Short Vs. Long
Short Vs. Long
With real estate investment, there are two fundamental investment strategies. You can go for short-term flips or long-term holds. While the economics of these are similar Initially, the risks and returns can be entirely different. Whether you are looking at residential or commercial; new construction vs. rehab; or cash flow vs. appreciation, your time horizon is going to influence every decision you make.
What is a Short Term Asset?
Classification of short vs. long term returns can seem like an arbitrary distinction, but it usually is driven by the way the gains are treated for tax purposes. If an asset is held for one year or less, it’s a short-term capital gain (STCG). The primary disadvantage to short-term investments is the inability to characterize the profits as long-term capital gain. STCGs are taxed at standard income tax rates, which in the US can be marginal rates up to 39.6%. However, short-term investments can offer greater liquidity and often higher returns.
What kind of properties are common short term investments?
In real estate, the vast majority of investment dollars are attracted to long-term investments. This interest in longer-term payoffs is probably an artifact of the long construction times, complex legal structures, and inherent tax benefits that have historically been associated with real estate investment.
Investment crowdfunding brings new efficiency to raising capital for short-term gains and has brought scalability to short-term investment funding. Two of the most popular options are residential new construction and residential rehabs (fix-n-flip) investments. Both of these can be completed in less than a year in most markets (weather permitting), and offer investors the ability to gain access to a deal and see returns in less than a year. Variables that can affect the time horizon for these investments include construction schedule, material and labor availability, the timing of the market for sale, and local economic conditions.
What is a Long Term Asset?
Classification of short vs. long term returns can seem like an arbitrary distinction, but it usually is driven by the way the gains are treated for tax purposes. If the asset was held for greater than one year, it’s a long-term capital gain (LTCG). While short-term projects are always taxed at the ordinary income rate, long-term projects can be eligible for long-term capital gain (LTCG) treatment. LTCG is taxed at the same rates as qualified dividend income. That is, any long-term capital gains that fall in the highest tax bracket will be taxed at a rate of just 20%, any LTCG that falls in the middle tax brackets will be taxed at a rate of just 15%, and any LTCG that falls in the bottom tax brackets will not be taxed at all.
However, LTCG is only available on properties that are pure investments. For an example, an investor who purchases a single-family house and rents it out, while managing the property and repairs can be subject to ordinary income because of the business management component of the investment. This distinction is a key advantage that crowdfunded investments can have over DIY projects. [maybe elaborate in a later post, why RE trusts and other workarounds can fail] When you invest in a third-party offering through MassVenture, you are not an operator or manager of the investment and can treat your gains as LTCG (if held for an appropriate period).
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