When you picture a real estate investor, you might picture someone making big multi-unit deals or a TV star flipping houses and laughing all the way to the bank. Sometimes the best strategy isn’t always the flashiest. Like many investment types, you can get more value by letting your real estate investment grow and knowing the right time to sell.
Table of Contents - Why Buy and Hold Might Be the Strategy for You
- You want a proven method
- You have time to let your investment appreciate
- You know the right market
- You’re prepared to be a landlord
- You expect the unexpected
- You want to build equity fast
- You want to make more investments
- You’re saving for retirement
- You’re open to other prospects
- Property Evaluation for Buy & Hold Rental Properties
Buy and hold doesn’t mean you won’t earn any income until you sell. Most landlords are using the buy and hold strategy to earn passive income until market conditions are prime for selling the property at a profit. Let’s break down the basics of this key real estate investment strategy and why it might be the perfect option for you.
You want a proven method
Investing in real estate sometimes feels risky, especially for beginners. Real estate has proven time and again that it is one of the best asset classes for growing wealth. Buy and hold will yield both short-term and long-term benefits through passive income from renters and eventually selling your property for more than you paid. It is relatively easy to get started in buy and hold real estate investing and the benefits are proven. Flipping is an exciting activity, and real estate investment trusts (REITs) asks you to trust others with your investments. But with buy and hold, you’re in control of your investment.
You have time to let your investment appreciate
The biggest benefit of the buy-and-hold strategy is that your property will appreciate over time. Of course, this isn’t guaranteed, but you can safely assume the value of your property will ultimately trend upwards. Real estate is a strong hedge against inflation because the asset will increase as prices rise, making buy and hold a good way to protect your wealth. There are plenty of resources and tools available that can help you make educated decisions about your property and the market so that you feel secure in your investment.
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You know the right market
Buy and hold is most successful when an investor understands the market and the potential for the home. Great investors have done their research to predict where the market will be in five, ten or twenty years and how that will impact the property’s value. Factors to consider when choosing a strong market include:
- Which companies are based in the area
- Which industries comprise the local economy
- Population changes and projected growth
- Housing affordability
With planning and foresight, you may find yourself holding a property in the hottest new neighbourhood.
You’re prepared to be a landlord
Buy and hold works best when you’re renting your investment property to tenants, creating passive income. However, any landlord would say that the word ‘passive’ is misleading. Landlording requires work, ranging from marketing the property to secure tenants to hiring professionals for maintenance and repair. You’ll have to sink some money into your rental property and spend time ensuring everything is running smoothly. If you can afford it, you can always hire a property manager to handle these tasks for you.
The good news is that rents rarely decrease. You can expect rent to increase on your investment property year after year. You’ve locked in the mortgage and interest rate for your home, but you can raise the amount you bring in overtime to increase your profit margin. Additionally, anything you spend on your rental property can be deducted on your taxes.
You expect the unexpected
The income you receive beyond your mortgage payment is a nice perk of owning an investment property. But if you’re spending those profits as fast as they’re coming, you’re in for a big surprise when the furnace breaks or the roof needs replacing. Landlords need to not only handle the home and the tenants but also be able to pay for the repairs. This requires good financial discipline to keep cash on hand for any emergencies.
You want to build equity fast
While you’ll finance your investment property through bank loans, you’ll build equity quickly through income from your tenants. You can apply the rental income towards your mortgage payments, paying down the principal on your mortgage. For every year you hold the property, the amortization of the principal increases. Eventually, you’re saving thousands of dollars on your loan each year until you outright own your investment property.
You want to make more investments
Unlike other assets, you can leverage real estate to obtain financing for other investments, allowing you to earn even more from your initial investment. You can’t secure a high line of credit against the cash in your bank account, but you can use your buy and hold property to obtain financing for additional investments. If you’re holding other investment properties, you have even more assets to leverage. Additionally, any appreciation on the property increases your return on investment because the entire asset appreciated, not just the down payment.
You’re saving for retirement
Everyone should be saving for retirement, but if you’re truly in it for the long haul, it’s possible to retire on the income generated from your rental property. Investors hold some properties for 20 to 30 years and end up with significant additional wealth. Couple that with the leverage to buy more properties and the amount of savings you have when it’s time to retire has grown exponentially. Once the mortgage is paid off on those investment properties, rental income can supplement any other retirement income.
You’re open to other prospects
The purpose of buy and hold is to hold onto the property, but there’s no official time limit. You can hold the property for only a year (or less) if you feel it makes the most sense for your financial strategy. Ultimately, you are in control of your investment and can decide when the right time to sell your property is to maximize the return on your investment.
Buy and hold is a tried-and-true real estate investment method. Adding a buy and hold property – or several – to your portfolio will do wonders for your financial prospects. You may find it perfectly fits both your personality and your investing goals.
Property Evaluation for Buy & Hold Rental Properties
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