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    Investing in Commercial Real Estate: Short-term vs Long-term Approach in India

    • 5 min read
    • Last Modified Date: February 7, 2024
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    • Real estate investing is a tried-and-true method of accumulating wealth that has drawn numerous investors for many years. Nonetheless, one of the most important things to consider when investing in real estate is if your goal is stability over the long run or quick profits.
    • However, investors should consider their investment’s time horizon before making any decisions about real estate. Selecting between long-term and short-term real estate investments requires carefully weighing several factors, including market conditions, risk tolerance, and financial objectives. This article will discuss investing strategies for both short-term and long-term commercial real estate investments.

    Understanding Long-Term Investments

    Holding properties for a long time—typically five years or more—is a requirement for long-term real estate investments. Over time, this approach enables investors to enjoy the benefits of tax advantages, rental income, and appreciation. 

    This strategy works well for reaching long-term financial objectives like retirement planning and school funding, as well as for progressively increasing wealth.

    Investment Duration

    Long-term investors purchase their assets and hold them for a long duration, adopting a long-term approach to their investment. They focus on long-term compound returns, with less attention paid to volatile market swings. The goal is to maintain market participation while avoiding frequent portfolio changes.

    Risk Tolerance

    Since long-term objectives are their main focus, long-term investors frequently have lower risk tolerances. They are prepared to withstand temporary market volatility in exchange for higher future returns because they know that markets experience ups and downs.

    Returns

    Higher returns over time are the goal of long-term investors. They know that although short-term market fluctuations are possible, long-term investments have historically outperformed short-term ones because of the power of compounding.

    Portfolio Diversification

    In order to control risk, long-term investors emphasise diversification. Their investments are spread out among various industries, asset classes, and locations. It is believed that a diversified portfolio lessens the effects of a fall in any one investment.

    Suitability

    Investors with long-term financial objectives, such as saving for significant life events, retirement planning, or accumulating wealth for future generations, should consider using this strategy. For those who can afford to wait for their investments to mature, it is seen as an appropriate course of action.

    Understanding Short-Term Investments

    When making short-term investments, assets are held for a short period of time days to several months. The aim is to make the most of sudden changes in the market or brief opportunities. Investors aiming to capitalise on temporary market fluctuations or those seeking rapid returns should consider this strategy.

    Investment Duration

    Trading, or the frequent purchase and sale of assets, is common among short-term investors. In an effort to maximise profits, they may carry out several transactions quickly in an effort to take advantage of temporary market trends.

    Risk Tolerance

    Short-term investors frequently exhibit higher risk tolerance because they expect greater price fluctuations in their search for quick gains. 

    Market Volatility

    Investments with a short time horizon are more vulnerable to market volatility. Because short-term price movements can be influenced by various factors and may not necessarily reflect the underlying fundamentals of an asset, investors need to keep a close eye on market trends and news.

    Returns

    Investors with a short-term focus look for easy money and try to capitalise on brief price swings. Rather than waiting for larger but slower long-term returns, they might be happy with smaller, gradual earnings from frequent trading.

    Portfolio Diversification

    Those who invest for the short term and concentrate on particular assets or specific markets may have a portfolio with little diversity. Their portfolios might be heavily weighted towards investments that are now seeing strong short-term returns.

    Suitability

    This strategy is better suited for seasoned traders or investors who can tolerate a higher degree of risk and have the time, expertise, and commitment to monitor markets closely and make frequent trades for quick profits.

    Advantages of a Short-term Approach in Commercial Real Estate Investment

    The short-term approach involves purchasing a property with the intention of selling it for a profit in a relatively short period of time. This strategy can appeal to investors looking for quick returns on their investment. There are several advantages to adopting a short-term approach in commercial real estate investment.

    • Firstly, this approach allows investors to take advantage of emerging market opportunities. By closely monitoring market trends and identifying areas with high growth potential, investors can acquire properties at lower prices and sell them at a higher price once the market heats up. This can result in significant profits within a short span of time.
    • Secondly, the short-term approach provides investors with greater flexibility. Since the goal is to sell the property quickly, investors are not tied down to a long-term commitment. This flexibility allows for more agile decision-making and the ability to adapt to changing market conditions.
    • Lastly, the short-term approach can give investors a higher return on investment (ROI) than the long-term approach. By capitalising on market fluctuations, investors can generate substantial profits quickly, especially in high-demand areas or during periods of economic growth.

    Disadvantages of a Short-term Approach in Commercial Real Estate Investment

    While the short-term approach offers the potential for quick profits, it also comes with its fair share of disadvantages and risks that investors need to be aware of.

