Short term investments play a crucial role in financial planning, offering individuals or investors an opportunity to grow their wealth over a period of time and accumulate additional source of income. One question that arises in this context is whether real estate such as residential properties, are considered a good short term investment.
This puts up the importance of understanding the dynamics and potential returns associated with real estate investments with a shorter timeframe. In this article, we explore the concept of short term investments and considerations surrounding its benefit as a short term investment.
What are short term investments?
Short-term investments are financial assets that possess liquidity that is readily converted into cash or sold in a relatively brief time period, usually one to three years. These type of investments are commonly utilized through short-term bonds, treasury bills, and various money market funds.
However, it is important to note that short-term trading, or also known as day trading, involved a notable element of speculation, therefore, exposes investors in a high-risk level of investing.
Advantages
- Short-term investments provide a significant advantage in terms of flexibility among investors, mostly because it does not require waiting for the security to reach maturity to access cash.
- Individuals that engage in short-term investments can readily convert their holdings to cash as needed, which is an advantage for immediate financial obligations or for capital on emerging opportunities in the market.
- The money invested is usually less risky, which means, in an unfavorable outcome, losses incurred are proportionally limited.
- Investors can safeguard more substantial portion of their capital which insulated themselves from the impacts of market volatility or unexpected financial downturns.
Disadvantages
- Short-term investing offers quick liquidity and flexibility, however, can come with high costs driven by elevated transaction that characterizes short-term trading.
- Each buy or sell incurs brokerage commission fees, which can rapidly incur when trading frequently.
- Engaging in short-term investing requires specific skills and substantial time commitment from investors. Close monitoring of price movements and the ability to promptly identify opportune moments for buying or selling is essential.
- To be successful in short term investments, investors must develop keen understanding of market trends, technical analysis, and other indicators to make informed decisions.
Why should you invest in real estate?
Passive income
Passive income are forms of earnings that require minimal active involvement from investors generating income stream. For instance, if you choose to lease out real estate, the rental income can serve as dependable source of passive cash flow.
This passive income of real estate grants investors greater degree of flexibility and lifestyle freedom, since it’s not their primary obligation to engage in day-to-day operational activities, which enable them to reap its financial benefits while allocating their time and resources elsewhere.
Leverage
You have the option to make an initial payment and secure financing for the remainder when you acquire your investment.
Appreciation
As long term investments, real estate properties possess potential to increase value over time. Numerous factors include market demand and contribution to the appreciation of investment properties.
When looking at the bigger picture, real estate values generally have a tendency to increase over extended periods of time, this enables investors to leverage the compounding effect of appreciation.
Tax deduction
Real estate investments offer tax benefits and deductions such as depreciation and maintenance costs, which are utilized to balance out your other earnings. Deductions have the potential to considerably decrease your taxable income, leading to reduce taxes and possibly better overall returns.
Furthermore, those investing in real estate can qualify for deductions concerning property managements and professional services expenses which makes it one of the best options for investment.
Protection against inflation
Real estate serves as a safeguard against inflation, when costs escalates or propel the overall price level, it leads to a tendency for real estate to increase simultaneously.
Rents from rental property can be adjusted to keep pace with inflation which enables investors to maintain a steady stream of cash flow. Real estate investments also offer a tangible asset that retains value and can serve as a source of wealth during inflationary periods, making it an attractive option for low-risk investing.
Diversify
Finding the right investment in real estate can contribute to diversifying your investment portfolio by incorporating a tangible asset that stands apart from conventional investments like stocks and bonds. Real estate generally operates independently of the stock market or bond market, serving as a hedge against volatility. In essence, the income derived from rental properties can deliver a consistent cash flow that isn’t dependent on market performance.
Downsides to investing in real estate
Upfront costs
Real estate investments often have a substantial upfront cash in the form of a down payment.
Property value decreases over time
Real estate value tends to increase in value over time, however, there are no guarantee due to the fluctuating market and no certainties it will appreciate.
Maintenance and repairs
Real estate requires regular upkeep which includes cleaning and repairs. Additionally, repainting and repairing may include unforeseen emergencies such as floods or fire.
Non-liquid funds
Real estate investments that are long-term cannot be easily sold. Even if the market is robust, the process of listing a home, negotiating, and completing transactions can take more than months. So it’s not ideal for those looking to make a quick cash at once.
What short-term rental investments?
Location
With short term rentals, location is the key factor among other real estate deals. This is because short term rentals heavily rely on influx of visitors to a specific area, which can either be vacation or resort destinations.
It’s important to know your rental monetary desires. Using the property as a part-time vacation home, it might be more convenient to rent it out for only a few months during peak seasons, if you’ll be using it as a personal vacation home as well.
However, if you don’t plan on staying frequently, you can use your real estate property for a year-round income potential, just make sure to choose an active or busy location.
Furthermore, it’s crucial to be aware of the potential limitations imposed on short-term rentals by state and municipal governments, as well as individual homeowners or condominium associations. Working closely with your real estate agent to conduct comprehensive research can help identify any constraints that might affect you and the desired location.
Taxes
It is advisable to consult with a financial advisor to understand how and which taxes will be applied to your property and how this investment might influence your overall tax strategy.
Add value
Enhancing the overall look of your rental can significantly change its look from other rentals. Depending on its location, incorporating details indoors and installing outdoor living space can boost our property.
Additionally, budgeting for furnishing of your short term rental for linens, dishes, cookware and other essentials must be incorporated in your financial calculations together with property management, cleaning, landscape, and other professional amenities.
Other rental spaces also provide supplementary amenities like coffee bars, toiletries, and guest gift baskets, so it’s crucial to factor in these costs as well.
Market your rental
Utilizing your short term investments, naturally, your methods must include marketing the rental through online platforms like Airbnb. However, before listing, you must use professional photographs, well-crafted content, and other marketing materials prepared. Consider editing out your photos or making sure the photos and videos turn out good for potential clients.
Feedbacks, reviews, or testimonials of guests will serve as additional marketing materials. This can establish credibility and enhance the appeal of your property for future guests. Additionally, maintaining communication among your guests can foster repeat visits.
Short term vs. Long term rental
- Long term investments require less hands on approach whereas short term investments need more attention or monitoring.
- Long term rentals are ideal for those financing their property or use for other investments, short term rentals are for those looking to monetize and be consistent with renting to cover mortgage payments.
- Long term rentals have a more consistent ROI since short term rentals can be affected by the market economy.
So, is real estate investment for you?
To determine if real estate is for your, assess what your short and long term investment goals are. If possible, having a financial advisor would also be helpful. Take note that real estate works best for long-term investments for its potential to appreciate in the long run as opposed to quick returns.
Related Blog: How To Get Started With Short Term Rentals
