What Are the Fundamentals of Buy and Hold Real Estate Investing

Investors can become overwhelmed when considering the many ways to invest in real estate. Some will prefer wholesale or flip distressed houses, while many, especially first-time investors, prefer rental properties, also referred to as buy-and-hold. Visit here for rules associated with this strategy.

Buy-and-hold differs from the other options because investors will buy residential properties to then hold over the long term. The owner will search for prospective tenants to rent these spaces using the rent to pay the mortgage. 

After reducing the balance on the house loan, the property can either be sold for profit or continue to hold between “5 and 30 years” for a steady cash flow each month. The properties can include single-family houses, duplexes/triplexes or other multi-family residential spaces, or apartment complexes.

What Is Buy and Hold Real Estate Investing

When investing in real estate, the buy-and-sell strategy involves renting residential spaces, collecting the rent to reduce the house loan balance, and then either selling for a profit or holding for as long as 30 years for a steady cash flow.

If the property is left vacant for an extended period, the investor has the risk of losing the profit, particularly if the property depreciates from disrepair. The rental income should exceed upfront and recurring expenses, including the house loan, in order to see a positive monthly cash flow.

This is how the investor is able to profit in either a short-term or long-term scenario. In the short term, they’re making profits from rent payments, and in the long term, the mortgage balance is reduced, and the property can be sold for a profit. 

Learn reasons to follow this strategy at https://www.linkedin.com/pulse/reasons-buy-hold-real-estate-property-long-term-kumar-manish-mdutf?, and then follow here for additional reasons investors choose buy-and-hold real estate investments.

The income

Rental income should be enough to cover all ownership costs with a positive cash flow, allowing for a steady profit. This strategy provides a predictable monthly income since the real estate industry is less risky and volatile than the financial markets. 

As long as the property value continues to rise, the rental income will deliver this stable cash flow for as long as the property is held.  

Something to remember as a landlord is that the income from rental properties isn’t necessarily passive. You will need to collect payments, communicate with the tenants, handle rental marketing, and perform repairs/maintenance.

You can hire a management company to handle these day-to-day responsibilities. That will leave you with a mostly passive income. Your obligation will be to ensure everything runs as it should, requiring minimal time and effort.

The leverage

Any investor with a stellar financial and credit profile who can afford the required down payment for properties can purchase any real estate sold in the United States. You not only can own these residential spaces, but you’re entitled to rent the assets.

The objective is to find consistently paying tenants to avoid being caught without income and lost profits. You can rent the properties for a price that will cover all of your ownership costs as a buy-and-hold investor. You also have the advantage of using this real estate investment when financing future property purchases.

Lenders want to see a stable financial standing and buy-and-hold investments held over the long term show a positive status.

The tax incentives

The taxes owed from the depreciation of residential spaces can be minimized as you perform the necessary repairs/maintenance. Home improvements for buy-and-hold investments are tax deductible for what’s considered its “useful life.”

With residential housing, this is roughly “28 years.” Here are more deductions you can take as an investor.

1. HOA fees
2. Property taxes
3. Maintenance/cleaning/repairs
4. Mortgage interest
5. Travel
6. Property insurance
7. Business/legal costs and office space
8. Management costs
9. Marketing

With the grand total, owners can save “tens of thousands” from taxes. The recommendation for property owners is to use a professional tax accountant’s service to guide them through depreciation and what tax deductions they can take for the property.

The appreciation

 The objective with residential real estate property is that it continues to rise in value as time passes. Many investors incorporate appreciation into their long-term business strategy. 

In this scenario quoted from Hard Money Co., (quote) “if you purchased a property in Jersey in 2013 for $170,000 and held it for roughly nine years with an annual average appreciation rate of 6.24 percent, the value now would be over $300,000.” (end quote) That means a net profit of approximately $140,000, nearly double the initial price point.

The recommendation is to use a “1031 exchange” to put the proceeds in a “like-kind property” in order to defer capital gains taxes. Even if you intend to hold onto the property for an extended time, you can leverage the home equity gain to obtain financing to handle renovations or invest further in other assets.

The wealth

Investors are able to accumulate/preserve wealth when they have a high net worth from real estate and other investments. While cash value decreases with inflation, the opposite is true for real estate since property value increases with inflation.

Those with substantial real estate wealth continue investing to benefit the next generation. This is referenced as a “stepped-up basis,” which considers the fair market property value for the heir from the day the benefactor passes away. 

If a benefactor passes 20 years ago, leaving behind a property valued at “$50,000,” the fair market property value becomes current. 

The heir, however, will have capital gains taxes when the property is sold if they fail to use a 1031 exchange. You have the potential to eliminate this tax entirely with passed-down housing if you handle it properly.

Final Thought

The buy-and-hold strategy in real estate investing boasts a safe, stable method of establishing wealth to pass on to heirs. The recommendation is not to expect riches immediately. 

You’ll not only want to do due diligence in researching to gain insight into the strategy, but it’s important to have a professional team, like a qualified tax accountant, guiding you along the way.