Short Term vs. Long Term
When developing an appropriate real estate investing strategy, it is essential to consider time as a primary factor. The element of time, simply put, refers to the length of the holding period. Depending on the type of investor you want to become, different time horizons can be considered.
For instance, investors that want to become flippers will likely aim to adopt a shot-term strategy, since many of their projects may only last 3 to 6 months. Other types of investors might target an intermediate or mid-term strategy, where they would buy, manage and hold rental properties for 3 to 5 years. On the other end of the spectrum, long-term buy and hold investors might have their sights set on owning a piece of real estate for 20 years or even longer.
Having clear goals that align with a specific time frame is required before an investor decides to seek financing that is required to acquire a property. One of the reasons for this urgency to plan this time frame ahead, is because time is a variable that is used to determine interest rates. Therefore, time is strongly correlated with the fate of someone getting a floating rate vs a fixed rate loan. Time also affects any prepayment sanctions that may be linked to the loan. The profits derived from long term tax rates have been proven to be historically superior to the short ones. This type of phenomenon is also very common in the stock market due to the overall tendency of the market price to rise over long periods of time despite short interval fluctuations. In addition to this, time plays a key role in strategies where turnover rates provide an opportunity to generate higher total returns.
Investment time frames can be divided into three different groups. The first one would be short-term investors who usually hold their properties for at most two years. These investors obtain gains by increasing value through improving the property or by finding market price inefficiencies. The second category belongs to intermediate-time investors, whose profit margin is determined by price appreciation and decent improvements to the property. Finally, the third category, also known as long-term investors, consists of investors who might even keep the property in the family for decades. Their gains come from capital appreciation. They simply hold and maintain their investments while only making improvements if needed.