The booming real estate industry holds many potential investment options. All the investment strategies available make it all the more lucrative. One of the best strategies in the industry has been buy and hold real estate investing.
The decision to buy and hold is often held against flipping properties. What exactly is buy and hold investing? How does it compare to flipping? How can you make the most out of this investment option? We help you explore the various buy and hold options, how to maximize them, and how to finance the buy and hold investment.
What is buy and hold investing?
Real estate investors know when to buy low to make more money. The buy and hold strategy is no different. Buy and hold investing is considered a long-term investment strategy. When making a buy and hold investment, you sell at a higher price once the property you bought increases in value.
Buy and hold real estate investing is done with a clear goal after evaluating the existing market. The fair market value is used as an indicator for when to buy and sell. Apart from being an indicator for buy and hold investing, fair market value influences the decision to flip or buy and hold.
Flipping is a short-term real estate investment. Investors buy houses at lower prices and sell them at a profit. To be considered flipping, the home must be purchased with the intention of quickly reselling.
One driving factor that pushes investors to flipping property is that it has a fast turnaround time and avoids the hassles that come with maintaining the property and finding tenants. On the other hand, investors lean towards buy and hold investing because of the associated relatively lower taxes and passive monthly income in the form of rent.
Benefits of Buy and Hold Real Estate Investing
Passive income flow is considered one of the elements of financial freedom. Buy and hold investing presents an option to attaining financial freedom through rental income. Simply put, the buy and hold real estate strategy is a gift that keeps giving. Here are some of the returns of buy and hold real estate investing:
Passive Income
Buy and hold investment can act as a long-term and short-term investment. By renting out the property, you can create a passive income flow. Once the maintenance expenses are deducted from the rent, what’s left is the positive cash flow. On the other hand, negative cash flow occurs when the expenses exceed the passive income.
When rental properties are in high demand, buy and hold investing can be a reliable positive cash flow. To that end, selecting the right tenants is an excellent way to maximize a positive cash flow when using the buy and hold strategy.
Appreciation of Assets
Appreciation in the value of the property is a long-term benefit of buy and hold investments. Real estate appreciation refers to the rise in fair market value with time. While the fair market value fluctuates over the years, real estate’s value almost always appreciates in the long run. The main determinant of appreciation is location. Location influences the school district, demand, supply, and economy—the main drivers of real estate appreciation.
Taxes Deductions
As a buy and hold investor, you will benefit from various tax benefits, including tax deductions. The deductions allow you to save extra money. Tax benefits are hinged on local and state regulations. Consult with a specialist to maximize these tax benefits.
Anti-recession asset
Recession is any investor’s nightmare. It is characterized by low economic activity in a region. The good news is that buy and hold assets provide a solution to recession. For instance, if you were to buy and flip a property during the recession, you would likely fetch lower profits or turn a loss.
Owning a property that generates positive income can help you weather recessions. Even with the covid-19 pandemic, the buy and hold investing strategy is still profitable.
Multiple Investment Options
Buy and hold assets are not tied to residential estates. The strategy presents many investment properties to choose from. Because of the flexible investment option, you don’t have to stretch your budget or skills too thin. Despite single-family homes being common, vacation properties and multiple-family homes can be added to the buy and hold investment pot as well.
The Risks Associated With Buy and Hold Real Estate Investing
Before settling on the buy and hold real estate strategy, it’s essential to know the risks the option poses. Like any other investment, the risks have to outweigh the rewards. Here are some of the risks associated with buy and hold real estate investing.
Rent Defaulters
Ask any landlord what they fear the most, and they would answer “defaulting tenants.” Going in, you should keep in mind that rent defaults are an inherent risk to all landlords. What comes next is a lengthy and expensive eviction process. Additionally, the tenant might leave the space in bad shape before vacating. Fortunately, the problem can be prevented before it ever comes to that point.
As a landlord, mitigating the risks includes aggressive tenant selection, default rent insurance, and investing in high-demand areas. By screening the tenants before giving them a key, you cut down the eviction risk by up to 95%.
Negative cash flow
To avoid paying your mortgage from your bank account, set aside an emergency fund to keep you afloat when expenses exceed the rent cash flow circulation. The reserve can be drawn from a portion of the rental cash flow.
Property damage
Property damage poses a risk for buy and hold investments. Again, prevention helps mitigate the risk. You can screen your tenants by asking their previous landlords how they maintained their previous homes. You can set a high security deposit to filter reliable tenants. Reliable tenants do not object heavily, since they know they will get their deposit back.
With your newfound knowledge, you can now make the next step, financing your buy and hold investment. Titan Funding provides reliable and flexible loans to help with your buy and hold investing. Becoming a landlord has never been easier. Contact us today, and we’ll share with you the biggest lessons we’ve learned in buy and hold real estate investing.