Long-Term Vs Short-Term Real Estate Investing

There are dozens of different strategies that you can adopt when investing in real estate, but generally speaking, there are two different philosophies or mindsets.

Short-term real estate investing and long-term real estate investing.

Both of these mindsets can result in big gains for property investors, but there are certainly differences when it comes to risk management, personal investment, and quite frankly – how stressful the whole process can be.

The good news is that you don’t need to commit to one or the other, and you could have a real estate investment portfolio with properties that are selected for the short term and others that have been selected for their long-term capital growth potential.

But is one of these mindsets superior to the other when it comes to real estate investing?

Let’s find out.

Pros and Cons of a Short-Term Real Estate Investment Strategy 

Short-Term Investing Advantages:

• Realise your Return on Investment faster by moving on the property and pocketing the profits sooner.

• A higher risk higher reward strategy, so you may end up with bigger net profits compared to long-term investing.

• No need for rental headaches, including zero property management costs, no difficult tenants, and no need for ongoing property maintenance.

• Learn a lot in a short amount of time. Short-term property investing will teach you about the local market, help you build relationships with property investment consultants in Melbourne, and introduce you to a range of other professionals. You can also get insights into renovating, developing, negotiating, dealing with councils, and more. Some of these lessons might be hard lessons, but you will learn them quickly and can apply them to your next investment!

Short-Term Investing Disadvantages:

• There are high transaction costs associated with both buying and selling real estate. If you’re buying and selling in a short period of time, you have less time to absorb these costs, which will eat into any profits.

• Real estate is illiquid, meaning it can be difficult to buy or sell, unlike other asset classes such as stocks. In this respect, real estate investing is much more suited to long-term strategies.

• If you can’t offload your investment by the set date, you will also need to consider the growing holding costs that you pay just for owning the property. 

• Short-term real estate strategies are usually hands-on and can be stressful! They often involve renovating or developing property – on a budget – in order to fast-track capital growth.

• Capital gains tax is higher for real estate investments sold within 12 months. If you sell in less than a year, you pay 100% of the capital gains at your income tax. If you hold the asset for more than a year, you are entitled to a 50% CGT discount.

• The sooner you sell your property, the less time it has to naturally appreciate. Melbourne real estate appreciates at an average rate of 8% annually, and a longer-term strategy could allow you to cash in on more asset appreciation and greater capital growth.

Common Short-Term Property Investment Strategies

• Usually lasts 12 months or less but can be on a timeline of a few years

• Typically high-risk high reward

• If you follow the data, complete feasibility reports, and do your due diligence, you can maximise your short-term rewards while minimising the chance of catastrophic failure

• Our Melbourne property investment advisors can help you define your timeline and build your portfolio for short-term gains, long-term retention, or a mix of both.

Renovate for Short-Term Gain

Your real estate investment isn’t likely to increase much in less than a year, and as a short-term investor, you need to overcome this obstacle. 

Often known as the “fix and flip” method, renovating for short-term gain involves selecting an investment property, making some smart renovations to add value, and selling it for a tidy profit.

It sounds simple, but a huge body of work goes into selecting the right property, making the right renovations, navigating council approvals, and overcoming those high entry and exit costs.

As a rule of thumb, you should aim to add $3 to your investment property for every $1 you spend. To maximise your ROI, focus on the bathroom, kitchen, and laundry. Smart, cost-friendly renovations like ripping up carpet to expose natural floorboards or a fresh coat of paint indoors can also go a long way to adding value. Landscaping and outdoor living upgrades should also be considered – especially at the front of the property (remember, first impressions count!)

Some other things to consider for a fix and flip strategy include:

• Choosing a property with good structural integrity. You want a fixer-upper, but not a money pit!
• Targeting properties that you can buy below market value, wherever possible, for increased short-term capital gains. Look for distressed vendors, dilapidated properties with good bones, or anyone who wants a fast, hassle-free sale.
• Finding a property in the right location – either a hot suburb or an up-and-coming area.
• Ensuring you have the short-term resources and finances to fund the renovations on a tight timeline
• Determining how much of the renovations you can do yourself and what needs to be left to the professionals.
• Taking care of all the admin and paperwork (approvals for work if required, consideration of tax implications, etc.)

Short-Term Rental Property Strategies

Strategies that focus on rental yield are usually longer-term strategies, but some investors approach rentals with a short-term mindset.

For example, if you own a property in a coastal or beachside area where demand regularly skyrockets, it might be worth pursuing a short-term rental strategy where occupants sign leases for weeks or months at a time – not years. That way, you can ensure your property is free for renters with deep pockets during the holiday season. 

Short-term rentals can generate much higher profits during peak season, and a shorter occupancy time makes it easy for you to have the property professionally cleaned and maintained regularly, helping to keep it in good condition. 

