Benefits Of The Buy And Hold StrategyBy JD Esajian on July 25, 2018
It wasn’t that long ago when buy and hold was the dominate method of real estate investing. Investors built their portfolios on rental properties with only the occasional house flip sprinkled in. Over the years this type of investing has taken a back burner to the dramatic rise in house flips and rehabs. The biggest, and most obvious, difference is the change of timeframe needed to see a return on your investment. With a rental property you can see monthly returns, but the primary goal is appreciation and long-term potential. With the right rental property you can set yourself, and your family, up nicely years down the road. Five, ten and even twenty years often comes much quicker than we realize. Here are five reasons to consider a buy and hold property strategy.
- Long term appreciation. Realizing a return with a rental property investment takes patience. With a rehab property you can get in and out often in just a few months and move on to the next property. The whole mentality with a buy and hold rental requires a different perspective. The end goal with a rental is to see a return on investment at some point in the future. There is never an appreciation guarantee with any property, but historical figures show that prices tend to go up. All the time you own the property you will have tenants paying down your mortgage. If you decide to take some, or all, of the residual cash flow and pay down the mortgage you will greatly accelerate how quickly the loan is paid off. Once the loan is paid all the rent that comes in becomes profit. This money can act as a form of retirement income or a full-time salary. It may take some time to get to this point, but when you do you will realize the power of a quality rental.
- Tax benefits. The government affords rental property owners with a handful of important tax write offs and benefits. It is not uncommon for a rental owner to break even in terms of cash flow but realize a huge tax break at the end of the year. This tax benefit often makes owning a rental property worth it. Between depreciation and write offs alone it is not a stretch to see a tax return changed by thousands of dollars strictly because of a rental property. There are also tax benefits based on the length of ownership, which can change your capital gains tax rate which has a big impact on bottom line. Always talk to your accountant prior to making any investment purchase to get an idea of exactly how it benefits you and your current situation.
- Cash flow. The idea of getting some form of mailbox money every month is very appealing. There is no question that there will be times when owning a rental property can feel like a mistake. With a bad tenant or lingering property issues you can second guess your decision. However, these times do not outweigh the many months you will be happy with your position. With the right rental property you will see residual income every month. This extra money is called cash flow and is one of the main benefits of rental property ownership. Depending on the location, amenities, expenses and demand for the property your cash flow can easily reach hundreds of dollars month. As you pay down your mortgage or reduce your expenses this number will only grow. With your cash flow you are not restricted in how you can use it. Paying down your loan is a good idea, but you can use your funds any way you like. If you want to pay off expenses or simply add to your savings there is nothing stopping you from doing so.
- Minimal cost of ownership. Real estate is one of the few investments where you can put down a portion of the costs but own 100% of the investment. Depending on the exact number of units you only need 20-30% of the purchase price to own the property. Once you take ownership if the property goes up in value you reap the benefits. The point is that it doesn’t cost and arm and leg to build your portfolio. There are many good investment properties that can be bought for less than $100,000. You may not break the bank with these on a monthly basis, but over time they should appreciate, and you will be happy with your return.
- Increased options. Not every rental property owner wants to hold the property until it is paid off. The longer you own the property the more options you have. If you see the value has appreciated over the years and you want to sell there is nothing stopping you. You can also take advantage of value increases by adding a second mortgage or seeking a cash out refinance. The bottom line is that there are several things you can do with a rental property besides simple holding on the them forever. These options allow you to keep building your portfolio, often times using the funds from one sale to the next.
Rental properties and cash flow are still the backbone of any investment portfolio. It may not be the quickest way to generate income, but it is often one of the most reliable.