BENEFITS OF BUY AND HOLD REAL ESTATE INVESTING
1. Consistent Income
Rents from tenants pay your mortgage and still leave you with cash in hand as a buy and hold investor. Buy and hold real estate investing offers predictable cash flow since real estate markets aren’t as volatile as the stock market. And you can expect payouts from rents to continue throughout the duration of holding.
However, buy and hold real estate investing isn’t always passive. As a landlord, you’ll be responsible for handling property marketing, tenant vetting, rent collection and property maintenance on your own, unless you hire a property management company.
2. Leverage
If you have stellar credit and can afford a 20% down payment, you can easily own any piece of for-sale real estate in the US. The best part is that you not only get to own that asset but also the rental payments from that asset.
If you fix up the property and find paying tenants, their rent payments go toward paying off your loan. Buy and hold real estate investing offers that unfair advantage.
Moreover, this piece of real estate can be used to get financing for other projects. This is because long term buy and hold investments add stable net worth that lenders want to see.
3. Tax Benefits
You can minimize the taxes you owe through depreciation. With depreciation, you can deduct the cost of improving the property over its useful life. On residential properties, that’s usually 27.5 years. Other expense deductions include:
- Property taxes
- Mortgage interest payments
- Property insurance
- Management fees
- Advertising
- Office space, legal and business equipment
- Travel costs
- Cleaning and maintenance costs
- HOA dues
All of these can add up to tens of thousands in tax savings. A qualified tax accountant can help you determine how to use depreciation and what expenses can be deducted for your rental property.
4. Home Value Appreciation
Real estate, for the most part, increases in value over time. This is why investors have always used appreciation as a long term exit strategy.
Let’s say you bought a property in Jersey City, NJ, for $170,000 in 2013. If you held it till 2022, at an average annual appreciation rate of 6.24%, the property would be worth $311,407 today. This means that when you sell, you’d net $141,407 (almost double the starting price) in profits. You could also defer capital gains taxes if you put the proceeds from your sale into a like-kind property via a 1031 exchange.
Even if you aren’t planning to sell, the gain in home equity can be leveraged to get financing for other investment opportunities or renovation projects.
5. Generational Wealth
High-net-worth investors typically invest in real estate since it enables them to preserve and accumulate wealth. Cash loses some of its value over time through inflation. But inflation actually has the opposite effect on real estate since the value of homes rises with inflation.
Moreover, the ultra wealthy invest in real estate so their heirs can benefit from what is called the stepped up basis. Stepped up basis is the fair market value of a passed down property on the day the benefactor dies. So, for a property worth $50,000 in 2010, if the benefactor dies, the stepped up basis becomes the current fair market value of the property. Usually, upon the sale of the property, without using a 1031 exchange, you’re expected to pay a capital gains tax. With the stepped up basis, you can eliminate this tax altogether for inherited properties.
SHORT TERM BUY AND HOLD VS LONG TERM BUY AND HOLD
The difference between short term and long term buy and hold is obvious – the holding period. With short term buy and hold, you generally do everything you want to do with the property within 5 years. That is, you buy and fix, bring in new tenants, improve cash flow and then sell – all within 5 years. You can pull this off easily with a poorly managed property that already has tenants in place.
However, since you’ll be spending a lot of money and making significant changes within a short period, short term buy and hold might not deliver as much cash flow as LTBH.
The majority of real estate investors skew towards long term buy and hold. This is because committing for the long term allows them to weather fluctuations in cash flow and periods of widespread volatility. With the long term buy and hold strategy, an investor holds on to a property for a period of 5-10 years before selling. Over time, since real estate runs in cycles, investors benefit from rent increases and higher appreciation rates.