Buy & Hold Strategy in Real Estate

The buy and hold real estate strategy is an investment approach where an investor buys a property and holds onto it for long-term financial profit. The goal is to make gains from property appreciation and rental income, making it a popular alternative to fix and flip.

Historically, all homes appreciate over time, bringing appreciation gains and higher rental incomes along with tax advantages. While there are a few risks such as market downturns and tenant issues, a good strategy can bypass the risks. You just have to understand how it works.

How the Buy and Hold Strategy Works

Buy and hold real estate involves purchasing a property to hold onto it for an extended period (typically years or even decades). Thus, investors can generate income in two ways: either by renting out the property or waiting for it to appreciate before selling. This strategy is effective for building wealth as properties get consistently expensive and there are more renters than ever as a result.

People will always need a roof over their heads, which gives you an opportunity for rental income. This money can be used to cover expenses such as mortgage or property fees. As homes increase in value and your equity builds, the capital appreciates, leading to profit.

Leverage options such as loans and mortgages can be used to buy property with only a fraction of their capital. This serves as a good opportunity to scale your capital. While there is a risk of being affected by interest fluctuations during downturns, a good strategy can optimize your profitability.

Key Benefits of Buy & Hold Investing

The buy-and-hold investment strategy comes with a series of benefits that make it the preferred choice among investors. This includes the following:

1. Passive Income

As long as you hold on to a type of property, you can generate consistent cash flow by renting it out to others. The monthly rent payments can then be used to pay off the expenses, including the mortgage. Once the property has been paid off, it can begin generating true profit from long term real estate investing.

2. Property Appreciation

The value of real estate gradually increases every year, especially if the property is cared for. The market is expected to grow by up to 2.69% by 2029, which means that you are looking at a valuable investment. If you hold onto that property for a couple of years, it can result in significant profit once you sell it.

3. Tax Benefits

When a property is used for real estate investment, you can enjoy a series of tax benefits in the form of deductions and deferrals. Depreciation deductions are among the most convenient, as they reduce your taxable income by penciling in the wear and tear. Interest can also be deducted if you bought your investment property with a mortgage. Last but not least, 1031 exchanges are convenient for deferring your capital gains taxes when you invest them in a similar property.

4. Leverage

The buy-and-hold strategy can also be used as leverage for scaling your investment strategy. With this, you can expand your portfolio faster than relying just on your capital. If you have a proper debt management system in check, you can even buy multiple properties at the same time and increase the ROI of your investments.

5. Equity Growth

With each payment you make to your mortgage, you reduce the balance remaining on the loan. During this time, the value of your property goes higher, which translates into a growth in equity. Financially speaking, equity is your money, which is encapsulated within an asset. You can use these funds as real estate financing options or even sell the property, leaving you with a profit.

Risks to Consider

Buying and holding comes with advantages we can’t help but recognize, but there are a few risks as well, including:

1. Market Fluctuations

For the most part, real estate investments gain value as time goes by. That said, economic downturns can cause these values to go down, leading to a property that’s worth less than what you paid for. Just look at the crash of 2008, which caused home prices to drop by 16%. It eventually recovered within a few years, as it almost always happens with real estate, but it’s a great setback if you don’t plan on holding the property for too long.

2. Tenant Management

For a held property to be successful, you’ll need to have tenants pay the monthly rent. Not only that, they need to do it on time. A late payment on their rent could cause you to miss a mortgage payment, which potentially leads to penalties. Good tenants are also difficult to come by, as property damage could lead to a decreased value of your property. Since each potential tenant has to be closely vetted, finding someone suitable can take more time than you can afford.

3. Maintenance Costs

No matter how fancy the house is, it will always need maintenance. A plumbing issue can appear at any time, or a storm could cause a leak to happen, compromising the health of your roof. To prevent these issues from getting expensive, you need to conduct regular maintenance and catch the problem before it’s too late. The older a piece of property is, the more you have to pay for maintenance.

4. Liquidity Issues

Stocks are liquid assets, which means they can be sold very fast, even within hours. Property is different, as it is a physical asset that requires in-person visiting, documentation, waiting for loan approvals, and more. A house can stay on the market for months before you can sell it, which could make it difficult to get your hands on quick cash. Not to mention that if you’re still paying for it, a potential lack of tenants adds an extra strain to your monthly finances.

5. Opportunity Cost

Buying a house for investment purposes can bring significant returns once the property is paid off, but it’s still loads of money. Those funds will be tied to the property in the long term, limiting other opportunities. You won’t be able to make another high-return investment because everything is in the first one.

How to Choose the Right Property for Buy & Hold

Some properties are meant to be held, whereas others are meant to be flipped. To generate true profit from it, you’ll have to buy the right property. Here are some things to look into.

Location Matters

Properties located in areas where the population is booming, and the job market is on the rise will perform better in the future. Low crime rates can also make a home more appealing, as will good schools and amenities. Tenants want to feel safe in all regards, especially if they are with a family, and most are willing to pay good money for that.

Cash Flow from Rental Property Analysis

Before purchasing a property, you should consider factors such as expected income, property taxes, mortgage payments, maintenance, and a variety of costs. Once you have a good idea of how much you have to pay, it’s time to calculate whether or not you can get profit from the cash flow. You can use the REI Lense rental property cash flow calculator to see if it holds a good potential for cash flow.

Property Condition

The condition of the property can affect whether or not it can turn a profit. For example, a new property will likely need minimal repairs or maintenance during the time you’re holding it. On the other hand, an older property could bring a series of hidden costs in the long run, affecting profitability.

Tenant Demand

If you want to tap into the rental market, you should know for a fact you have a steady flow of tenants. For instance, cities with high-demand universities, job opportunities, and a steady entertainment culture will likely draw a lot of people in. However, if there’s nothing to do, most will not be in a hurry to get a home there.

Before buying a piece of property, take a look at the vacancy rates, along with the price trends. If landlords had to lower their rent prices, then it means they were forced into it by low demand.

Buy & Hold vs. Other Real Estate Strategies

Before determining if buy and hold real estate is the right strategy for you, it’s important to make a comparison between various methods. Each option has its potential and drawbacks, helping you decide your limitations. The table below can help you make an informed decision.

Tips for Successful Buy & Hold Investing

Buy-and-hold real estate can bring multiple benefits to an investor, but only when it’s done right. Here are a few tricks to consider:

• Start with just one house before you scale up your portfolio.
• Always perform a cash flow analysis before you purchase the property.
• Consider employing a property management company to keep costs at a minimum.
• Diversify the portfolio across different locations and property types.
• Stay current with local regulations and market trends.

Buy and hold investing can bring significant profit in the long term, whether or not you decide to sell the house. Start analyzing deals with REI Lense today and make your first investment!