Long-Term vs. Short-Term Real Estate Investing

Lets refresh our knowledge of Long-Term vs. Short-Term real estate investing. When evaluating real estate as an investment, one of the most important considerations is the hold period of the asset. How long do you plan to hold the property before a sale occurs? Your desired hold period will also dictate the investment strategy employed to minimize risk or maximize return over this period of time. Lets talk about some of the differing strategies for Long-Term vs. Short-Term real estate investing.

Long-Term Real Estate Investment Strategies:

Long-term investment strategies rely heavily on time and often on cash flows to be successful.

Buy and Hold – The bread and butter of long-term investing. Buy the asset, maintain it over a long period of time, receive cash flows and then sell for additional profit. Buy and hold is a great way to invest because it touches on the four main beneficial reason to invest in real estate. These are cash flow, appreciation, principal pay down and tax sheltering. This isn’t a short-term strategy because likely the asset will be already performing with little value to add and the costs of sale will negate any equity you have if not held for a period of time.

BRRRR (aka value add) – Buy rehab, rent, refinance repeat, my favorite. This involves buying a distressed property, renovating all of the units or square footage, releasing the property at higher market rents, refinancing to get all or some of your initial investment back and hold for cash flow. If you can stomach a lot of risk, then this strategy really shines. If you buy the property right, you could obtain all of your initial investment capital back but still keep the property for cash flow, appreciation, principal pay down and tax sheltering. Then you can go repeat the process! This can be used as a short-term strategy if you sell the property instead of refinancing because of the likely value added during the rehab process.

Buy, Hold, Develop (speculative) – This usually involves buying vacant land or tear-down properties. This is a very risky investment and will likely have a negative return over the hold period. You greatly rely on the sale of the property to make your return. The way this works is you identify an area that you believe will greatly appreciate in value. You purchase desirable land in that area and wait a period of time for the area to change. When the time is right, you either sell the land to a developer or develop the lot yourself. The profit here can be immense but you must have the capital to sustain years of negative cash flows while you wait. Also you risk being wrong or the market shifting and your plans may not come to fruition. This isn’t a short-term strategy because you are relying on time to improve the value of the land and the future development.

Lending – Lending money on a long-term basis to an investor securing the note to the property with a mortgage. You don’t have to be a bank to lend money. This isn’t a short-term strategy because typically you need the buyer to hold the property and pay the mortgage over 25-30 years earning a percentage of the money lent along the way.

Seller Financing  – When you sell your property to a buyer you can loan them a portion of the sales price and have the buyer pay back that portion with interest over a period of time. If you are done investing and don’t need to put the capital into another building then this might be a good way to earn some more money out of that property for a period of time. This can also be a short-term strategy if the payback period of the financing is less than one year.

Syndication – This involves pooling multiple investor’s capital to purchase an asset or group of assets. Typically the investors are offered a preferred return. Many times syndications are held long-term and they can be a great way for these investors to invest in real estate in smaller chunks or to easily diversify among locations and real estate product types without spending all of their capital in one shot.

Short Term Real Estate Investment Strategies:

Short-term real estate investing can be profitable but one of the difficulties is trying to find somewhere to place the profit after the sale occurs.

Single Family Flipping – Everyone wants to be a flipper thanks to all of the flipping shows on tv. Everyone makes money! That isn’t the case and there is certainly a lot of risk. But this is probably the most common form of short-term real estate investing. You buy a condo or single family home and renovate it. Then you sell it for a profit. You will have to pay short-term capital gains tax but if you buy it right, that won’t matter. Not a great long-term strategy because you want to get out of the property before the market shifts.

Multi-Family Flipping (value-add flip) – This is similar to the BRRRR strategy but instead of refinancing you sell the building to get your money out. If this strategy is executed effectively you will profit greatly. However you may have short-term capital gains and you’ll miss out on the benefit of holding.

Wholesaling – This strategy involves flipping contracts for fees. The wholesaler finds sellers off of the market and locks the property under contract with the seller. Later, they assign the contract for a nominal fee to another buyer who closes the deal. Very short-term, even faster turn-around than flipping but generally less profit. Not a great long-term strategy because the contract you are assigning requires usually 15-60 days to close and assign the property to another buyer.

Hard Money Lending  – This usually involves lending money to flippers at high short-term interest rates with large origination fees. This is high risk high reward. If you’re able to understand the flipping market and have solid relationships with flippers, this can be a great way to make money without managing the construction or sale process. Not a great long-term investment because often if you aren’t getting your money back quickly then you are unable to reinvest it in other deals.

As you see, each strategy has some pluses and minuses. Short-term strategies are generally riskier with higher returns and longer term strategies are generally less risky with lower returns with some exceptions of course.  Learning a number of short-term and long-term strategies is a great way to be an investor in any market at any time.

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