Buying real estate when you don’t intend to keep it long-term can be very risky.
Quick buying and selling can lead to high transaction costs.
Since real estate is an illiquid investment, it only makes sense to buy it for the long term.
While it is sometimes possible to buy a property and quickly resell it for a profit, it can be a risky proposition. And it’s unlikely to be worth it unless you know the local market very well, time your purchase correctly, and are willing to put in a little work to ensure the property is in good condition before it earns sale value.
However, in most cases, whether you’re buying a house to live in or an apartment to rent, it’s best to think of buying property as a long-term investment. Here are three important reasons.
1. The investment is illiquid
Physical real estate is not an easy in and out investment.
With many other assets, such as listed stocks, cryptocurrencies, or even physical gold or silver, there is often a large pool of potential buyers. A certain company’s stock, virtual currency, or piece of precious metal is usually as good as any other of its kind, making it relatively easy to find someone to buy the asset with a minimum of fuss.
However, this is not the case with a home or investment property. When you list a building or land for sale, you have no idea how long it will take to find a qualified buyer interested in that particular property. It can take weeks, months, or even years to find the right person, even if you’re willing to sell at a loss because you can no longer afford the cost of ownership. And if you find a buyer quickly, it can take several weeks or months for the property to change hands due to the logistics of the transaction.
If you want to access your money quickly and make sure you can get rid of an asset whenever you want, buying real estate is the wrong investment. But if you have a long-term horizon for the property, it probably doesn’t matter much if you need time to find the perfect person or company to eventually sell to.
2. High fees apply
When you’re buying and selling a property, you’ll face closing costs, which typically range from 2% to 5% of the property’s value, or more.
As a seller, you may be required to pay a brokerage fee. As a buyer, you will likely have to pay mortgage fees, appraisal fees, inspection fees, and survey fees. Additionally, as both a buyer and seller, you should consider title insurance, prorated taxes and association fees, and property transfer tax.
When you have thousands of dollars in expenses every time you buy or sell a property, you need to make a sizable profit to break even. This is much more likely if you plan to own the property for a long time, as it can take years for the property to be worth enough to cover transaction costs and break even.
3. Taxes can be much higher if you sell quickly, and can sometimes be avoided entirely if you hold onto the property long-term.
When you sell a property quickly, you have to pay taxes on the gains. If you have owned property for less than ten years and you sell it for a profit, you will have to pay taxes on the gains.
However, if you hold the property longer, the sale will be tax-free after ten years. And if you own the property for at least three calendar years before the sale and use it as your primary residence, you also don’t pay taxes.
For all these reasons, before buying a property, it is worth considering whether you are willing to make a long-term commitment. If you don’t plan to invest for the long term, you should seriously consider the downsides and risks of short-term ownership and consider investing in this asset class in ways other than buying physical real estate.
The article 3 Reasons Real Estate is a Long-Term Investment first appeared in The Motley Fool Germany.
This article was written by Christy Bieber and was published on Fool.com on 03/22/2022. It has been translated so that our German readers can join the discussion.
Motley Fool Germany 2022