Summary: In this article you’ll learn about the best real estate investment strategy for 2020: buy and hold investing. Find out why it’s a better strategy than flipping. Hint: It’s far more profitable in the long run AND way less risky.
How would you like to make $30,000 from real estate in just a few short weeks?
Of course you would. Who wouldn’t? Before you get too excited, here’s the catch: in order to make this $30,000, you’ll have to risk a little…only about $80,000, or so. No big deal, right?
If you’re like most people, risking $80,000 is a HUGE deal. And this my friends is one of the main reasons that most investors choose to use long-term real estate investment strategies over short-term investment strategies.
Determining which investing option is right for you comes down to the type of person you are.
Are you a risk taker that wants to make fast cash? Or would you prefer to take things slow and reap bigger benefits in the long term?
Continue reading to get the full scoop on both short-term and long-term real estate investment strategies.
Part 1: Short Term vs. Long Term Real Estate Investment Strategies
Short Term Real Estate Investments
A short-term real estate investment strategy focuses on immediate profits within a short period of time. Usually this is within 5 years.
Pros & Cons
Short-term investing can be exciting, because it’s possible to make a lot of money quickly. This type of investment strategy is also really risky, especially if you don’t have a 100% understanding of the numbers.
Tips for Success
- Understand market timing. You need to get into the market at just the right time and then get out before it falls apart.
- Try to get lucky. You need to be lucky enough to find an opportunity to buy a property that will quickly go up in value and still be desirable in a few months or years. This makes it less like investing and more like gambling. You’re essentially betting on your ability to get lucky at just the right.
Long Term Real Estate Investments
A long-term real estate investment strategy focuses on long-term profits over a long period of time. Usually about 10 years.
Pros & Cons
Long-term investing may not be as exciting but or fast, but it is often far more profitable over the long run.
Tips for Success
- Be willing to wait. The greatest asset in a long-term investment is time. However, in this case, it’s the amount of time you’re willing to wait.
- Have patience. The longer the investments are less risky by nature. Therefore, the longer you can hold onto a property (as long as it was a wise investment to begin with) the more money you can make on it.
Part 2: Why Flipping Isn’t As Profitable As You Think
One of the most popular short term real estate investments is house flipping. This strategy focuses on the following:
- Buying a house
- Renovating/improving it
- Selling it for (hopefully) more than you spent
Flipping property is not as glamorous as it might seem on TV. The biggest mistake people make is not understanding how much flipping really costs.
Here’s a simple example:
Betty wants to invest in real estate to make money fast. So, she does a little research and finds a home she thinks will work. She buys this home for $80,000. After three months of renovations and one month on the market, Betty sells the home for $100,000. It would seem as if Betty made $20,000 in 4 months. This is good, right? Eh, it’s really not.
Let’s take a deeper look at the numbers:
- Sale Price: $100,000.
- Initial purchase price: $80,000.
- Closing Costs: $1000
- Mortgage (x4 months): $3,000
- Property Taxes (x4 months): $1,500
- Renovation Costs: $10,000
- Total Profit: $4,500
At the end of the day, Betty made about $1,125 per month, which is nothing to complain about.
BUT, how many hours did she put in to get there?
To give Betty some credit, she did take a big risk and she came out positive in the end. This is awesome for Betty, but unfortunately this outcome is not as common as HGTV would like you to believe.
Here’s a short explanation from Kathy Fettke:
“Betty came out on top but only because she was fortunate enough to sell the house in time. If she had to wait another 5 months or more before someone bought the house, the holding costs of taxes and insurance would have eroded her profit. After a long enough waiting period, she could end up losing money on the deal.”
Moral of the story: flipping homes can be profitable, but this isn’t usually the case.
Part 3: Why Long-Term Property Investments Are Smarter
In every way that a short-term investment is risky, a long-term investment is secure. For every negative associated with short-term investments, the long-term option has benefits. The greatest asset in a long-term investment is time. The longer the investment, the less risk associated with it.
One reason for this is simple: inflation. Every year things get more expensive and this is true for home values as well.
One thing to keep in mind when you choose a long term strategy is your initial costs.
Your initial costs to purchase a home include closing costs, commissions, prepaid taxes and insurance, mortgage points and renovation costs if needed. Most of these will happen in the first year and are considered a one-time fee. Within the first year, the costs you’ll incur include taxes, insurance, mortgage payments if applicable, and possibly some repairs. Considering this, you may not make a huge profit in the first year, like you might with a flip. That being said, if can wait a few years, a long-term investment will yield significantly more profit.
Short-term investments require exact timing and a bit of luck. You can make large sums in a short period, but you’ll owe a lot more in taxes, compared to a long-term investment. It’s also harder to find a super deal, which means it might be harder to make significant profits.
The longer you can hold onto a property, provided it was a wise investment to begin with, the more money you can make on it. This is thanks to factors like appreciation, depreciation, cash flow, and lower tax rates for long-term capital gains when you sell.
You can plan in advance how many properties you want to purchase and own free and clear in order to generate the passive retirement income you desire when the time comes.