Real estate was traditionally viewed as a long-term investment. Investors would buy a property and hold it for years before selling. But investors today have far more options, including short-term real estate investment projects.
In this article, we’re going to compare short-term vs. long-term real estate investment strategies. We’ll explore different investment options that fall under each category and help you decide which strategy might be a better fit for you!
What is Long-Term Investing in Real Estate?
Long-term investing in real estate simply means buying real estate-related assets and holding them for several years. The exact timeframe is up for debate. Some investors say an asset must be held for at least five years to qualify as a long-term investment. The IRS (Internal Revenue Service) says that any investment held for more than a year qualifies as a long-term investment. This will be important when we discuss income tax implications of different investment types in just a bit.
Examples of Long-Term Investing in Real Estate
There are lots of ways to invest in real estate for the long term. Options include:
Buying your own home. Your home is a piece of real estate that you probably plan to own for several years and then sell for a profit.
Building an ADU on your property. An ADU (accessory dwelling unit) is a private living space homeowners add to their properties. This could be a stand-alone structure (like a guest house) or a converted area of your home (like an in-law suite). You might rent the ADU out to create passive income, or you might use it as a living space for adult children or aging parents. As long as you hold the property for years after construction is complete, this is a long-term real estate investment.
Buying and holding raw land. Raw land is often purchased to be leased to farmers on long-term leases, typically of five years or more. But it can also be purchased speculatively; perhaps you’re watching your town expand, and you decide to purchase land on the outskirts now so that you’ll be able to parcel off lots to sell to developers in the future.
Build-to-rent residential with a long hold period. With young families being priced out of the housing market, it’s becoming more popular for investors to develop single-family homes and multi-family structures specifically to serve as long-term rentals. Multi-family BTR is different from traditional apartments in that the units are designed to feel more like a home. For example, multi-family BTR may come with higher-grade finishes and individual yard space. Single-family BTR is different from general new home construction as it offers sturdier materials and fewer customization options. For example, a BTR home may come with laminate wood plank flooring instead of higher-maintenance hardwood floors. You can read up on the pros and cons of BTR if this model interests you.
Commercial development. Building a commercial property (like retail storefronts, office space, self-storage units, and shopping centers) is a long-term real estate investment. Construction alone could easily take over a year, then you can hold the completed asset as a rental until you’re ready to sell.
7 Benefits of Long-Term Real Estate Investments
Long-term real estate investments offer several benefits, including:
Appreciation. Real estate typically increases in value over extended periods of time.
Passive income potential. Many long-term real estate investment types offer ongoing rental income.
Reduced transaction costs. Investors with a long-term focus typically complete fewer real estate transactions than investors who focus on short-term projects. This usually means lower transaction fees overall for long-term investors.
Extra tax advantages. Many real estate investments (short and long-term) offer some type of tax benefit. However long-term investments have the distinct advantage of being taxed at the lower capital gains rate. Short-term investment profits are taxed as earned income, using your tax bracket to calculate the tax rate. But investments held for at least a year are taxed at the favorable capital gains tax rate.
Inflation hedge. The value of real estate tends to rise during periods of inflation. So holding long-term real estate assets can help protect your net worth against inflation.
Equity building. As your property grows in value, you earn equity. This equity can be leveraged to access additional capital. For example, you might take on a home equity loan on your primary residence to cover the down payment for a new investment property acquisition.
Less exposure to risk from market fluctuations. Long-term investments are generally less susceptible to short-term market fluctuations than assets that are held for only a short period.
What is Short-Term Investing in Real Estate?
Short-term investing in real estate simply means buying real estate-related assets that can grow in value quickly and then selling them as soon as possible. Many investors consider investment periods of under five years to be short-term. However, only investments that are held for less than one year are considered by the IRS to be short-term. As we mentioned in our discussion of long-term investments above, this is a generous position for the IRS to take because it means that only super-short investments are taxed at the higher earned-income rate. If you hold an investment for 14 months, for example, you get the favorable long-term capital gains rate while having your funds tied up for a relatively short period of time.
For the purpose of this section, we will consider investments of three years or less as short-term real estate investments.
Home flipping. The traditional fix-and-flip model consists of buying distressed properties, fixing them up, and reselling them for a profit. There is a lot of money to be made in flipping, particularly for experienced flippers who do enough deals each year to negotiate lower prices for labor and materials. Flips can often be completed in a matter of months.
