When entering a high-risk-oriented rental property investment, you often hear “choose a long-term investment horizon.” Besides, statistics show that real estate tops the list of the best long-term investments.
A long-term investment horizon is generally significant because it enables investors to survive short-term fluctuations. Also, it helps you focus on your investments’ overall performance for an extended period.
With a long-term investment horizon, investors can easily make investment decisions based on the long-term predictions of an asset. This is better than responding to short-term market emotions. In the end, you get to kill two birds with one stone, reducing short-term market volatility effects and enabling high chances of achieving investment goals.
If you’re hesitant about choosing a long-term investment horizon, worry not. This article will explain why a long-term investment horizon is preferable. Read to the end!
What Is A Long-Term Investment Horizon?
Long-term refers to a time frame of ten years or more. While most people think investing takes a long time, an investor has several options. You could decide on investments with higher risk and instability but significant rewards. This helps you maximize your returns and not worry about the time horizon.
Aside from the typical stocks and bonds, investors can also invest in less liquid assets like real estate and rental property investments. When approaching your long-term investment goal, you can move your funds into other time horizons like medium-term or short-term investments. Most people dive into long-term investment horizons to achieve the following goals;
- Creating a family legacy
- Saving for a larger home
- Saving for major renovations
- Saving for retirement
- Saving to travel in retirement
Rental property investments are an ideal example of reaping the rewards of a long-term investment horizon. This is because your short-term rental provides a higher income potential from the higher daily rates. So as an investor, you can increase your returns by adjusting prices to suit the local market demand and facilities.
For example, a 40-year-old can buy a vacation property to save for retirement. As a reliable and promising short-term rental investment, you start renting the house for retirement income.
An effective short-term rental strategy will allow you to pay off your mortgage for the next 25 years before retirement. Because it’s a passive-income rental property, you can use it to supplement your other retirement savings.
Importance of a Long-Term Investment Horizon
A long-term investment horizon is essential if you are saving for long-term financial goals. This is because it allows a more patient and disciplined investment approach. There are several benefits to having a long-term investment horizon, including:
- Ability to Ride Out Market Fluctuations
As per this research, there are several reasons why real estate market prices keep fluctuating. However, market volatility is normal, and short-term fluctuations purposely distract investors. History has proven that while markets may fall, they always bounce back.
Usually, a short-term investment horizon has most investors exiting the market when there’s a downturn, effectively locking in significant losses. But staying put, even when markets drop, shows you’ll survive until the tide turns.
Sometimes, the value of a rental property investment tends to drop significantly over the short term. But worry not, as you can expect higher returns over the long term, notwithstanding financial obstacles.
Previous research has shown that markets do not always move in the same direction. So, if you’re investing in rental property as a beginner, expect the prices to fluctuate in response to natural, political, and economic events. The coronavirus pandemic is complete proof!
In the end, taking a long-term investment approach is beneficial to surviving short-term market fluctuations and focusing on overall investment performance. This can reduce the instability of an investor’s portfolio.
- Potential for Higher Returns
Over the long term, investments in real estate continue to generate higher returns than bonds. For instance, when you buy rental property and hold it long-term, the positive cash flow has the potential for higher returns.
Gaining positive flow means having a significant profit after paying all the expenses from rental property investment income. The trick here is to avoid vacancies and ensure you secure your tenants for an extended period.
Eventually, you’ll pay off all expenses, including your mortgage, renovations, and maintenance, and still have positive cash flow. So, investing for the long term makes the goal of higher returns very achievable.
- Greater Diversification with Reduced Risk
Are rental properties a good investment? While most people say yes to this question, you should know that choosing a long-term investment horizon is the honest answer. The long-term rental property investment strategy allows investors to diversify their portfolios, potentially reducing the overall risk.
As you know, markets can go up and down quickly. But you’re likely to get positive investment returns over the long term. Besides, that’s why people invest—to make excellent returns.
When learning how to make money with rental properties, it’s essential to know that long-term investing provides an adequate recovery period. Nonetheless, it’s essential to diversify your long-term investment portfolio to reduce the risk. It would be best if your portfolio covered several classes and audiences as part of your strategy.
The goal is that when you diversify and the market drops, only some investments will dip in value. Other rental properties will perform better in different periods, allowing the returns to average over the long term.
- Ability to Take a Disciplined Approach
Discipline, time, and patience are a priority when it comes to long-term investing. An investor should avoid making impulsive decisions based on short-term market movements by focusing on the long term.
Discipline in investing involves doing your due diligence and research, then creating and sticking to your plan in good and bad times. This way, you’ll focus on long-term trends rather than recent fluctuations.
A long-term investment horizon allows you to commit to your short-term rental property investments, ensuring the money doesn’t go elsewhere. This works best, especially when you’re retiring and trying to achieve a reasonable amount for your rainy-day savings. Moreover, the discipline acts as a guide to reduce the chances of making poor and emotionally-driven investment decisions.
Discipline also applies to setting aside money for investments regularly. You can achieve this effortlessly through dollar-cost averaging (DCA), as it helps spread risk over time.
A long-term investment horizon, particularly in rental property, is the best way to build wealth. This might involve higher returns or appreciation. With a flexible investment horizon, you could also earn active or passive income from a rental property investment.
Even so, it’s crucial to note that a long-term investment horizon doesn’t guarantee success, as there’s always some risk. Investors, on the other hand, have a high chance of success if they stay focused and disciplined on their objectives.