Real estate investing comes in different forms and serves different purposes depending on your starting capital, previous experience, and financial goals. Short-term real estate investments such as fix and flips have a lower barrier to entry and are provide easier starting points for new investors. They offer a chance at a more immediate profit that is balanced by being potentially high risk, high reward compared to long-term investments. For investors willing to wait it out, long-term real estate investments like building a rental portfolio can provide a stable path towards generating long-term wealth and passive income. While it takes much longer to become cash flow positive compared to buying and selling a house, long term-investments offer the chance of steady monthly income that can begin funding other investments and compounding an investor’s money. We’re going to break down several types of short term and long-term real estate investment strategies to help you decide which investment route is best for you.
Short-Term Real Estate Investments
Fix and Flip
One of the most popular short-term real estate investments are fix and flips. The process is in the name: you purchase a property that you can renovate to significantly increase the home’s value and then sell for a profit. The goal is to find a property that you can purchase for the lowest possible price that will fetch a desirable price upon the completion of your renovations so you can maximize your ROI, or return on investment. According to ATTOM Data, as of Q2 2020 the national average ROI for fix and flips was 41%, but some markets are performing much better than others. For example, the same period of Q2 2020 saw the average fix and flip ROI in New Jersey at 75%, in Connecticut at 79%, and in Pennsylvania at a whopping 86%!
Being able to understand the market trends before you invest is key to maximizing your ROI. If you’re able to find the right deals and budget yourself correctly, you could potentially chain together multiple fix and flip deals a year, making part-time or even full-time income from these short-term real estate investments.
Residential or multi-family new construction is another form of short-term real estate investing but typically requires more experience and planning than fix and flips to be profitable. However, if done right, ground up construction can be a very lucrative investment strategy. By designing a new house with an end goal of selling, you can build the home around maximizing value for the future homeowner. For example, creating a home with energy efficient lighting and appliances will save the future homeowner money over time, providing them an added value that can be seen in the final listing price yet doesn’t break your bank during construction. You can also make sure to build the home around modern housing trends, such as open concept kitchens and vaulted ceilings, improving your ability to attract potential buyers. New builds can be especially profitable if you’re able to save costs throughout the construction- importing materials directly, having a good relationship with a contractor who prices work fairly, etc.
Currently, housing supply is reaching all-time lows, meaning new construction can take advantage of a market where inventory simply is not available for home buyers. Many real estate investors have followed this trend and began profiting off of it, as the national average of new housing construction is up 11% in September of 2020 compared to the previous year.
Short-term real estate investments are typically 12 months or less, meaning from the initial investment to the final exit should be no longer than one calendar year. The potential to walk away with a large cash profit in such a short time frame is very exciting, but it requires significant planning and research to make sure you find the right deal in the right neighborhood.
The reason short-term real estate investments are more high risk, high reward than long-term real estate investments are because problems arising like renovation delays or market fluctuations can push back your home’s sale date or lower your estimated sale price, leaving you carrying the costs longer and eating in to your profit margin. Budgeting your rehab or construction costs accurately, both the money cost and time spent, can make a big difference in your ultimate profits. If you are willing to do the research and planning, then short-term real estate investments like fix and flips and new construction can be a profitable venture.
Long-Term Real Estate Investments
Long-term real estate investments may not be as fun or flashy as short-term investments, but they also provide a more stable path to generating profit over the investment’s lifespan. These types of investments are clearly longer than 12 months and is dependent on how long the investor wants to hold the investment- ranging from a few years to a few decades. Long-term real estate investing is where wealth is created, but the barrier to entry can be significantly higher than short-term investments due to the time needed before the investment becomes cash flow positive
The most common long-term real estate investment is owning rental property. By renting out the property you own, you begin generating passive monthly income that can be used to fund your next investments, compounding your money over time. Lots of people think rental properties are owned by multimillionaires or property management companies, but the vast majority are owned by everyday real estate investors. According to ATTOM Data, as of 2020 nearly 75% of rental properties in the United States are owned by individual real estate investors. The stable rise of average rent prices year over year helps ensure rental portfolios are both safe and profitable investments. 91 of the top 100 housing markets have seen rent increases year over year, and the total population of renters continues to rise throughout the country. The biggest problem with long-term real estate investing is the amount of time it takes before profits are realized compared to short-term investments. As an investor, you will have to be comfortable not becoming cash flow positive for an extended period, allowing your monthly income and property appreciation to slowly push you into the green and beyond. You also have to be ready to be a landlord, dealing with tenants over the investment’s lifespan. Not every investor is prepared or willing to do so.
You can become cash flow positive and eventually see a noticeable ROI over time with just one or two rental properties, but using your profit to continue investing in rental properties and refinancing your loans along the way can help you create long-term wealth more quickly. This type of investing is known as the BRRRR strategy, which stands for buy, rehab, rent, refinance, repeat. Much like fix and flips, the process is in the name- purchase a property, renovate it to increase its overall value, rent it out to begin generating monthly income, refinance the loan to leverage the equity, and then use those profits to repeat the process with a new rental property. BRRRR investing has an unlimited cap on its ROI and is dependent on the determination and capital of the investor, as well as being able to find quality rental properties in areas with low rental vacancies. Like fix and flips or new construction issues can occur if renovations are delayed, so be sure to budget yourself to account for potential problems along the way.
ABL Funds Short-Term And Long-Term Real Estate Investments
Asset Based Lending provides fast and flexible loans for both short-term and long-term real estate investments, helping our borrowers achieve their financial goals with either investment strategy. We match our loans to your specific project, whether its fix and flip, new construction, or adding a rental property to your real estate portfolio. Our team of experts are ready to provide you the highest quality service and the most reliable hard money loans available. With over a decade of funding successful real estate investments, ABL is dedicated to being the premier hard money lender for investors. If you’re looking for hard money loans for fix and flips, new construction, or rental property financing contact us today.