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The Homerun in the Longrun: Why investment real estate should be a 10+ year investment

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By : Shamon Kureshi    99 or more times read
Over the past few years I have witnessed a huge influx of landlords entering the industry. When real estate prices are in a state of increase, people seem more than happy to purchase a second property and rent it out. When times are bad, it seems that very few of those same people would ever consider entering the rental real estate market. Unfortunately, it seems that those bandwagon landlords are rarely able to realize a true benefit from the economic machine of the rental real estate industry. This article will examine the ways that real estate investments are most profitable when given a 10 or more year window.

The first and most important issue to examine relates to market fluctuations. In the real estate business, booms and busts are a fact of life. If you think that a bust will not happen, or a boom is unlikely, then you misunderstand the nature of the industry. Shocks to the system are inevitable and should not be considered as a matter of chance, instead one must consider these things as a matter of timing. It is not a question of “if” a shock will happen but rather a question of “when” this shock will occur. As a short term real estate investor, these events can cause a premature ejection from the market, or even worse a pre-mature entry point. As a real estate investor these are speed bumps, be it positive or negative, that are observed and endured during a long term marriage with a property.

Next, lets look at the ability of a landlord to provide suitable customer service. It doesn’t matter what part of the country you live in, bad landlords are everywhere. A quick survey of your friends or family will certainly yield a horror story relating to a landlord either not doing their job to a paying tenant, or even worse, a landlord maliciously causing financial harm to a tenant. It has been my experience that these landlords are most often new to the industry. Being a good landlord requires much skill, training, and experience. In most cases these traits take up to 5 years to master. Short term real estate investors who have not got the suitable experience to deal with tenancy issues or disputes give the rest of us a bad name. Worst of all, tenants get wronged and often by landlords who do not think that they are doing anything wrong in the first place.

Mortgage interest is another issue to consider when deciding whether to subscribe to the long term approach to investment real estate. It is common knowledge that under standard mortgage amortization terms, a twenty five year mortgage commands more interest charges during the term than the actual principal loan amount. The problem with this system of money lending is that the interest is not charged equally. During the first half of a mortgage term, the interest component of a monthly payment comprises up to seventy five percent of the payment while principal debt repayment lacks at a minimal twenty five percent. As the term matures, the ratio reverses and greater debt reduction takes place. As a short term investor, the benefits of debt reduction are not experienced.

The benefits of real estate investing are best enjoyed when taking a long term, buy and hold type approach. Short term investors do not realize the full benefits of principal mortgage debt reduction, are generally not able to provide a competent landlording service to their tenants, and are swayed by every shock to the real estate market.

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