Short-Term vs. Long-Term Real Estate Investing

Any commitment to invest in real estate will depend on the decision-makers overall investment objectives, financial situation and acceptance of risk. Such decision may also be affected by the holding period or length of time it is intended to own the property asset in order to achieve the required investment returns.

Influences on the investor’s decision

Part of the decision whether to hold a property long- or short-term will also depend whether the investor is looking for stable cashflow over a longer period with any capital appreciation seen as a bonus; or, alternatively, the investor intends to try to “add value” to a property and sell at a higher price into a strengthening or rising market over the short-term.

Some investors may actually alter or shift their strategy according to the particular property in question, adopting short- or long-term investment modes as required.

In fact, the nature of the investor may also have a bearing on the strategy adopted. For example, a large pension fund or sovereign wealth or insurance group type investor will almost certainly have to adopt a long-term investment strategy, partly as they:

• Are mandated to achieve long-term growth for their stakeholders and require recurrent annual returns to pay dividends etc;

• Have so much capital (billions of $) to invest that smaller deals (say less than $ 50M) which offer shorter term returns are too small, being only a fraction of the capital they have available;

• Are not as nimble in moving in and out of investment transactions as private equity/capital or smaller investment companies

In summary, both holding real estate for the short-term and the long-term have certain advantages and disadvantages, and any investor will need to determine what is the most appropriate investment strategy to adopt given the actual situation.

Let’s have a look at the advantages and disadvantages of short-term and long-term investments:

Long-term investing

Suitable for: investors looking for long-term stable rentals, some income growth and gradual capital appreciation

Types of investors: pension funds, sovereign wealth funds, governmental institutions

Advantages

• Provides greater stability as changes in property performance and in market cycles are less significant or consequential, and such changes tend to even themselves out over time;

• More time between acquisition and sale allows for the likely improvement in market fundamentals;

• An increasing amount of equity is being built up as more repayments of principal are made, and this can be significant over the longer-term;

• Provides a greater hedge against inflation than short-term investments;

• Investors do not have to be concerned the constant cycle of redeploying capital into new investments;

• Allow investors to collect passive income and benefit from value appreciation without having to incur capital gains taxes;

• Very tax-efficient, as most investors are liable for only minimal taxable income during the ownership period. The majority of taxes are incurred upon sale which, due to long-term ownership, are in the distant future.

Disadvantages

• The future always holds uncertainties, and projecting economic outlook and market conditions for the upcoming 2, 3 or 5 years is much easier than looking 10 or 15 years ahead and trying to identify the beginning and end of market cycles and economic downturns;

• Investors may have to deploy diversification to counteract changes in real estate fundamentals, market and locational attributes;

• Overall returns may be lower than if several short-term (say, 3-5 year) higher risk investments produced better returns, say, every 5 years, instead of the investor holding a single asset for 15 years.

Short-term investing

Suitable for: investors looking for opportunities to add value, improve rental returns, achieve a lower cap rate than entry, and exit with capital gain.

Types of investors: private equity funds, syndicates, HNWI, private investors

Advantages

• The desired return on investment (“ROI”) is achieved quicker;

• In a rising or strengthening market, an experienced investor can acquire a property, execute its business plan, add-value and sell the assets to realize capital gains before the next downwards cycle begins;

• Higher IRR’s are likely to be achieved in view of due to the relatively short length of time the investor is involved in a deal, as well as the fact that the majority of the return is derived from the sale of the asset at a higher price.

Disadvantages

• Investment returns tend to be more volatile with shorter holding periods as changes in property market and economic conditions can have a more drastic impact;

• In the event a property is sold, there may be pressure for the investor to quickly commit to another investment rather than allow funds to be uninvested and not earning any meaningful return. Furthermore, regularly having to source and execute transactions can be a costly and time-consuming process;

• There may be a significant opportunity cost for not having capital invested in an income producing asset;

• Getting the timing of a sale right is vitally important and there may be a variety of challenges to overcome relating to due diligence and legal issues on such disposition of a property;

• Investors may be liable for capital gains tax, as well as depreciation recapture tax, upon the sale of a property. Even though there are ways for investors to defer taxes, through instruments such as 1031 exchanges, there will be some reduction in after-tax investment returns. Tax related issues can add a high level of complexity to managing short-term investments.

Breneman Capital

Breneman Capital (formerly Rise Invest) is a data-driven multifamily investment firm pushing the real estate industry into the future with a modern approach to direct real estate investments.

We focus on providing our investors with the best risk-adjusted investment opportunities in carefully selected markets across the U.S., researched and underwritten with extreme detail from our headquarters in Chicago.

Breneman Capital offers investors investment opportunities with carefully crafted strategies that maximize the potential of an asset in its respective market—with varying hold periods.

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