If you've invested in real estate, with the idea of producing income and someday selling at a profit, it won't be long before you're asking: How long should I hold on to my investment property to maximize the return on my investment?
There is no guarantee that your property will appreciate in value, but presuming you did your research and the property is in a desirable location, you can reasonably assume the value will hold, if not increase, by at least 1% per year. Economists suggest 3% to 5% is reasonable to expect, but conservative forecasting approaches are better to avert financial concerns down the road.
The return on your investment (ROI) will depend on many factors, including fluctuations in the market, your costs to maintain the property (such as taxes, maintenance, and insurance), the amount of rent you receive, the interest rate you obtained on your loan, and the type of property it is (such as a condo versus a single-family home).
Real estate investment trusts (REITS) and other commercial property investment companies frequently target properties with a five-year outlook potential. Whether they are looking to develop these investments or sit and hold them, these companies are aiming to maximize the return for their investors in the shortest amount of time.
As an individual investor, however, you do not have that pressure hanging over you and can determine what's more important to your needs. Say in five years your property is worth 10% more than what it is today and you decide to hold. If the subsequent five years earn no additional appreciation on your property, certainly, the additional five years you waited to sell would result in a worse return on your investment. But, although there was no appreciation, your property was still actively earning you cash to pay off your mortgage and provide stable income.
Before buying your investment property, determine what your goal is for this particular investment and stick to that plan, regardless of where the market goes. Some goals to consider for yourself are:
Whatever your goal is for your investment property, it's important to remember that real estate is not a liquid asset. Always consider the worst-case scenario of not being able to sell your property in the time frame you want.
If your investment property is a single-family rental home, see Nolo's book First-Time Landlord for guidance on purchasing and managing residential rental property.