Most real estate investment strategies have either short-term or long-term benefits; however, the buy and hold investment strategy has both! This is just one of the many benefits associated with this particular investment strategy.
With that being said, no one real estate strategy is perfect for every investor, and the buy and hold strategy has its individual drawbacks similar to other real estate investment strategies.
This blog aims to highlight both the advantages and disadvantages of the buy and hold investment strategy.
What is the Buy and Hold Real Estate Investment Strategy?
The buy and hold investment strategy is often referred to as traditional real estate investing and is by far the most common way to invest in real estate. This strategy requires someone to purchase an investment property with the intent of “holding” it and renting it out for many years.
Buy and hold real estate allows you the potential to benefit from both long-term gains in the form of appreciation and short-term monthly cashflow in the form of rental income.
Pros: Why You Should Buy and Hold Real Estate?
Appreciation is the long-term benefit of holding an investment property for many years. According to Zillow, real estate typically appreciates nationally at an average annual rate between 3 and 5 percent.
Just imagine purchasing a rental property for $100,000 in an area that appreciates 4% a year. If you were to hold on to this property for 20 years, the property could be worth up to $219,112.
Monthly cashflow is the short-term benefit for buying the property and renting it out to tenants. Your monthly cashflow is the portion of the rent leftover AFTER the expenses such as reserves, property taxes, and homeowner’s insurance.
But the best part is the fact that you will be able to raise the rent for your property over time due to the constant increase in inflation. In short, you will be making additional cashflow the longer you hold on to the property.
One of the amazing tax benefits of using the buy and hold strategy is depreciation of the property. Depreciation allows you to minimize your tax burden when having an investment property so that you can keep more of your cashflow. Typically, you can depreciate a residential investment property over 27.5 years.
Another tax benefit with this strategy is the use of the 1031 exchange rule at the sale of your investment property. When it is time to sell your buy and hold investment property, and you want to continue investing in real estate, you can use the 1031 exchange rule to defer paying capital gains tax by purchasing another similar property with the profits from the sale of the first.
It is highly recommended that you consult a professional before executing this advanced real estate strategy due to the strict guidelines.
Loan Pay-Down & Equity Build-Up
Assuming you have a mortgage on your investment property, you will have the ability to build-up equity within the property as your tenants continue to pay down your loan. Basically, your tenants will be paying for you to fully own the property over the years.
Cons: What Are the Risks of Buy and Hold Real Estate?
Dealing with Property Vacancies
Having to deal with vacancies at your property can be a financially risky experience for all landlords. If you intend to use the buy and hold investment strategy, you may find your investment property vacant many times over the years that you own it. Therefore, it is extremely important to find ways to mitigate this risk before buying the property.
One thing you can do is invest in areas that have a high supply of renters. So, if and when your property becomes vacant, there will be multiple prospects waiting to live in your property.
Another important risk mitigation tip is to ALWAYS keep a sizable cash reserve for each property. This will help you sleep well at night, just in case your property is vacant for a very long period of time. Regardless, if you are a buy and hold investor or not, every investor should have a cash reserve for 3-6 months of expenses and vacancy.
Potential Bad Tenants that Lead to Evictions
As a landlord, you will always risk acquiring bad tenants who may not pay their rent or damage your property. It is definitely not ideal and could end with you having to evict them.
Evictions can be very expensive and time-consuming. It is best to try to prevent yourself from having to deal with eviction if possible. You can do this by finding good tenants and avoiding the nightmare ones!
Screen your Tenants! Tenant screening will help you find individuals who have a record of being a good tenant or have the potential to be a good tenant. During the tenant screening process, investors should look at:
Current Income Verification
Criminal Background Check
These elements will help you decide whether you should rent your property out to a tenant.
If you are not sure how to effectively screen your tenants, you can always hire a property manager or use one of the many property management software and apps to assist you with the process.
Tenant Proof the Property! If you are planning to buy and hold an investment property, you may experience some property damage by tenants over the years.
To mitigate the risk of property damage from tenants, you should tenant proof your property. Simply choosing sturdy and resilient flooring for the property is a start, but you can also install door stoppers behind doors or use semi-gloss paint for the wall. These are just a few things that will help ensure the property remains in decent condition until you are ready to sell it.
You can also collect a higher security deposit to ensure that you have an upfront fund for any damage done to any of your properties while being rented. If there is damage when the tenants leave, you are able to use those funds to fix them.
Now you understand how powerful the buy and hold real estate investment strategy can be for all investors; you are well equipped with the necessary knowledge you will need to tackle your first buy and hold investment property. Here is a recap of the big four advantages to buy and hold real estate:
Loan Pay-Down & Equity Build-Up
If you would like to learn more about the buy and hold investment strategy—head over to the Zelite app!