In real estate investment, the buy-and-hold approach has long been a reliable wealth-building tool, allowing landlords to pass down wealth to the next generation and beyond. If you want to establish a legacy, owning even one investment property can grow into an extensive real estate portfolio.
Beginners who want to use this real estate investing strategy must know the basics before proceeding. How can you hold properties to your advantage, and how a property management company can help you stay on top of tasks? Let’s dive into what buy-and-hold real estate is, its pros and cons, and other vital bits of info.
What is buy-and-hold investing?
Buy and hold is a long-term real estate investment strategy in which you purchase real estate, intending to keep it for an extended period. This isn’t a short-term fix-and-flip project but a long-term investment method that allows real estate investors to profit off rental income.
Buy-and-hold investors may purchase single-family homes, multi-family residences, or commercial properties to generate rental income. These properties also appreciate over time, adding to the profits. The seasoned buy-and-hold investor takes advantage of market cycles to buy low, renovate and manage properties wisely, and sell high after the holding period.
This type of investment requires significant commitment. You must be on top of managing your properties, communicate with renters, and perform ongoing management responsibilities. If you like the idea of holding properties but not being the go-to contact for every issue, hiring a property manager can significantly free your time.
The Benefits of buy-And-Hold Real Estate Investing
The buy-and-hold strategy has been a favorite method to generate monthly cash flow across cultures, generations, and time. When done correctly, it offers some substantial benefits.
- Potential to profit significantly: When you buy low, renovate wisely, maintain occupancy, and manage the rental well, you can get an excellent return on investment, especially when it’s time to sell and the home price has appreciated.
- More income minus the tax hike: Buy-and-hold real estate investing is a great way to generate passive income. Regular rental payments from tenants can be taxed at a lower rate regardless of your total income, providing consistent income without the pain of higher tax rates.
- Financially secure golden years: While pensions and social security remain frozen in time, property taxes and the cost of living don’t. Having a rental property to generate consistent income that rises with rent rates and inflation offers excellent financial protection. It’s a great way to remain financially stable in your old age — no part-time job required!
- Rental tax breaks: This strategy can provide some fantastic tax deductions and tax benefits. A professional CPA will ensure that you don’t miss any deductions or capital gains taxes deferments, increasing your bottom line.
- Backup house: Let’s be honest; sometimes, it’s just nice to have a backup for everything. Nobody knows how life will go, so owning more than one property can give you peace of mind that you will have a home no matter what.
The Risks of Buy-And-Hold Real Estate Investing
Any investment method has some drawbacks. Buy-and-hold real estate investing isn’t immune to these pitfalls. If you pick a property or tenant haphazardly, this investment strategy can be risky.
- Beginners are more likely to put their finances on the line. Buy-and-hold investment requires a significant upfront investment. Whether you pay all cash or take out a second mortgage, beginners often feel like getting the first property takes a fair measure of financial guts. However, working with an excellent lender and financial advisor can help you make the best choices to make you as comfortable as possible.
- Risk of vacancy or damage: Tenants are humans, which means human error is always on the table. Sometimes tenants may lose their source of income mid-lease, and some improperly vetted tenants may damage the rental. Though security deposits account for these risks, sometimes the costs exceed the deposit. This puts a strain on your cash flow.
- Not all markets are the same: Buy-and-hold investors can’t rely on general inflation or national market trends to determine if a property is worth holding. They must work with a realtor who understands local real estate markets and can advise them on what’s on the rise and what’s in decline.
- Significant learning curve: Experts can more easily find investment opportunities and can comfortably take more risks. However, everyone has their day one, and as you get more comfortable and knowledgeable with this investment method, you can also master the housing market and know what home values and investment types are right for you!
You Decide: is Buy and Hold Right For You?
Buy-and-hold real estate investing can be a great way to generate passive income and build up long-term wealth. However, it requires substantial upfront capital or loan payments, and there are always risks involved with property conditions, tenant behavior, and more.
If you want to discuss this investment method with a Marketplace Homes real estate agent, contact us today by phone or email. We’d be glad to share how we help investors at all levels of expertise — whether it’s your first time considering it or your 50th rental acquisition!
Alicia Persson is the real estate content writer for Marketplace Homes. She has several years of experience working in real estate teams that specialized in investments and property management. Before she joined MH, she was a freelance writer for 7 years, providing real estate and home living content for boutique digital marketing agencies.
She is a proud University of Virginia master’s graduate and enjoyed her undergraduate years at the University of Mary Washington. When she is not writing, she plays keytar and does female lead vocals in a local 90’s band or spends time with her amazing family.