Understanding Your Investment Period in Commercial Real Estate

Investors often want to put their money into investment opportunities with a longer time horizon in order to earn high returns. But what if you would prefer to invest for a shorter period of time?

The most common piece of advice you may have heard when discussing investments in general is to “keep holding” if the investment is steady. You wonder what the harm is in investing for a shorter period of time, even though it is a sensible piece of advice. If it is stable enough, it will be worth the time for short-term investment as well.

What is a Holding Investment Period in Commercial Real Estate?

In commercial real estate,  the holding period is the amount of time that an investor must hold onto the asset in order to generate income, price appreciation, or both. 

The day a property is purchased marks the beginning of the holding period, which ends on the day it is sold. The average holding period for a commercial property is 5-7 years, although this depends on the type of investment.

Why Does The Holding Period Matter?

The holding period is important for several reasons, the three main ones being: expectations, returns, and business plans.

• First, “How long will it take for me to get my money back?” is one of the first questions a potential investor might ask when looking for investment capital.  Investment platforms typically set a time limit on investments for this reason alone in order to give investors an idea of when they can anticipate receiving their capital back.  An investor’s capital is illiquid during the specified holding period, and they are typically unable to access it. 
• Secondly, in order to calculate the return on an investment in real estate, a defined holding period is required.  Time-bound return metrics that are frequently mentioned include cash on cash return, equity multiple, capital gains, and internal rate of return (IRR). 
• Lastly, and maybe most importantly, putting the business plan for a commercial investment property into action just takes time.  This is particularly common with a value-add investment strategy.

With Assetmonk, investors can explore a wide range of alternative investments, including commercial real estate, co-living spaces, and more, all with a focus on generating stable, long-term returns. With alternative investments, you can diversify your portfolio and minimise risk while maximising returns, and with Assetmonk’s expertise, investors can do so with confidence.

Short term Investment Period

It is important to know what is meant by “short-term” when discussing commercial real estate investments. Rental periods for ownership or investment can range from 1 to 12 months. Anything more, then you’re entering long-term territory. 

When a property would rather stay vacant, short-term leases are a feasible alternative. If your investment is in an area where there is a high demand for space and strict eviction laws, short-term leases may be a suitable option. Tenants are more readily available for landlords to select from. This implies that even if several short-term tenants vacate the property, the property in question most likely stays occupied.

• Benefits: Both the landlord and tenant can benefit greatly from a short-term lease. It gives the landlord the freedom to modify the terms and conditions as well as the rental price because the term is short and the rent is typically higher than for comparable long-term properties. Shorter leases make sense to be beneficial for tenants, provided that they are not subject to any restrictions.

Where does a Short-Term lease Fall short?

Despite its advantages, short-term leases are typically not recommended for real estate investments. These are the reasons why:

• Short-term leases frequently translate into higher rent for the tenant. It also implies that there’s no guarantee the landlord won’t have chosen another tenant for a longer term in the meantime, even if the current tenant decides to stay for a longer term.
• Lenders and prospective asset buyers frequently find short- or ultra-short-term leases to be unappealing. This, however, will depend on the type of the asset. The lease period for an industrial or commercial space may be longer than that of a multi-family residential building.

Long Term Investment Period

The term “long-term” describes the prolonged period of time an investor owns an asset. Long-term investments can last anywhere from 12 months to 30 years, depending on the needs of the investor. The majority of investors keep long-term assets for a minimum of five to ten years.

• Benefits: Long-term investing requires less time because investors do not have to constantly watch the markets for minute changes.
• This also  gives landlords and owners a greater chance of obtaining a reliable and stable investment asset. Capital appreciation over time plays a major role in the growth of wealth in these types of investments.

Where does a Long-Term lease Fall short?

A long-term commitment also comes with its own challenges:

• There is typically a lock-in period associated with long-term leases. If the lease is broken during this time, there will be financial consequences; rent for the full lock-in period must be paid in full before leaving the property. 
• The lease agreement may also contain additional restrictions. If a problematic tenant is under a long-term lease and their assets are not being managed by a management company, the landlord/owner may find them to be quite the hassle. 
• Landlords and owners may feel left out if the market conditions improve because they are unable to raise rent.

What Can be Done About Illiquidity During the Holding Period

Since most commercial real estate investments have a hold period of 5 to 10 years, investors may find the illiquidity of the assets to be problematic.

Assetmonk’s offerings in the form of real estate structured debt can help real estate investors who need liquidity since  investors can participate with a minimum investment horizon of just 36 months and provide them with a consistent stream of monthly income in the form of fixed returns. It is also one of the best short term tax saving investments in India.

Investment Strategies to Reduce Liquidity Risk

You may begin making real estate investments that are suited for you now that you understand real estate liquidity.

• Fractional Ownership: Purchasing or leasing commercial real estate is an expensive endeavor that demands large sums of money. But, Fractional ownership allows you to invest with just Rs. 25 lakhs via alternative investment platforms like Assetmonk to purchase fractional ownership of a commercial space. 

Compared to fractional property assets, traditional real estate investments have substantially less liquidity. If you invest in fractional ownership, you can easily sell and transfer your share of the property to other people, making it highly liquid.

• REITs: Real estate investment trusts, or REITs, were first created as a response to the illiquidity of real estate. These companies are there to own commercial real estate and offer investors stock. For publicly traded REITs, this ownership structure allows for exceptional liquidity. 

Stocks are the most liquid asset. Thus, REITs have high liquidity. Publicly traded companies that own or finance real estate are known as REITs.

Optimizing Your Investment Period:

• Diversification: Spread your investments across different property types and locations to mitigate risk and maximize returns across various timeframes.
• Exit Strategy Planning: Develop a clear exit strategy early on, considering potential market conditions and buyer profiles.
• Regular Reassessment: Regularly review your investment strategy and adjust your holding period as needed to adapt to market changes and personal goals.

Which is Better – Short Term or Long Term Investment Period?

There’s no clear winner since both have benefits and drawbacks. With short-term investing, we can minimise risk and reach our financial goals in a remarkably short amount of time. On the other hand, if we want higher returns and have a greater risk tolerance, we can go the long-term investing route.

Bottom Line

An investor in traditional CRE investing is frequently faced with the difficult decision of selecting between long-term and short-term investment period. Knowing the features, advantages, and differences between CRE Investment Holding Periods will enable you to make well-informed decisions that are in line with your risk tolerance and financial objectives as you start your real estate investment journey. 

With alternative investments like fractional ownership, investors can now be part owners in multiple Grade A commercial properties and reap the benefits of high returns without paying the full price of owning the commercial property.

To optimise the returns on your real estate investments, don’t forget to carry out extensive research, use due diligence, and consult financial advisors. 

Assetmonk is one the most popular websites for investing in fractional ownership property.  With a projected annual return on investment (IRR) of 21%, it provides you with savvy real estate investing options like Growth, Growth Plus, and Yield models to help you increase your investment. Visit our website now to learn how to invest in real estate the right way! Happy Investing!

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FAQs

Q1. Why is my investment period important in commercial real estate?

A: Your investment period determines your exit strategy, cash flow needs, and risk tolerance. It affects everything from the property type you choose to how you manage tenant leases and finances.

Q2. What factors should I consider when choosing my investment period?

A: Look at current market trends, the type of property (industrial, retail, etc.), your financing options, and your own financial goals and risk tolerance.