The best way to begin your investing journey in the real estate market is with one of the best investment strategies. The buy and hold real estate strategy is the high-grade long-term investment plan through which you can achieve both short-term gains and long-term appreciation. What makes the buy and hold strategy appealing to beginners is that it generates a steady passive income. So, let’s have a vivid idea regarding the benefits of buy-and-hold investment.
Benefits of Buy and hold real estate strategy
Buy and hold is the most popular investment strategy in real estate. As the name denotes, you buy a property, hold it for a long period typically for five years or more. Furthermore, you sell the property. The benefits can be both short-term by passive income and long-term by rental appreciation.
Determining the ideal buy and hold property may take some time and resources. But once you do, consider high-quality tenants and hire the correct property management company. Then you can relax and wait for the steady money. Other advantages of buy-and-hold property, aside from constant rental income, are:
1. High leverage:
Leverage is the term that denotes the ability to finance a buy-and-hold property with someone else’s money. You can own a property of $1million just by giving $200,000 from your pocket. And the rest were borrowed in the form of real estate secured loans, popularly known as a mortgage. This factor triggers the high return on investment also.
2. Rental income:
The monthly rental income is the indispensable reason property investors adopt a buy-and-hold real estate investing plan. Other references of revenue could include vending machines, laundry, and parking money. This renders a source of passive income. If you have good tenants then the upkeep of the property becomes less. You can also hire a property manager to take hold of the issues of the buy-and-hold property.
Read Lilypads’ article on real estate passive income here.
3. Tax deductions:
Another crucial benefit of buy and hold is the tax deductions. While running a rental property there are several expenses that an investor comes across. The IRS allows you to take tax deductions for any legitimate expenses. For instance, you can deduct your mortgage interest payments, property taxes, management fees, some closing costs, legal costs, etc.
As the real estate investors hold the property for a long period, they’ll pay the lower capital gains tax rate. However, your usual income tax rate is much higher when you sell.
Bank loans are commonly used to finance investment properties. The equity in your property normally grows each month as the collected rent matches the mortgage payments. Tenants may potentially cover your debt repayments by paying rents on time (which are also tax-deductible). Therefore, finding decent tenants is crucial.
5. A buy and hold real estate strategy generates passive source of income:
Another crucial benefit of buy and hold is the generation of passive cash flow. If your property is favored with a reliable long-term tenant then you won’t have to bother about your property. The tenant will manage the entire upkeep of the property. And also, you can appoint a property manager to delegate the work of your property. Hence, you remain stress-free only counting your money.
Whenever you purchase an investment property for buy and hold you hold the property for a long period of time. Hence, the property appreciates over time. And if the property is located at a desirable location then also the value rises. Your overtime mortgage loses its value in the case of long-term investments. Since the mortgage value is constantly paid with the monthly rent. Usually, there is no actual cumulation of appreciation but a property appreciates between 3 to 5%. Thus, with this benefit, you have the opportunity to earn a monthly cash flow while raising the appreciation of the property.
7. Increase in rent:
Every year, the rent increases. So, if you tend to buy and hold real estate then it’s obvious that you raise the rent over years. Thus, it gives an opportunity to increase your cash flow over years.
8. Impact of inflation on a buy and hold real estate strategy:
Real estate also has to face the impacts of inflation. While you invest in real estate you have to subtract the inflation to get the actual return. But with this buy and hold strategy you don’t have to bother with inflation since the rents increase with inflation. Sometimes, the proportion of hike in rent is more than the inflation and thus adjusting the inflation over years.
Read Lilypads’ article on the impact of inflation on real estate here.
9. Retirement plan:
Your benefits of buy and hold also include the retirement advantages. Your rental income can be a good source for retirement. With a good plan to invest in real estate, you can own 1 to 2 properties and trade up with 1031 exchanges. You give the investment property for rent thus ensuring a source of passive income. People generally sell their stocks and bonds during retirement to cope with their needs. But with rental properties, you don’t need to sell them to earn. Because rental properties are a source of generating income for your entire life.
Read Lilypads’ article on 1031 exchanges here.
10. Multiple exit strategies to a buy and hold real estate strategy:
When you acquire a rental property, you mitigate your investment hazards. There are various ways to sell or access funds from your rental investment to enhance your profits. You can also use one of your properties for personal uses besides selling, refinancing, leasing, or selling it on seller financing terms. You can even lease your property to a tenant-buyer.
Risks of the Buy and Hold Real Estate Strategy
A buy-and-hold real estate strategy, like any other sort of investing, comes with its own set of hazards. Make sure you understand the hazards connected with rental properties – and how to mitigate them – before committing money to any property purchase.
1. Defaults in rent:
Rent default is one of the most terrible risks for the investor. If your tenant originates any default to your property before leaving then you have to bear all the expenses. So, the most useful way to mitigate the hazard is by preparing an emergency fund beforehand. Furthermore, you can impose thorough tenant screening, buying rent default insurances to mitigate the risk.
You have to be cautious about not paying the mortgage loan from your personal account. Hence, prepare an emergency fund with the rental income from the beginning. Your hold strategy covers the repairs, insurances, taxes, and also mortgage payment if you interact with rent default by the emergency fund.
Vacancies are another hazard in buy and hold which can be controlled by prevention. First of all, you have to choose your property in a locality with high demand. Next, you have to consider the vacancy rate while culminating your cash flow in the rental property calculator. Hence, you have to set a property reserve for paying the mortgage when you face a vacancy.
3. Property damage:
Another challenge that investors have to face is property damage. So, it is important that screen your tenants properly. Therefore, you can also ask for a security deposit from the tenants that you may refund after you assess the condition of the property when they leave. Furthermore, you can invest tactfully in the materials of the property. For instance, without choosing fancy tiles you can install luxury vinyl tiles that look aesthetic and are durable as well. Thus, prevention can mitigate this risk also.
The Lilypads Bottomline
Real estate investing is a profitable sector if everything goes well. Buy and hold strategy is among those strategies which deliver exceptional returns. It’s a great mode of owning a property and making money simultaneously. Buy and hold also enhance your investment portfolio. But it does come with some hazards. So, be sure to conduct proper due diligence before putting your eggs into this basket.