When it comes to investing in real estate, two investment strategies prevail; you can choose to invest in long term real estate investments or go for non-traditional short-term rentals. Both strategies have their pros and cons, and the success of each investment strategy depends on many factors including location of investment property, occupancy rate, and cash flow. Nevertheless, real estate experts strongly advise long term real estate investments to maximize profits and avoid losses.
Long Term vs Short Term Real Estate Investments
Investing in real estate for the long term means that real estate investors hold an investment property for a long period of time before selling it again. Long term real estate investments are leased for a longer period of time when compared to short term real estate investments. Therefore, long term real estate investments rely heavily on cash flow and time to be successful.
It is important to differentiate between the long term strategy, first as an investment strategy and second as a rental strategy. The first implies investing in a real estate property without selling it for a long time, while the second is just a rental strategy where an investment property is leased for a period exceeding 6 months. Therefore, a long-term rental strategy can still be a short term real estate investment if the property is sold within a couple of years. But in most cases, long term rentals are long term real estate investments.
Before choosing what investment strategy is better for you, answer the following question, “How long do you plan to hold the property before selling it again?” We think that real estate property should be treated as a long term investment for a simple reason: with long term real estate investments, you are able to ride the peaks and troughs of the markets, but when you opt for a short term investment strategy, you expose yourself to higher risk and potential losses due to the high illiquidity of real estate as well as high entry and exit costs.
Related: Real Estate Investing: Traditional vs. Airbnb Investments
Best Long Term Real Estate Investments
1- Long term real estate investments: Buy and hold
As the name implies, buy and hold is a long term real estate investing strategy where a real estate investor purchases a property, maintains it over a long period of time, receives continuous cash flow as rental income, and then sells it in the future for an additional profit. What makes the buy and hold investment strategy favorable among real estate investors is that it is not limited to a certain type of real estate property. On the contrary, it is applicable to all kinds of properties, from single-family homes to multi-family apartment buildings.
2- Long term real estate investments: Value add
Value add is a long term investment strategy that involves the buying of a distressed real estate property, renovating it, and then releasing it at a higher market rent. This investment strategy is riskier than the traditional buy and hold because it requires an additional renovation investment. However, if you buy the right property, you can get your investment back in no time and enjoy constant cash flow, high appreciation, and other benefits.
3- Long term real estate investments: Buy, hold, and develop
This long term real estate investment strategy involves buying a vacant land, holding it for a long period of time then selling it to a real estate developer or developing it yourself when the market conditions are favorable. Buy, hold, and develop is a very risky investment strategy as it would likely have a negative return and negative cash flow during the hold period. The key to success here is to identify an area that you believe will appreciate in value, then hold it and wait for change to happen.
4- Long term real estate investments: REITs
Investing in Real Estate Investment Trusts or REITs is a low risk passive real estate investment strategy that allows individual investors to enter the real estate business without the need for high capital and most importantly, without playing an active role in managing the real estate property. By buying shares of REITs you will receive a passive income in the form of dividends. Investing in REITs allows property investors to diversify their real estate investment portfolio, thereby lowering their risks.
Why We Recommend Long Term Real Estate Investments
The most common short term real estate investments are flipping and house wholesaling, two strategies that are very volatile, time-consuming, and normally not suitable for beginner or inexperienced real estate investors. We believe that long term real estate investments are the most profitable real estate investments for the following reasons:
- Consistent cash flow: Cash flow is the difference between rental income and rental expenses. With long term real estate investments, cash flow tends to be high and positive. You just have to find an investment property in a good location that guarantees high occupancy rate. We recommend using a rental property calculator to select investment properties that generate positive cash flow.
Related: Mashvisor: The Best Rental Property Calculator You Could Ask For
- High appreciation: By holding an investment property for a long period of time, the property appreciates or increases in value, allowing property investors to sell it at a price higher than the original purchase price. Moreover, as demand for rentals keeps increasing, rents also appreciate!
- Tax benefits: The main tax benefit of owning a long term real estate investment is the ability to deduct costs like property depreciation and mortgage insurance from an investor’s taxable income.
To learn more about the tax benefits of real estate investments, click here.
- Inflation hedge: Owning real estate is a great way to hedge against possible inflation. As prices rise, so will the cost of housing (rents or market value). Therefore, a long term real estate investment would protect your wealth in case of inflation.
The Bottom Line
Long term real estate investments are low risk, income generating investments that offer more benefits when compared to short term real estate investments. That’s why we recommend them!
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