns beyond rental income. Nigerian real estate markets in Lagos, Abuja, and Port Harcourt have shown strong appreciation trends.
2. Full Control Over Property
As an owner, you have full authority over how you manage the rental. You can make modifications, adjust pricing strategies, and optimize the space without needing landlord approval.
3. No Restrictions from Lease Agreements
When leasing a property, landlords may impose restrictions on subleasing or short-term rental use. Owning a property eliminates these concerns.
4. Potential Tax Benefits
Owners in Nigeria can take advantage of tax deductions on property-related expenses, including maintenance, renovations, and mortgage interest (if applicable).
Cons of Buying
1. High Upfront Costs
Buying requires a substantial initial investment, including a down payment, legal fees, and property renovations if needed. In Nigeria, buying property outright is often preferred since mortgage financing is not widely accessible.
2. Market Risks
Real estate markets fluctuate, and there’s always a risk of property values declining, making it harder to sell for a profit later.
3. Responsibility for Maintenance and Repairs
Owners must cover maintenance costs, repairs, and unexpected expenses, which can eat into profits.
4. Limited Flexibility
Once you buy a property, it’s a long-term commitment. If the short-term rental market in the area declines, selling or repurposing the property may take time.
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Pros and Cons of Leasing a Property for Short-Term Rentals
Pros of Leasing
1. Lower Upfront Investment
Leasing a property requires far less capital compared to purchasing. You may only need a security deposit and the first year’s rent, making it easier to start a rental business.
2. Flexibility and Scalability
Since you’re not tied to ownership, you can quickly expand your portfolio by leasing multiple properties in different locations without large financial commitments.
3. Ability to Test the Market
Leasing allows you to test different locations and markets without committing to a mortgage, making it easier to pivot if demand shifts.
Cons of Leasing
1. Dependence on Landlord Approval
Many Nigerian landlords prohibit subleasing for short-term rentals, making it difficult to find suitable properties. Convincing a landlord to allow short-term rentals may require revenue-sharing agreements or increased rent payments.
2. Risk of Rent Increases or Lease Non-Renewal
Since you don’t own the property, landlords can increase rent at renewal or refuse to renew the lease, forcing you to relocate your business.
3. Limited Control Over the Property
You may not be able to make property improvements or customize the space to optimize guest experience without landlord approval.
Key Factors to Consider When Deciding
1. Financial Situation
- Do you have enough capital for a down payment, or is leasing a better short-term option?
- What is your expected return on investment (ROI) for each model?
2. Business Goals
- Are you looking for long-term wealth accumulation (buying) or short-term cash flow (leasing)?
- How important is flexibility to you?
3. Market Conditions
- Is the area experiencing strong real estate appreciation?
- Are there regulatory restrictions on short-term rentals?
- What is the demand for rentals in the location?
4. Risk Tolerance
- Can you afford potential vacancies or property devaluation?
- Are you willing to manage long-term property responsibilities?
Hybrid Approach: Rent-to-Own & Master Leasing
For those torn between buying and leasing, there are hybrid strategies worth considering:
1. Master Leasing
A master lease allows you to rent a property with the explicit right to sublease it as a short-term rental. This strategy provides control similar to ownership without the upfront cost of buying. In Nigeria, this may require legal agreements to ensure compliance with landlord requirements.
2. Rent-to-Own
Rent-to-own agreements allow you to lease a property with an option to buy it later. This approach enables you to test the market before fully committing to ownership.
Case Study Example:
Tunde, an investor, started with a master lease on a short-let apartment in Lekki. After two years of profitable short-term rentals, he secured financing to purchase the property, leveraging his rental income history to get a favourable mortgage.
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Conclusion & Final Recommendations
Choosing between buying and leasing for a short-term rental business in Nigeria depends on financial goals, market conditions, and personal risk tolerance. Here are key takeaways:
- Buy if: You have capital for a down payment, seek long-term property appreciation, and want full control over the asset.
- Lease if: You prefer a low-cost entry, value flexibility, and want to test different markets.
- Consider a hybrid approach: If you want ownership benefits with lower upfront costs, explore master leasing or rent-to-own agreements.
Next Steps
- Conduct a market analysis for your target location.
- Review financial projections and determine your ROI for both models.
- Consult with real estate professionals or legal advisors to navigate leasing agreements.
- If leasing, ensure landlord agreements explicitly allow short-term rentals.
By making an informed decision, you can set yourself up for success in Nigeria’s competitive short-term rental market.
Whether you choose to buy, lease, or take a hybrid approach, strategic planning and financial diligence will be the keys to profitability.