What is Buy and Hold Real Estate?
Buy and hold real estate is one of the most common strategies used in real estate investing for both seasoned investors and first time property investors alike. In a buy and hold strategy, an investor will purchase a property, rent it out and hold it for a while (typically five or more years). This allows the investor to receive both monthly cash flow while it’s rented out and future appreciation when they sell.
Despite horror stories of the most horrible tenants, with the right screening and management in place, buy and holds have numerous benefits.
Benefits of Buy and Hold Real Estate
1. Cash Flow (Monthly income)
Cash flow is the life blood of the buy and hold strategy. From a little extra wiggle room in your monthly budget, to completely replacing your employment income, the benefits of another monthly income stream are immeasurable. In addition to rental income, your property may generate revenue from parking, laundry and/or vending.
2. Tax Advantages
When investing in real estate for the long term, a real estate investor is granted tax advantages in addition to tax deductions that protect his/her income, which leads to making and saving more money. This is another incentive that attracts property investors to buy and hold real estate. Depending on provincial and/or federal regulations, you may be able to deduct mortgage interest, property taxes, depreciation, maintenance and repair expenses, legal and accounting expenses, as well as travel and educational expenses in relation to your real estate investments.
3. Building Equity
Building equity with other peoples’ money is one of the best parts of the buy and hold strategy. As you pay down your mortgage with the rental income each month, you build equity in the property with no additional input from you.
While properties can fluctuate in value, historically properties in good condition in good areas will steadily go up in value over a long period of time. The key here is buying in a good location – those areas that have a high demand for and low supply of rental units.
There is a direct positive relationship between real estate investing and inflation. Inflation happens when there is an increase in the cost of living. Since rental rates keep pace with inflation, the prices of rental properties rise when inflation occurs. This is beneficial to buy and hold investors because:
- Inflation allows property owners to raise rents
- The value of the property will go up as the rental income goes up
- Inflation doesn’t affect mortgage payments – they actually decrease as inflation increases.
For these reasons alone, buy and hold real estate should be a part of every real estate investor’s portfolio. There is one other major benefit that should be mentioned briefly.
Bonus Benefit: Leverage
Because you can borrow money to buy rental properties, you are able to multiply how many properties you can buy. By using the equity in your properties to purchase more rental properties, you can build a decent-sized portfolio with only a modest down-payment. This is the basis of the BRRRR Strategy, which we have a whole article on over here.
Types of Buy and Hold Real Estate:
Turnkey real estate: purchase a move in ready property (with or without existing tenants and/or a property management company).
Multifamily Property: These are your traditional duplexes, triplexes, and quadplexes (2-4+ units)that you rent out for rental income.
Apartment building: Typically 5+ units that creates monthly income, along with other income like laundry and parking revenue.
Vacation Property Rental: often used to enjoy a few weeks of vacation themselves, investors will often rent out vacation properties to offset the cost of ownership.
Should You Purchase a Buy and Hold Investment?
As with all real estate investment purchases, whether or not you should purchase a buy and hold investment comes down to your goals. When done correctly, a buy and hold strategy can build your wealth exponentially. Because of this, it is the preferred strategy for both seasoned investors as well as first time real estate investors.
When you are deciding whether buy and hold real estate is right for you,consider these questions:
- Are rental properties performing well in the area you are considering?
- Do you want something turn-key or do you want to renovate?
- How involved do you want to be in the day to day operation of it?
- Do you want to manage it yourself or will you hire a property management company?
- How much time do you have to dedicate to it?
Building a Portfolio for your Retirement
Adding a buy and hold property to your portfolio each year can not only increase your cash flow now, but can set you up for a comfortable retirement. By paying off any financing or loans you may have on the properties before you retire, you give yourself the option to either live off the recurring monthly cash flow, or you can decide to sell a property off every 3-5 years to finance your lifestyle.
In addition, should you choose to keep the properties, you can build a family legacy of wealth.