REO investing. REO (real estate owned) is a special category of house flipping. REO properties are those that have been foreclosed on and are currently owned by the lender. In many cases, lenders are willing to sell these assets at a discount because their operation is not equipped to handle vacant units or manage rentals. It’s worth noting that these properties are often subjected to deferred maintenance, so there may be substantial repairs required.
Wholesaling. Wholesaling is similar to flipping, but instead of flipping the property, you flip the purchase contract. Simply put, you get a home under contract for a low purchase price, and then you immediately sell that contract to the final buyer for a higher price. The deal may take only weeks to complete. Wholesaling works best for well-connected investors in quickly appreciating markets.
Real estate mutual funds and ETFs (exchange-traded funds). These real estate-based securities offer high liquidity because they trade on the stock market. Funds are essentially packages of stocks and bonds, which investors can buy shares in. So, for example, you might purchase several shares of a real estate ETF which contains shares of stocks for multiple real estate-based companies. You can keep your money in the fund until you’re ready to cash out, at which point you just sell your shares.
Real estate investment trusts (REITs). REITs are companies that own income-producing properties. You can buy shares in a REIT and sell soon after for a profit. Pay attention to the required hold periods when reviewing REITs as many REITs expect investors to keep their funds invested for a specific amount of time, perhaps a one-year minimum.
Land development. Raw land can be developed fairly quickly, making this a good short-term real estate investment option. Perhaps you construct cost-effective storage units on the land and then sell the completed project to an investor who will rent out the units. Or maybe you develop a multi-family structure with the intention of selling to an investor immediately upon completion rather than managing the lease-up yourself. In any event, you complete construction and sell as soon as possible to capture your short-term earnings.
5 Benefits of Short-Term Real Estate Investments
Short-term real estate investments offer benefits like:
Quick returns. Short-term investments can offer faster returns on investment, ideal for investors looking for quick gains.
Market flexibility. Short-term investors can adapt more quickly to market changes and trends, potentially taking advantage of emerging opportunities or avoiding downturns more effectively than long-term investors.
Capital isn’t tied up for an extended period. In addition to market flexibility, many investors simply want their original investment capital returned as soon as possible so they can use that money in other ways. Perhaps you want your money available for other investments, but you might also want your money available for causes like starting or expanding a business, paying kids’ tuition, or traveling the world.
Forced appreciation opportunities. Unlike traditional appreciation, which relies on market conditions to drive values up over time, short-term real estate investments offer forced appreciation, in which investors can quickly add value for faster gains.
Potential for higher profit margins. Well-executed short-term real estate investments can offer higher returns than long-term investments. Even when long-term options offer advantages like lower capital gains tax rates and lower transaction fees, investors typically net higher yields with short-term real estate investments.
Which are Better: Long-Term or Short-Term Real Estate Investments?
We found seven advantages for long-term real estate investments and only five advantages for short-term real estate investments. But to understand which option is better, you need to consider the value of each of the benefits, not simply the number of benefits.
The value of each benefit will vary from one investor to the next. For example, one investor might highly value steady income from long-term investments while another might prioritize the aggressive returns and liquidity of short-term investments.
To know which is the better investment for you, you need to ask yourself how much you value each of the benefits afforded by each option.
How to Invest in Both Short-Term and Long-Term Real Estate Projects
Now, what if you want to see the benefits of both long-term and short-term strategies? Well, you can always allocate a portion of your investment capital to long-term assets and the remaining to short-term, juggling both strategies on your own. Or you could take advantage of a real estate syndication to incorporate both short-term and long-term opportunities in your portfolio.
Real estate syndication is when multiple investors pool their funds to finance a specific real estate project, which is professionally managed by a real estate sponsor. This investment model is highly flexible and can include investment types such as:
Long-term multi-family rentals,
Long-term single-family rentals,
Short-term single-family house flips, and
Short-term multi-family developments.
Since syndication projects have comparatively low investment minimums, you can spread your investment capital among multiple properties for an instantly diversified portfolio containing both long and short-term investments.
California-based Gatsby Investment even offers a unique hybrid opportunity that combines the benefits of short-term and long-term real estate investments into a single project. Gatsby’s multi-family BTR model allows investors to get in on the ground floor of a new multi-family development, earning the forced appreciation benefits of a short-term development project, and then continue into the rental phase for long-term benefits like rental income. Plus, Gatsby expertly manages every step including acquisition, construction, and lease-up, making your returns completely passive!