    • One of the primary risks of the short-term approach is market volatility. The real estate market can be unpredictable, and prices can fluctuate rapidly. Investors who fail to time their purchases and sales accurately may end up selling their properties at a loss or missing out on potential profits.
    • Additionally, the short-term approach requires a deep understanding of market dynamics and the ability to assess property values accurately. Without proper research and analysis, investors may end up overpaying for properties or investing in areas with limited growth potential, resulting in financial losses.
    • Moreover, the short-term approach often requires significant capital and resources. Investors need to have access to funds for property acquisition, renovation, and marketing. 
    • They also need to be prepared for the costs associated with property maintenance and management during the holding period. This can be a barrier for some investors, especially those with limited financial resources.

    Advantages of a Long-term Approach in Commercial Real Estate Investment

    On the other hand, the long-term approach to commercial real estate investment focuses on acquiring properties with stable cash flow and potential for appreciation over an extended period. This strategy offers several advantages that make it an attractive option for many investors.

    • One of the key advantages of the long-term approach is the potential for steady income. By investing in properties with reliable rental income streams, investors can generate a consistent cash flow that can be used to cover expenses, repay loans, and even provide passive income. This can be particularly beneficial for investors who are looking for a reliable source of income and wealth accumulation over time.
    • Another advantage of the long-term approach is the potential for property appreciation. Over a longer holding period, properties in high-demand areas have the potential to increase in value. This can result in significant capital gains when the property is eventually sold. By holding onto properties for an extended period, investors can benefit from market appreciation and maximize their returns.
    • Furthermore, the long-term approach offers investors the opportunity to leverage tax benefits. In India, various tax incentives are available for long-term real estate investors, such as deductions on mortgage interest payments and depreciation allowances. These tax benefits can reduce the overall tax liability and increase the profitability of the investment.

    Disadvantages of a Long-term Approach in Commercial Real Estate Investment

    While the long-term approach offers stability and potential for wealth accumulation, it has drawbacks. Investors must carefully consider the following disadvantages before adopting a long-term commercial real estate investment approach.

    • One of the main challenges of the long-term approach is the potential for illiquidity. Unlike the short-term approach, where properties can be sold relatively quickly, the long-term approach involves holding onto properties for an extended period. This can limit investors’ ability to access their capital when needed, especially in situations that require immediate cash flow.
    • Additionally, the long-term approach requires a long-term commitment and patience. Property appreciation and rental income may take years to materialise, and investors must be prepared for the long haul. This can be a challenge for investors who are looking for quick returns or who have shorter investment horizons.
    • Moreover, the long-term approach requires careful property management and maintenance. Investors must actively manage their properties, ensure they are well-maintained, attract quality tenants, and remain competitive in the market. This can be time-consuming and may require additional resources or professional assistance.

    Difference between Short-term vs Long-term approach in Commercial Real Estate

    Here’s a comparison table outlining the differences between short-term and long-term approaches in investing in commercial real estate in India:

    AspectShort-term ApproachLong-term Approach
    Investment ObjectiveQuick returns on investmentSteady rental income and long-term capital appreciation
    Time HorizonTypically less than 1-3 yearsSeveral years or more
    StrategyFocus on capital appreciation, flipping propertiesFocus on acquiring and holding properties for rental income
    Risk LevelHigher risk due to market fluctuations and shorter timeframesLower risk due to longer investment horizon and stable cash flows
    Profit PotentialPotential for high profits in a shorter time framePotential for steady and consistent income over the long term
    Market ConditionsMore susceptible to short-term market volatilityLess impacted by short-term market fluctuations
    Decision FactorsEconomic trends, property location, and short-term market factorsEconomic stability, long-term growth potential, property location
    Success FactorsOpportunistic timing, quick decision-making, market timingProperty quality, rental demand, economic stability

    It’s important to carefully assess your investment goals, risk tolerance, and market conditions before choosing the most suitable approach for your commercial real estate investment in India.

    Bottom Line

    You will never regret making a commercial real estate investment, regardless of your chosen method. Purchasing real estate is among the wisest choices you will ever make. Becoming a successful investor also requires selecting the investment option in accordance with the investment goal. Investing in commercial real estate can diversify your portfolio and lower risk because it is one of the best investment opportunities. With this guide, even beginners can now invest in real estate without feeling intimidated.

    Assetmonk is an alternative investment platform that offers high-potential long-term and short-term commercial real estate investment opportunities to value investors like you.

    We provide tailored real estate investment opportunities based on your investment goals. Commercial real estate structured debts are one type of short-term real estate investment that can yield a guaranteed IRR of 17%. Long-term investments are offered in the form of: Fractional ownership real estate, with an expected IRR of 14-21%

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