How to combine short, medium and long-term real estate investments



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Not all real estate investments require a long-term commitment. I combine short-, medium- and long-term real estate investments to spread out risk and returns. 

Contrary to popular belief, private equity real estate investments actually increase the average portfolio’s risk-adjusted returns. Soren Godbersen of EquityMultiple breaks down the data on how real estate raises returns within the average investment portfolio while reducing risk. 

If you can leave your long-term investments untouched, that is. This is precisely why you need to balance your portfolio with shorter-term investments. 

Try the following ideas to diversify your portfolio not just across geography and property types, but also across time. 

The purpose of short-term investments

I can’t predict the future any better than you can. A sudden crisis might strike, that requires cash — and lots of it. 

This is the reason people keep emergency funds. Many personal finance gurus recommend you keep six to 24 months’ living expenses in your emergency fund. 

That adds up to a massive sum to hold in cash, losing money to inflation each year. So while I do keep a month or two worth of expenses in cash that I can tap at a moment’s notice, I also keep some money in short-term investments. 

These range from flexible investments that I can withdraw (albeit with a delay) to term investments lasting less than one year. I also keep several unused credit cards that further shore up my emergency defenses. 

Short-term investments won’t make you rich. But they will protect you from financial catastrophe, as funds you can access when needed. 

My short-term real estate investments

You can always buy publicly traded REITs and sell them at any time. However, REITs are volatile, which makes them a better fit for buying and holding long-term to wait out short-term corrections. Worse, REITs are too closely correlated with the stock market at large, which defeats the purpose of diversifying into real estate.  

Instead, I hold short-term real estate investments in private notes, Groundfloor notes and Concreit’s fund. 

A promissory note or just “note” is the legal document signed when one party lends another money. You can sign a private note lending another person money, such as a real estate investor you know and trust. You negotiate the term, whether fixed (such as a six-month note) or flexible (which you can cancel at any time, with a certain amount of advance notice). 

I currently hold several notes with other investors, which pay me 10 percent interest like clockwork. 

Some companies borrow money in the form of notes. For example, I’ve lent money to Norada Real Estate, and to hard money lender Groundfloor. Groundfloor offers one-, three- and 12-month notes currently. 

As an alternative crowdfunding option for real estate debt, Concreit offers a pooled fund that owns hundreds of short-term loans. You can withdraw your money at any time, with a delay of two to four weeks. 

If a crisis hit me tomorrow that I couldn’t cover with my cash emergency fund, I can simply look over these other short-term investments to find the best one to raid for cash. 

The purpose of medium-term investments

I think of investments lasting one to three years as medium-term investments. 

Some cash flow well, while others plan to return my investment capital relatively quickly. If I get my money back in 18 months, I can either put it toward a major expense as needed (such as a new roof on my home) or reinvest it for a high velocity of money. 

In fact, I may be able to pursue infinite returns on them. Say I invest in a real estate syndication and the sponsor refinances the property, returning my initial investment back to me. But I keep my ownership interest in the property and keep collecting cash flow. In the meantime, I can reinvest the same funds again… and again… and again. 

Lastly, because you hold these investments for longer than one year, the IRS taxes any profits at the lower long-term capital gains tax rate. And you have plenty of options to defer or avoid taxes on real estate gains

My medium-term real estate investments

As touched on above, I invest in some medium-term real estate syndications. But even though I hope they return my capital within two or three years, I don’t have any control over them. I have to accept that I may not get my cash back in under three years. 

You do have a few crowdfunding options that let you sell in that medium timeframe. Ark7 and Lofty offer fractional ownership in single-family rentals, multifamily properties and Airbnb short-term rentals. Both feature secondary markets, where you can sell your shares after the initial holding period (typically one year). 

If you use Lofty, just beware that you get paid in a stablecoin cryptocurrency, which not every investor is comfortable with. 

Some companies and individual investors offer notes that mature in the one-to-three-year range. For example, 7e Investments offers a note that allows early redemption, although the full term is four years. 

The purpose of long-term real estate investments

Real property is a fundamentally illiquid asset. It costs a lot of money and time to buy or sell. 

This means that most real estate investments are long-term investments. 

Most of your investment portfolio should comprise long-term investments. Sure, you need some short-term investments to help buttress your emergency fund, and medium-term investments give you some extra flexibility and possibly velocity of money. 

But the beefy returns — the kind that lead to financial freedom — come from long-term investments. 

Bear in mind, too, that when you invest with a tax-sheltered account, you typically can’t touch the money anyway. So it doesn’t matter if you commit your money to an investment for four to seven years. 

My long-term real estate investments

Today, I mostly invest in private equity real estate for my long-term investments. 

I get all the benefits of owning real estate, from cash flow to appreciation to tax benefits, but I don’t have to become a landlord or mess around with contractors, renters, city inspectors, lenders or property managers. Good riddance. 

That doesn’t mean you shouldn’t invest in income properties directly. Countless investors buy and hold rental properties every year, and many earn strong returns. I just prefer to invest passively in real estate nowadays, as a busy entrepreneur, husband, father, and frequent international traveler.  

I sometimes invest in long-term real estate debt funds. But by and large, I prefer shorter-term debt investments. 

As an alternative, you buy fractional shares in rental properties through Arrived for $100. Like Ark7 and Lofty, you collect cash flow and the properties (hopefully) appreciate over time. However, Arrived doesn’t offer a secondary market for selling shares, so expect a five to seven-year holding period. 

Expected returns for different investment lengths

As a general rule, I accept 6.5 percent to 8 percent returns on my short-term investments and 8 percent to 10 percent returns on my medium-term investments. 

But on longer-term investments, I expect to earn a bare minimum of 10 percent, and preferably more. In our co-investing club, we meet every month to vet new deals together, and we aim for annualized returns of 15 percent to 25 percent. 

Those high returns don’t necessarily come with high risk (although they can). All investments come with risk, so the savvy investor looks for asymmetrical returns with relatively low risk and high returns. They’re out there, and when you have an entire community of investors reviewing deals together, you find them. 

Just as you diversify your portfolio to include different markets and types of properties, diversify across timelines. 

Whatever you do, don’t try to predict the market. It’s a fool’s errand and a loser’s game. 

G. Brian Davis is a real estate geek and co-founder of SparkRental.

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