The main reason why individuals invest in real estate is to establish an adequate source of income. However, most people are confused whether to invest in the short or long term. Property magazines and TV commercials are full of stories about how investors are making quick cash in the real estate industry. However, what they do not tell is that the market has fluctuating cycles that determine the potentiality of an investment. Below are some pros and cons of investing in the short and long term.
Capital Gains and Locations
The supply for housing in certain areas is not able to meet the demand, especially in urban areas. For instance, in Australia, due to low lower interest rates, there has been an increase in buyers in the recent years. According to Property Observer, the demand for housing has risen by 43.1% and 25.9% in Sidney and Melbourne, respectively, since 2012. However, not all regions are experiencing the boom. Areas such as Perth and Darwin have been experiencing a decline in demand.
The above information presents two significant perspectives for short-term investors. First, they should consider the location to make a quick capital gain. Second, they may require more cash to be able to invest in high growth areas. On the other hand, for long-term, investors may find cheaper properties that are likely to realize capital gains in the property cycle.
One significant advantage of investing in the long term is the ability to evade pressures and fluctuations that are characterized by short-term investment. Long-term investors can wait for the right time to make an investment and avoid making reactive decisions. Some of the essential factors long-term investors may consider include interest rates, inflation, and other considerations that might affect investment.
Cash flow is one of the primary considerations when taking a long-term investment strategy. Having a property does not guarantee permanent occupancy. Therefore, an investor should research thoroughly about the area to gain important insights such as upcoming infrastructure. Long-term investors are discouraged from investing in areas with short-term visions such as those that rely on service industries for investment. An investment with a positive cash flow is an attractive incentive for long-term investors because it provides the ability to service loans and a steady income.
Long-term investors experience lower risks than short-term investors looking for quick cash. Although the capital gains may grow slowly, it is less stressful. Also, long-term investors enjoy positive cash flow over a longer time.