As well as flexibility and greater earning potential, short-term rentals also allow property owners to use the investment property themselves if required. The end of the current rental period is never too far away, making it easy for you to plan a holiday of your own once in a while!

Of course, this Airbnb-style approach to renting is highly situational, and you need to own the right type of property in the right sort of location. But if you are in a position to pursue a short-term rental strategy, it may be worth its weight in gold. And the best part about it is that you can reap the benefits of short-term investing while retaining your asset and repeating the strategy for years and years.

Property Development As a Short-Term Investment Strategy

The short-term approach to property development is much like the renovation strategy mentioned above. You buy a property or block of land and develop it to add as much value to your purchase as possible.

You could subdivide and build multiple townhouses, keep the existing property and build a new detached house on the remaining land, or buy a block that has already been approved for specific property development projects – plans and all!

Once the project is complete, you can sell your developments, pay off your loans, pocket the profits (minus taxes), and move on to your next project.

An even more stripped-back approach to property development is simply purchasing a large, vacant block, subdividing that land into multiple blocks, and selling the land for a higher price per square metre. You might have paid $800k for a 1,000m² block, but if you can sell four 250m² blocks for $300k each, that’s $400k in your pocket. Selling smaller blocks of land for a lower price will also attract more buyers, meaning more competition and more opportunities to drive up prices.

Of course, you will need to consider capital gains taxes, stamp duty, the selling agent’s commission, and other costs that will eat into your profits. Compared to the renovation approach, there will be more focus on the land and less on the house for development projects – especially if you plan on buying a vacant block or bulldozing any existing structures. It’s important to understand what you can and cannot build on the land, considering council bylaws, overlays, easements, covenants, and any other restrictions that may prevent your block of land from reaching its full potential.

Property development (and all the approvals and processes involved) take time, so this might not be the shortest of short-term strategies. For most projects I work on, there’s about a 2-year process from when you first purchase the development site to when you sell your developed properties. But as long as you manage the development costs, turning one property into two, or one block into five can be a profitable short-term strategy.

Pros and Cons of a Long-Term Real Estate Investment Strategy 

Long-Term Investing Advantages:

• Long-term real estate strategies allow you to invest passively. There’s a large body of work upfront to choose the right investment, but once this is done, you can enjoy the benefits of property appreciation and rental income without doing much at all.

• Long-term investments can generate extra cash flow via rental income. If you’re looking for a steady stream of extra money every month, a stable long-term investment could be perfect for you.

• The longer you hold onto your investment property, the more equity it can build. You can then leverage that equity to make additional purchases. In this way, you can use one long-term property investment to fund another (and another, and another – continually growing your portfolio).

• Long-term real estate investments come with tax benefits such as negative gearing or writing off interest, depreciation, and other property expenses.

• Investment properties have historically been able to weather rising inflation. Increases in the cost of living are also offset by increases in rental prices, allowing you to charge more for your rental property.

• Capital growth is the holy grail of real estate investing. And apart from proactive value-adding, the best way to add value to your investment property is to let it appreciate over time. 

Long-Term Investing Disadvantages:

• The longer you rent out your property, the more likely you are to come across troublesome tenants. From damaging your property to not paying rent on time to wasting your time with frivolous legal claims, bad tenants can be a headache for anyone pursuing a rental yield strategy.

• Empty properties that aren’t generating any income still have holding costs that need to be paid. If you’re struggling to find your next tenants or you’re foregoing a rental strategy altogether, these costs will need to come straight out of your pocket.

• Depreciation can happen, and when it comes time to sell, your property might not be worth as much as it once was. There are many steps you can take to select the “right” property and mitigate these risks, but you never know what things will look like economically or politically in 10 or 20 years. All these factors and more can cause your property to drop in value over time.

Common Long-Term Investment Strategies

• Medium-long-term strategies last as little as 4 years and as long as a few decades!

• The aim is to ride out the many cycles of the property market and emerge with significant capital gains

• Along the way, you might take advantage of rental yield (positive gearing) or tax offsets (negative gearing).

• Typically lower risk, although nothing is guaranteed in property investing

The “Buy and Hold” Method 

The “buy and hold” method essentially involves purchasing an investment property, waiting for it to appreciate as the years go on, and eventually selling it for a tidy profit. This approach involves chasing capital gains by selecting a property with ongoing appeal and growing demand.

You don’t need to renovate to add extra value, and you don’t need to rent the property out to take advantage of rental yield (although, you can do both these things as part of your buy-and-hold strategy if you choose). Just sit back, relax, and use a negative gearing strategy to offset your expenses and lower your taxable income if necessary.

If you don’t want to sell the property, you can take an even longer-term approach. Assuming your property has increased in value as planned, you can leverage the equity and use those funds to purchase your next investment property – double the assets, double the gains.

