Investing in real estate is definitely one of the best ways to make money. The real estate investing business offers numerous types of investment properties and strategies. As a real estate investor, you can choose to invest in a long term investment property, or opt for a short-term (Airbnb) rental. Both have their advantages and disadvantages, and both can yield a high return on investment depending on many factors such as the location of the rental property, the rental income, and occupancy rate. Nonetheless, real estate experts still believe that real estate investing for the long term can be your way to riches!
In this article, we’re breaking down 4 of the best long term investment strategies in real estate, what makes them attractive to property investors, and what to consider before following each strategy.
Long Term Investment Strategies – Buy-and-Holds
The first and most common long term investment strategy is the buy-and-hold strategy. In real estate investing, this strategy is fairly simple; it involves buying the investment property and leasing it out for a long time period. This long term investment strategy is attractive to real estate investors thanks to the many benefits it has to offer, such as:
- It gives them the ability to make money from both cash flow AND appreciation. A buy-and-hold real estate investment property generates a steady cash flow in the form of monthly rent collected from tenants. In addition, real estate investors can simply hold their investment properties until they appreciate in value, allowing them to sell them later on for a higher price, resulting in a profit.
- Any type of rental property works as a buy-and-hold – whether a single-family home, multi-family home or an entire apartment building.
- While real estate investors are holding their investment properties, the mortgage is being paid down each month using the collected rent. This, in turn, further builds equity in the real estate investment property!
What to Consider When following this Strategy
One thing to keep in mind when following this long term investment strategy is the investment property financing method. Buy-and-hold real estate investors need a reliable source of financing such as a mortgage loan. Property investors also need to know how to evaluate the investment property to determine whether or not it would yield a good return on investment as a buy-and-hold.
Furthermore, a real estate investor needs to conduct a real estate market analysis to decide when is it smart to keep holding the rental property and when it is a good time to sell it for a profit. In general, a real estate investor should hold long term investment properties when real estate prices are low and inventory is high (high supply, low demand). On the other hand, when the real estate market becomes over-heated (low supply, high demand), real estate investors will make a high profit from selling their investment properties.
The final thing to keep in mind with this long term investment strategy is that just because these investment properties generate cash flow, that doesn’t make them passive investments! Buy-and-holds require property investors to actively manage their investment properties and perform a number of tasks such as screening tenants, overseeing repairs, handling maintenance issues, and keeping financial records. Thus, before buying a long term investment property, ask yourself if you’re ready to become a landlord. If not, you can always hire professional property management to handle these responsibilities, but these do come at a cost.
Long Term Investment Strategies – Rent-to-Own
This investment strategy is similar to buy-and-holds in that it involves renting the income property to long-term tenants. However, the difference is that this type of long term investment strategies involves a signed contract between the real estate investor and the tenant. This contract gives property investors the ability to make a deal with the tenant in which he/she will rent the investment property for a set time period (typically 1 – 3 years) before actually buying it.
What to Consider When following this Strategy
Upon signing this contract, the real estate investor can’t place the rental property on the market for rent or sale! However, in spite of this, this long term investment strategy offers many benefits to property investors:
- First, the potential buyer has to pay a non-refundable “Option Money Fee”. This fee allows the real estate investor to make a quick profit when the tenant first moves into the rental property, besides giving them some security in case the agreement is broken.
- This long term investment strategy also guarantees that the rental property won’t be vacant for the set time period in the contract.
- Moreover, the real estate investor ensures that the investment property will be sold.
- Rent-to-own have fewer risks: potential buyers won’t cause damage to the rental property since, eventually, it’s going to be their new home.
- Additionally, depending on the contract, tenants are responsible for repairs and maintenance costs, which further gives the real estate investor a sense of financial security.
- Finally, hiring a real estate agent when selling rent-to-own real estate investment properties after the set time period is not required, meaning property investors eliminate the extra fee which they would otherwise have to pay to the agent.
All these benefits prove that rent-to-own is one of the best long term investment strategies!
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Long Term Investment Strategies – Passive Investments
In real estate investing, there are many types of passive investments. When it comes to long term investment strategies, however, we are talking about Real Estate Investment Trusts (REITs). These are companies that buy and own multiple real estate investments ranging from apartment buildings, office building, to large shopping malls and skyscrapers.
This is considered one of the best long term investment strategies especially for investors who don’t have a big capital nor the time to invest in real estate as a full-time job. Real estate investment trusts enable investors to be a part of the real estate investing business without the hassle of becoming landlords and playing an active role.
Investing your money in a real estate investment trust means you’ll receive a passive income in the form of dividends. You’ll also have minimal responsibilities because, as previously mentioned, REITs will take care of property management. And lastly, since a real estate investment trust owns more than one investment property, real estate investors following this long term investment strategy will have a diverse investment portfolio and this, as a result, lowers their risks.
Long Term Investment Strategies – Commercial Real Estate
Joining commercial real estate investing can be one of the best long term investment strategies as it leads to a higher return on investment. Commercial real estate properties can vary dramatically in size, style, and purpose. What makes this strategy different than all the previously mentioned strategies is that commercial properties are initially leased to businesses (not residential tenants). Some real estate investors rent out to small local stores, while others rent out to big supermarkets.
What a real estate investor must consider before investing in these long term investment properties is that even though they generate a higher income, there’s also the possibility of facing longer vacancies. In fact, commercial real estate properties can stay vacant for a longer time than residential real estate properties – some even stay vacant for years! Every smart real estate investor knows that the longer the rental property remains vacant, the more money you’ll start to lose instead of make, which ultimately leads to a negative return on investment.
Thus, commercial real estate is considered one of the best long term investment strategies for experienced real estate investors who are in a solid financial position, not for a beginner real estate investor. To learn more about all aspects of real estate investing, continue reading our blog.
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