Determining which investing strategies work best 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 more significant benefits in the long term?
A short-term real estate investment strategy focuses on immediate profits within a short period of time. Usually, this is within 5 years.
Short-term investing can be exciting because it’s possible to make a lot of money quickly. This type of investment strategy is also hazardous because of the high risk especially if you don’t have a 100% understanding of the numbers.
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 time.
A long-term real estate investment strategy focuses on long-term profits over a long period of time. Usually for about 10 years.
Long-term investing may not be as exciting or fast, but it is often far more profitable over the long run.
Tips for Success
One of the most popular short term real estate investments is house flipping. This strategy focuses on the following:
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.
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 significant 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.
“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.
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. The costs you’ll incur include taxes, insurance, mortgage payments if applicable, and possibly some repairs. Considering this, you may not make a considerable profit in the first year, as you might with a flip. That being said, if you can wait a few years, a long-term investment will yield significantly more profit.
As investors, we are in business to make a modest profit on any deal. However, we can help homeowners out of just about any situation, no matter what! There are no fees, upfront costs, commissions, or anything else. We offer the simple truth about your home and how we can help you sell it fast.
Give us a ring. We would love to help you understand the process and to answer all of your questions. You can reach us at 402 999.0577.