5 Benefits of Buy and Hold Investing
There are two common types of residential real estate investing: “buy and hold” and “fix and flip.” Both have their own unique advantages and great potential for profitability. The main difference is time. Last week, we covered five of the best benefits of fix and flip (aka “house flipping”)—click here to read.
This week, we want to talk about buy and hold real estate investment and the key benefits that come along with holding onto a house for a longer period of time. In most cases, the property will be rented out and that’s how you generate your primary income over time. Therefore, we will focus on rental property ownership as we explore the following 5 buy and hold advantages:
1. Steady Income
One of the appealing aspects of rental property ownership is that you can generate a steady income from month to month—as long as you keep your house occupied with quality tenants. They pay their rent and you generate revenue. It’s a pretty simple concept, which is why it’s easy to see why so many real estate investors opt to own rental income properties.
2. Covering Your Ownership Costs
You may end up spending more upfront on your rental property, especially if you are buying with cash or putting down a large down payment. Then, you will have renovation time and costs if you are remodeling it. Lastly, there will be some marketing expenses to find your tenants. These upfront investments should be paid back over time as you collect rent from month to month. If you are financing your income property, then ideally your rent price should cover your loan payment AND ongoing ownership costs—including property taxes, insurance, property management, general upkeep and repairs. The ideal situation will find you bring in more in rent each month than you are spending on average to keep and manage the property. Hiring a professional property management company to handle the day-to-day needs will eat into your profitability, but may pay for itself if it keeps good tenants in the unit who pay on time each month.
3. Property Appreciation
Another very important benefit of buy and hold investing is the long-term value growth of the property itself. A fast flip won’t give you much in terms of property appreciation. Holding onto a house—especially if in a desirable or up-and-coming market—for several years can really be advantageous. It will allow you to raise your rent price periodically. And when the time comes, you can choose to sell the property and cash in that home equity. Some rental property owners are content breaking even each month with rent and ownership/management costs because they know the long-term returns will be worth the investment. Ideally, you will be making profit along the way while also growing your equity over time.
4. Active Income
If you spend a significant amount of time managing your property and/or you get proper real estate licensing, you may be able to consider your rental income “active income” in the eyes of the IRS. Active income can offer you some better tax-deduction advantages and additional write-offs compared to passive income—which is when you collect your rent money without being that involved in the renovation or day-to-day property management duties. Talk with your tax advisor to learn more about passive vs. active income, as well as what you can and cannot deduct come tax season.
5. Other Tax Benefits
Owning any real estate generally comes with additional tax benefits. Even if you are only making passive income, there will be certain tax deductions you can make each year as an income property owner. Again, consult with your tax advisor to make sure you are taking advantage of every tax benefit that comes with rental property ownership and management.
These are just a few advantages to consider when it comes to buy and hold investing (aka rental property ownership). For access to great off-market properties and other real estate investor resources, join the PropertyLark network.