How Long do Real Estate Investments Last?
Loading...Loading...Loading...Loading...Note: this is Chapter 4 of an entire guide on Why Real Estate Investing?
In investments, you must decide two things: when you buy in and when you sell out. This is because as a successful investor, money is simply a tool to build wealth and you'll want access to it when you need it.
As mentioned previously, real estate investments have low liquidity meaning it is more difficult to cash out at any given point. So individually, you must decide your general date range of maturity for an investment when you think it will reach its full maturity.
Why?
Because investments for most people have a timeframe in which an investor expects it to grow the fastest over a period. Selling early may mean missing out on optimal returns and selling late may lead to losses.
While we can't decide your optimal timeframe since it depends on a variety of very individual factors, we can tell you some of the considerations to think about.
As with every other investment, buying young allows you to compound your wealth over a longer period of time. However, getting the capital for real estate typically means that investors are older than those who buy low barrier-to-entry investments like stocks.
While life is different for all of us, we've identified a number of typically age-based financial events that may affect your ability and future growth on investments.
By keeping these items in mind will allow you to build a long term picture of what you will realistically be able to invest in real estate. Those on the younger side will have a longer timeframe which allows younger people to build wealth, but typically face more personal expenses like loans, property, vehicles, and life events. Those on the older side, while having a shorter timeframe, typically have more capital and less cash flow expenses.
Think about your income right now. If you're working a 9 to 5, it's probably pretty stable. If you're a freelancer, it might be less stable.
Now what you'll need to think about is this income right now, five years later, ten years later, fifteen years later, and so on. The question is two-fold.
For one, in an ideal case, having the ability to pay for your rental's mortgage may protect you from financial loss in the event a tenant leaves. If you don't have that kind of cash flow, then you may miss payments on your mortgage. Being able to project your income out in the future may help you account for how much of a rental you can truly afford safely.
Second, do you have excess cash flow you can be saving towards a down payment? You might plan to have a down payment in three years or ten years. It'll depend on your excess cash flow. A consideration for those on the older side is retirement. During retirement, your goals may be misaligned as there may not be excess cash flow.
As you consider making the deep-dive into being a successful real estate investor, you'll have to decide on your risk preferences, or the amount of risk you are willing to take on.
Everyone falls into three categories:
Typically, as the risk increases, the potential investment gain increases. Why does this matter?
Taking more risk early on can lead to quicker success and may reduce the amount of time needed to reach your goals. However, increasing risk increases the chances of financial loss. Taking less risk will lead to slower success, but increases the time needed to reach your goals.
Most people typically fall into the risk-averse category which means they prefer to take less risk with slower success and a longer timeframe.
So you'll have to ask yourself. Are you the type of person to throw all of your capital to try to strike it rich in a year? Or are you the type of person to slowly feed your capital to drag out your growth until retirement? Moreover, do you think your risk preferences will change substantially over time?
Liquidity seems like it keeps coming up, but as a refresher: