There are several ways to approach a real estate investment. You can purchase a property, spruce it up, and then sell it at a profit. You can also purchase a property, rent it out, and consider it as a source of passive income over a period of time. And then there’s the more popular approach – the “buy and hold”.
In real estate investing, the “buy and hold” strategy enables you to earn long-term real estate returns. As the name suggests, it allows you to purchase a residential property and rent it out as you hold onto it. Instead of “flipping” the house instantly, it contemplates spreading out the return on investment (ROI) over several years.
This strategy is one of the easiest strategies applied by property owners and property management companies. If you’re interested in buy-and-hold real estate, we’ve outlined its basics below.
What is buy and hold in real estate?
Buy and hold in real estate is when an investor purchases a residential property that they plan to hold onto over several years. As they hold onto it, its value increases and the investor benefits from a stable cash flow in the form of rental income.
If it sounds straightforward, that’s because it is. The buy-and-hold strategy is the easiest way to get started in real estate investing, and it’s a surefire way to generate more money to purchase more rental properties. In other words, it’s a great way to grow your wealth.
Aside from being profitable, a buy-and-hold property gives you the time to navigate the industry. If you’re a first-time landlord, a long-term investment will allow you to get the lay of the land before you go and find other properties to buy.
For these reasons, it’s no surprise that seasoned investors and property management agents would suggest buying a property, renting it out, and then selling it eventually. Below, we’ll take a look at the benefits of a buy-and-hold.
What are the benefits of a buy-and-hold?
Investors love the buy-and-hold investment option as it provides passive income over a period of time. However, it’s important to note that for buy-and-hold to be as profitable as possible, you should hold onto your investment for at least ten years. By treating it as a long-term investment, you’ll be able to give the property time to appreciate or increase in value.
#1 Stable income
One of the benefits of a buy-and-hold is that it offers a stable income. It also lets you calculate how much you’ll likely make prior to purchasing the property. For example, a property management company can run the numbers by conducting a market analysis so you’ll know the kind of return you’ll expect. While the rental income can vary due to vacancies, in general, the average returns can be predicted.
#2 Property values
Again, if you’re considering this strategy, you should hold onto the property for a long time. The longer you hold, the higher your returns. This is because the buy-and-hold’s value increases over time. If you were to purchase a property today and sell it two years later, you wouldn’t be able to take full advantage of its potential to make more money, particularly if it’s in a rapidly developing market.
#3 Tax deductions
Another advantage of the buy-and-hold strategy is that it allows you to write off specific expenses from your taxes. You can deduct the costs of repairs and maintenance, property management firm fees, and more. In general, you can deduct every cost involved in managing your rental property – even your mortgage payments! You can even deduct depreciation.
For a full breakdown of tax deductions, you can benefit from hiring an expert property management company with an in-house team of accountants, such as Luxury Property Care.
With a buy-and-hold, you’ll be able to buy additional investments with another person’s money (i.e. your tenant’s). In short, you can use the rent that you collect from your tenant each month to pay for another property that you can rent out.
What are the cons of a buy-and-hold?
Not all investors are convinced that the buy-and-hold option is the best. Here are some of the cons to consider:
For your long-term investment to make money, you need to make sure that it’s vacant at all times. If you’re unable to find tenants for your buy-and-hold, you run the risk of losing money since you won’t be exempt from paying your expenses. That’s why it’s a wise idea to hire a property management company that can help you avoid vacancies.
Compared to “flipping” a home, a buy-and-hold comes with more responsibilities that a new property owner may not be prepared to deal with. Running a long-term residential rental can be time-consuming, tedious, and demanding. If you’re self-managing your property, you’ll become burnt out because of the endless tasks on your to-do list, like conducting tenants screenings, scheduling inspections, coordinating repairs, and so on.
#3 Legal concerns
There are specific laws that govern the management of buy-and-hold investments and these laws vary by state. Ill-prepared property managers are at risk of finding themselves in legal trouble for even “minor” violations. It’s very important to gain a general understanding of the relevant laws that apply to your particular property, otherwise, you risk ruining your real estate business before it can take off.
This, of course, can be mitigated by working with a property management company that’s familiar with the market’s specific laws.
Should you invest in a buy-and-hold?
If you’re new to real estate investing, a buy-and-hold is the best way to “dip your toes” into how the market works. It’s also the safest kind of investment since it lets you predict the risk and rate of return from the onset.
Interested in the buy-and-hold strategy? Get in touch with Luxury Property Care’s experts today. Our team will be by your side to advise you every step of the way. With our top-rated investment services, we’ll help you spot properties with potential so that you can ensure that your investment is worthwhile.