A target holding period, or target investment period, can refer to the estimated length of time that any type of investment will be held between its purchase and its sale. In the real estate world, however, a target holding period is most commonly associated with crowdfunded real estate investing. With that in mind, here’s an overview of what a target holding period is, and what all investors who are interested or involved in crowdfunded real estate opportunities need to know.
The short answer
The simple version is that a target holding period is the amount of time you plan to hold an investment, measured from the date of the purchase to the date of the sale.
For example, I may say that I bought a certain stock with the intention of holding it for 10 more years, after which I’ll retire. Or, in the context of real estate, I may buy an investment property with the goal of renting it out, gradually fixing it up, and selling it after a five-year holding period.
Holding periods are important for a couple of reasons. First, a target holding period of more than a year can qualify for investment gains with the favorable long-term capital gains tax rates. And, if the goal is to put money into a real estate investment to sell it at a profit, your target holding period can greatly affect your annualized return. In other words, if you sell an investment property at a $50,000 net profit, your annualized return will be better if you hold the property for three years versus five years, all else being equal.
Crowdfunded real estate target holding periods
Target holding periods are extremely common in crowdfunded real estate investing. If you aren’t familiar, crowdfunded real estate investments are generally not open-ended, buy-and-hold investments. And although there are other types of deals, the most common variety involves the purchase of a single commercial real estate (CRE) asset, some sort of value-adding modification (like a renovation), and an eventual sale.
For this reason, you’ll generally see a target holding period listed for crowdfunded investment opportunities.
For example, one deal listed on a major crowdfunding marketplace at the time of this writing plans to acquire a newly constructed apartment community, make upgrades, integrate new and more efficient management, and then sell the property at a profit after a five-year target holding period.
It’s important to mention that during the holding period, you won’t be able to cash out of the deal. In crowdfunded real estate investments, your money is typically tied up from the date you contribute your capital until after the property involved in the deal is eventually refinanced or sold.
Remember that these are just targets
One important thing to keep in mind when shopping for crowdfunded real estate investment opportunities is that target holding periods are estimates, not set-in-stone periods for which you’ll get to cash out at the end.
Deal sponsors certainly make their best efforts when estimating their target holding periods. They take economic conditions into account, as well as factors such as lease expirations, rental growth rates, financing structures, the estimated duration of any repairs or renovations, and more. However, that makes them educated guesses, with an emphasis on the word guesses.
It’s entirely possible, if not probable, that a deal sponsor will choose to exit the investment at a time other than the target holding period. For example, if an investment has a five-year target holding period and there happens to be a recession going on in five years, the sponsor might feel that it’s in the investors’ best interests to hang on. Conversely, if a renovation project is completed earlier than anticipated and the target cash-out price can be reached ahead of schedule, a sponsor may decide it is in the investors’ best interests to sell early. Also, keep in mind that real estate is an extremely illiquid investment -- and this especially applies to large commercial properties. There is no guarantee that a deal sponsor will be able to sell at an acceptable price exactly when they want to.
The bottom line is that a target holding period for a crowdfunded real estate deal is based on what the sponsor feels would be an appropriate length of time to complete their investment objective and produce the desired level of return. However, there’s absolutely no commitment that they will actually exit the deal at the end of the holding period, so take it with a big grain of salt.