The Pros and Cons of Buy and Hold Real Estate Investment
Most real estate investors will fall into one of two categories. Either you are a “fix and flip” (house flipping) investor who buys a house, renovates it and then resells it on the open market for a quick profit. Or, you are a “buy and hold” investor who buys a house, rents it out and gets a long-term return on investment (ROI) from rental income and property appreciation. One presents a short-term gain and the other presents a long-term gain.
Of course, there are other types of single-family real estate investment and some gray areas between these two primary types of property investments. However, for the purposes of these next two PropertyLark Blog articles, we will be focusing on pure fix and flip vs. buy and hold strategies that are used by most real estate investors in our network. Today, we are going to talk about the pros and cons of buy and hold real estate investment. Next week, we’ll do the same for fix and flip.
Which Real Estate Investment Strategy is Better?
Before we get started, we will say that there is really no wrong answer here. Both are sound real estate investment approaches that can earn you a lot of money if done right. Investing in real estate is usually a much safer and more predictable bet than the roller coaster of a stock market. It’s mostly about your personal goals and how you choose to build your wealth. One is the tortoise. The other is the hare. However, in this case, both will win the race!
Okay, enough pretense. Let’s talk more about buy and hold real estate investment strategy.
What is Buy and Hold?
The basic object of buying and holding properties is to earn money over the long run. This could be a few years until you find it’s time to move onto a new investment, or it may be an income property you hold onto the rest of your life and pass onto your heirs. How long you want to hold onto the property is up to you and your investment plan.
Buy and hold investment is generally considered “passive income.” Some of it can be considered “active income” depending on how involved you are with the property—usually only if real estate investment is your full-time career. If you are hiring a property management company to handle the day-to-day tenant and repair issues, then it is going to be seen as passive income by the IRS.
The Pros of Buy and Hold
Here are some of the pros of buy and hold investing:
- Steady Long-Term Gains—The longer you hold onto the property, the more money you can earn over time from rental income and appreciation. The growth should be steady and dependable.
- Monthly Income—As long as your property is occupied by paying tenants, you’ll be getting monthly rent payments that can supplement your primary income. As long as the rent covers all your average monthly ownership expenses, you are making money each month.
- Equity Appreciation—Most real estate assets will appreciate over time. If you buy a house for $200,000 now, it could be worth $300,000 or more in 10 years. Even if you don’t want to sell it and cash out that equity, you can use the current value to raise rent prices. You can also leverage this equity into home equity lines of credit (HELOCs) that allow you to pull out cash to make upgrades, pay down other high-interest debts or use for other personal expenses.
- Not a Lot of Work Needed—If you hire a property management to oversee the rental, there’s not a whole lot you need to do other than covering your repair/maintenance expenses and paying their service fees. They will handle all the dirty work of screening rental applicants, collecting rent from tenants and fielding complaint/request calls. You collect your money every month and let them do all the dirty work!
- Taxes—Depending on how you manage your investment, the tax advantages of a buy and hold property can be very advantageous. There are certain ownership expenses that you can write off each year, though they will be treated differently than your primary residence. Consult with your tax advisor about setting up a proper tax plan for your real estate investments.
The Cons of Buy and Hold
Here are some of the cons of buy and hold investing:
- Ownership Costs—Even when you buy a house outright for cash, there are always ongoing costs of ownership. You have property taxes and insurance. You have repair and maintenance expenses. You have property management fees. If you are financing the property, then you will also have mortgage payments and interest to worry about each month.
- Vacancy—The worst thing a rental property owner can experience is prolonged periods of vacancy or a lot of turnover between tenants. Turnover can allow you to raise your rent more often, but it also leads to more vacancy periods. Any time the home is vacant, you are losing money. You are not collecting rent, but you are still paying the property management company and all your other ownership expenses.
- Legal Issues—Owning a property for a long period of time and dealing with property management companies and tenants can ultimately bring up some legal issues. There are a lot of examples we won’t go into here and the chances of a lawsuit are rare, but you always have to be prepared in case there is a dispute between any of the parties involved (property management company, tenant and you, the landlord).
- Net Losses—Because rental properties are considered “passive income” by the IRS unless managing your real estate investments is your full-time job, you have restrictions on any annual net losses you can deduct. Passive activity loss rules can be confusing and can work against you if you have losses you want to write off. Again, consult with your tax advisor on this subject as it’s too complex to get into here.
If you are going to buy and hold a real estate investment, you have to be prepared and do your research. You have to project your ownership expenses and then set the rent price accordingly. You have to study the market to understand what you might be able to get in monthly rent, as well as how much the property may appreciate over time. These are all factors you need to consider before you invest.
This is where PropertyLark comes in. Members of our elite network of home buyers have access to exclusive off-market real estate deals. These properties have been identified, researched and vetted by our proprietary analytics software and personally by our team. We seek out the best investments and then pass them onto you. You can then decide if you want to buy or hold or fix and flip. To learn more about our buyer network, click here.
Stay tuned to the PropertyLark Blog next week for The Pros and Cons of Fix and Flip Real Estate Investment.