In our second podcast on The Long Term Real Estate Investor, I interviewed one of the most influential real estate investors of my life: my father, Jose Pepe Sigal. During our talk, he said something that has stayed with me:
“I’m a professional chicken – I want to invest where I know the chances of failure are really small.”
This might not seem like real estate investing wisdom, but trust me, it is.
Safety. Stability. Dependability.
Jose learned years ago that real wealth is built over time. This happens by patiently selecting investments that minimize risk, are located well, and have the potential for quality improvements. According his strategy, appreciation, not cash flow, is key here; although purchasing an asset where you can add value is also essential. The goal is to pass wealth to future generations by creating safe, stable, and dependable investments. This is not the typical fix-and-flip strategy, nor is an end date (or sell date) a consideration of the plan. Patience and a focus on slow, steady, reliable returns is my vision for successful real estate investing. Appreciation turns a dollar into three or four down the road.
Today, many investors are in the business of chasing a high internal rate of return (IRR) or large cash flow opportunities. These deals are often riskier than deals focused solely on appreciation and adding value. The deals are focused on creating wealth in the short-term. This may work for many investors in strong growing markets, but when a downturn hits, that has a much higher chance of a different outcome.
9 Benefits to Long-Term Investing
I want to share some of the advantages of holding real estate for the long-term: 10 to 15 years or more. There are nine major benefits that I’ve found that give some perspective for your long term real estate investing plans.
Benefit #1: Less risk
Finding the right deal takes time, energy, and the patience to pass on many average deals. Investors chasing fast returns often jump from deal to deal every few years. Many of my deals take years to find, vet, and purchase. Moving too quickly lowers the quality of deal selection and vetting. It can be tempting to follow IRR and other investment metrics before really understanding a property’s location and local market dynamics.
Benefit #2: More stability
When your deal is leased up, all you have to worry about are the property management including collecting the rent. Unless the market provides a compelling reason to sell, you are in it for the long-term. No more timing the market or rushing from deal to deal.
Benefit #3: Avoid spending time hunting for deals
The right deal takes a tremendous amount of time to find. It can’t always be a buyer’s or a seller’s market. Having to do this every few years means you aren’t growing your wealth. When you invest for the long-term, you can focus your energy on getting the most from a property, not looking for more.
Benefit #4: Survive market cycles
Timing the market is tempting. Investors of all stripes are dazzled by the prospect of stunning short-term gains. Most investors fall short when local or national markets swing unexpectedly. The long-term investing strategy is positioned to weather any market storm.
Benefit #5: No selling costs
New real estate investors often learn the hard way that buying and selling carries many costs. Commission fees, escrow fees, and other fees like loan penalties can eat up gains. Long-term holding avoids these extra costs, until absolutely necessary.
Benefit #6: Avoid taxable events
Taxes are another factor that can reduce the profitability of an investment. Capital gains and depreciation recapture are triggered when an investment sells, unless an exchange is made. Long-term investing creates fewer taxable events and allows for better planning for when the taxable event occurs.
Benefit #7: Lower tax basis
While this is a complex topic, legislation such as California’s Proposition 13, which limited the property tax rate for real estate, changed the tax basis for many investors.
Benefit #8: Access cash through refinancing
Long-term investing means you can refinance when interest rates are the most favorable. The extra money from refinancing can be used to further build wealth by enhancing the property or investing in another.
Benefit #9: Longer loan amortization period
A common feature of loans is that debt payments pay down more of the principal the longer the loan is held. Put your money to work paying off the actual principal, not the interest.
The Long-Term Mindset
It’s easy to recognize the value of a long-term approach. More investors are waking up to the risk of building wealth over short-term investments. While it may be difficult to know what the market will do in five years, the long term strategy is more dependable and will give you piece of mind.
Read more on The Family Investment Mindset.