Short vs. Long-Term Real Estate Investing

In This Article

There is no right or wrong way to invest in real estate. All that matters is that you’re comfortable with your strategy and positioned to generate a positive return on investment (ROI). However, it never hurts to compare all your options—and that means taking a closer look at short-term vs. long-term real estate investing. 

Short-Term Real Estate Investing

Short-term real estate investing involves buying property to quickly sell or rent for a profit within a short period, typically less than a year.

Types of short-term real estate investments

There’s no shortage of short-term real estate investments to consider, including:

• Fix and flip: This strategy involves purchasing properties in need of repairs, renovating them, and selling them for a profit.
• Vacation rentals: Investors buy properties in popular vacation destinations and rent them out to tourists on a short-term basis.
• Multifamily rentals: Investors purchase apartment buildings or other multiunit properties to rent out the units on short-term leases.

Some of these may work for you, while others don’t. Even so, it’s important to compare the details of each to determine the best path forward.

Pros of short-term investing

Now, let’s examine the benefits of short-term real estate investing:

• Potential for higher returns: Short-term investments can yield a significant profit in a relatively short period, especially with strategies like fix and flip.
• Flexibility: Short-term investing allows investors to adapt and pivot strategies based on market conditions and personal circumstances.
• Market resilience: By capitalizing on immediate market trends and demands, short-term investments can be less affected by long-term market fluctuations.
• Cash flow: Vacation and multifamily rentals can provide steady cash flow through continuous short-term leases.
• Diversification: Investing in short-term real estate can diversify an investment portfolio, reducing overall risk.

Cons of short-term investing

While there are many benefits, there are also some drawbacks: 

• Higher risk: Short-term investments often involve higher risk due to market volatility and potential for unforeseen expenses in projects like fix and flips.
• Increased expenses: Short-term strategies, particularly fix and flips and vacation rentals, may incur higher operational and renovation costs.
• Time commitment: Managing short-term rentals or overseeing renovation projects requires significant time and effort, which can be a drawback for some investors.
• Market dependency: Success in short-term investing can heavily depend on current market conditions, making timing crucial and sometimes unpredictable.

Real estate can be a short-term investment if you know what you’re getting into and have a concrete strategy to guide you. 

Long-Term Real Estate Investing

Many investors find a long-term strategy ideal. This involves purchasing property to hold for an extended period, typically years, to benefit from rental income, appreciation, and tax advantages.

Types of long-term real estate investments

Here are three of the most common types of long-term real estate investments:

• Buy and hold: This strategy involves purchasing properties to rent out over a long period, benefiting from steady rental income and property appreciation.
• Commercial real estate: Investors buy commercial properties, such as office buildings, retail spaces, or warehouses, to lease to businesses over the long term.
• Residential rentals: Investors purchase single-family homes or multifamily units to rent out to tenants, aiming for long-term income and property value appreciation.

Pros of long-term investing

There are many benefits of taking a long-term approach to real estate investing:

• Stable cash flow: Long-term real estate investments can provide a consistent, predictable cash flow through rental income, offering financial stability.
• Appreciation potential: Over time, real estate values tend to increase, allowing investors to benefit from property appreciation when they decide to sell.
• Tax advantages: Owning property for the long haul offers various tax benefits, including deductions for mortgage interest, property taxes, and depreciation.
• Inflation hedge: Real estate investments can serve as a hedge against inflation, as rental rates and property values tend to rise with inflation.
• Leverage opportunities: Long-term investing allows investors to leverage their capital, using mortgage financing to acquire properties and increase potential returns.

Cons of long-term investing

There are several potential drawbacks of long-term real estate investing:

• Capital intensive: Long-term real estate investing often requires significant upfront capital investment for property purchase and maintenance.
• Liquidity issues: Real estate is not a liquid asset, making it challenging to quickly convert properties into cash without potentially selling at a loss.
• Management responsibilities: Owning rental properties comes with ongoing management responsibilities, including tenant relations and property upkeep.
• Market risk: Long-term investors are exposed to market fluctuations that can affect property values and rental incomes over time.
• Regulatory and tax changes: Investors may face challenges such as changes in local regulations or tax laws.

Comparing these pros and cons of long-term real estate investing will help you decide which option is best. 

Choosing Which Is Right for You

There’s no rule saying you can’t be involved with both short- and long-term real estate investing. However, it’s typically best to focus on and master one type before moving on.

Key factors to consider

Here are the most important factors to consider when choosing between short- and long-term real estate investing:

• Market and timing: The choice between short- and long-term investing depends on current market conditions and timing; short-term strategies might favor rapidly appreciating markets, while long-term investments benefit from stable growth over time.
• Investment goal: Personal investment goals and the time required to reach these goals should come into play.
• Risk tolerance: Risk tolerance is critical in deciding between short- and long-term real estate investing, as the former involves higher risks and potential for rapid returns, whereas the latter offers more stability and lower risk over the long run.
• Financial circumstances: Your financial capacity and access to capital greatly influence your investment strategy.

These factors are likely to move to the forefront when making a decision, but also take into consideration any detail that could impact your personal life and finances. 

Final Thoughts

There’s a lot to think about as you compare short-term versus long-term real estate investing. Use all the information available to make a decision that puts you in a position to succeed.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.