If you were attempting a short-term “buy and hold” strategy, the timing would become extremely important. If you are not giving your property years to appreciate, you need to try and buy at the lowest point of the cycle and sell at the highest point. 

Timing is still a factor for longer-term “buy and hold” strategies, but if you have all the fundamentals in place, then the years your property has had to appreciate will mean you’re still making a great profit, even if you sell when the market is a bit flat. But hey, you’ve held the property for this long – why not wait a little bit longer?!

Long-Term Rental Property Strategies

As I mentioned above, you can always combine a “buy and hold” method with a rental yield strategy. Properties that are good candidates for capital growth are often also suitable for producing plenty of rental income. Look for homes in strong or emerging neighbourhoods and consider things like school zones, population growth, nearby amenities, proximity to universities, hospitals and other high-wage industries, and overall changes in the job market.

If your investment property is positively geared, it’s generating more money in rental income than what it costs to upkeep the property. You can then use that extra income to fund your next investment or any other expenses. If your rental income isn’t making you enough money, you can still take advantage of the tax benefits associated with negative gearing.

Long-term rentals are much more common than short-term rentals. Some things to consider when pursuing a long-term rental strategy include:

• Are you going to manage the property yourself or will you hire property managers/agents to find tenants, deal with issues, perform inspections, arrange/approve repairs, and take care of your investment property?

• Do you have a budget in place to pay for rates, repairs, insurance and more, even if you don’t have enough rental yield to fund these purchases?

• Do you understand all the tax benefits and drawbacks associated with this approach, including declaring your profits for the financial year or what expenses you can write off as part of your tax return? 

As investment consultants and buyers advocates serving Fitzroy and the wider Melbourne area, the team at Property Analytics can help you understand the pros and cons of long-term rental property strategies. While rental yield is a useful tool for property investors, we would not recommend prioritising it at the expense of capital growth.

For example, you may find a property with some appeal for renters, but you should also focus on the land and how this may contribute to the value of your investment over time. The endgame for any asset – even a rental property – is selling it for profit, so it pays to set yourself up for long-term success.

Land Banking

Land banking is essentially the “buy and hold” method except it skips the property altogether and focuses on acquiring blocks of land or undeveloped farmland. The idea is that you sit on this land for years – maybe even decades – while you wait for it to appreciate in value. Land is a limited resource, and eventually, you may be able to sell your investment to an aspiring home builder, a big developer, or maybe even a fellow investor for a tidy profit. Theoretically, there will be little to no maintenance costs for owning a block of land, but loan repayments, interest, land taxes, and council taxes can still apply.

Land banking still comes with its risks though, especially if you are buying undeveloped land that may not be zoned or approved for development for many years. Be aware of land banking schemes and scams, and make sure you do your research before buying an empty block of land.

Property Development As a Long-Term Investment 

We’ve already talked about property development as a short-term investment option, and many of the same points apply.

Your aim is to buy a property or block of land and develop it to its full potential. That could take the form of multiple townhouses, a duplex project, or even just a vacant block of land that you subdivide.

The difference here is that you don’t sell your development as soon as construction is complete. Instead, you hold onto the property for the long term and take advantage of all the benefits that come with it.

You could enjoy high rental yields from multiple brand-new properties, take advantage of depreciation tax benefits over time, refinance your property to access extra funds for your next development, and watch the strong capital growth roll in.

If you’ve done it all properly, that project that you poured so much time, money, and effort into is now a valuable long-term asset. You could cash in and enjoy the short-term wins, but it often makes more sense to retain your asset and reap the longer-term benefits.

Short Term vs Long Term – Which Is Better for Property Investing?

If you’re wondering whether long-term investing or short-term investing is better, you’re asking the wrong question.

Some better questions to ask would be “what should I look for in an investment property?” or “how can I grow my real estate portfolio?” Basically, whether you want to invest in real estate for the short-term or the long-term, you need to know how to do it well.

That’s where Property Analytics comes in.

My team can help you put a strategy in place, find the perfect property or development site, and help you close the deal through expert negotiations.

Based in Ivanhoe, we’re buyers advocates serving Kew East and all Melbourne suburbs. That means we’re experts in shortlisting suburbs and properties and buying investments on your behalf.

We’re also property investment advisers and development consultants in Melbourne. That means the properties we select are built around your financial goals and investment strategy. From detailed feasibility studies to putting all your development plans in place, Property Analytics takes care of the whole process.

All our services are backed by valuable market research that we not only have access to but have personally cultivated over the last decade. Our real estate analysts have their fingers on the pulse of emerging trends and historical data, and some of the largest, most successful industry professionals subscribe to our database. When you partner with Property Analytics, we put that data to work for you.
Become a master of real estate investing in the short-term and the long-term. Get to know Property Analytics and talk to us about your investment goals.