If you’re a beginner real estate investor, you’re going to want to learn about one of the best strategies in the industry- the buy and hold real estate investment strategy. Let’s get into the details of this long term investment strategy and cover why it has everyone’s attention.
What Is a Buy and Hold Real Estate Investment Strategy?
This is one of the most common real estate investment strategies, and it is widely considered one of the best ways to diversify any investment portfolio. The buy and hold real estate investment strategy is exactly what the name says; it is the strategy of buying an investment property with the intention of holding it for a long period of time- typically five years or more. So you’re not just purchasing, flipping, and immediately selling an investment property for a quick profit. While buy and hold real estate investors may intend to sell their investment properties, that is more so down the line.
During the “holding” period, the investment property is set up as a rental. Renting out the property is where the return on investment comes in. If the buy and hold real estate investment strategy is done correctly, you can benefit from both short term gains through positive cash flow and long term real estate appreciation.
The buy and hold real estate investment strategy is how to invest in real estate if you’re a beginner. This is mainly because it is one of the easier strategies for first-time investors, as compared to the fix and flip strategy which requires experience to spot the right distressed properties. It’s also a favored strategy among experienced property investors who are looking to build wealth over time from property appreciation and equity buildup.
Types of Buy and Hold Real Estate
Rental properties come in all different shapes, sizes, and purposes. To make sure you’re making the most from your buy and hold real estate investment strategy, you should identify which type of property/ rental strategy you want.
Here are a couple of different types of income generating assets you can invest in using the buy and hold real estate investment strategy:
Turnkey Real Estate
Investing in turnkey real estate is when you buy a move-in ready property, which already has professional property management and also usually has tenants already living in it. So everything is basically taken care of. You simply “turn the key” and have before you a strong investment property.
Vacation Rental Property
The vacation rental market has been very strong recently. Investing in short term rentals is a great rental strategy if you choose the right market at the right time.
Single Family Home
This is usually used with the traditional long term rental strategy; you invest in a normal house and rent it out to a tenant. Many beginners choose single family homes as a way to get a feel of the real estate investing industry. One rental unit and one tenant keep things simple.
Multi Family Home
If you’re looking for more, a multi family home is a great option for the buy and hold real estate investment strategy. A multi family property is a building with more than one housing unit (2-4 units). They are pricier than a single family home, but because you’re renting multiple units to multiple tenants, you’ll be generating higher rental income. It’s great for strong cash flow and quickly building your investment portfolio.
Commercial Real Estate
The buy and hold real estate investment strategy isn’t just about residential real estate. Investors can also purchase a property used for business purposes like an office building or retail store. However, commercial real estate investing could be a bit more complex, especially for beginners so research this strategy well.
The Advantages That Come With a Buy and Hold Real Estate Investment Strategy
We did say this strategy comes with its benefits. Besides the obvious cash flow, there are many advantages to investing in buy and hold real estate.
1) Rental Income
The main reason property investors choose a buy and hold real estate investment strategy is the monthly rental income. There could also be other sources of revenue such as vending machines, laundry, and parking income. If you have a long term rental or employ professional property management, all the generated revenue will be passive income and you can typically account for it on a monthly basis.
2) Tax Deductions
Rental expenses aren’t completely terrible- most (if not all) are tax deductible. In addition to property tax benefits, there is a number of expenses you can write off like depreciation as well as mortgage interest and loan origination fees. Other operating expenses like maintenance and repairs are also tax-deductible; it even goes down to the cost of any pen and paper involved in running the buy and hold investment property. Learn more about tax-deductible expenses by reading: All You Need to Know About Investment Property Tax Deductions.
Financing an investment property is usually done through bank loans. The great thing about the buy and hold real estate investment strategy is the tenants of your rental property end up paying down your mortgage. As the collected rent covers mortgage payments, the equity in your property typically increases each month. Tenants will even pay your interest expense (which is also tax deductible). The key here is to find good tenants.
Real estate appreciation could also be another great thing that comes out of the buy and hold real estate investment strategy. Real estate markets can fluctuate over the years, but if you choose a good city to buy and hold, your rental property will steadily gain value with time. Typically, buy and hold real estate appreciates at an annual rate between 3 and 5 percent.
The Most Important Part: A Real Estate Investment Calculator
Beginner real estate investors really need to understand the basic numbers involved in an investment. For buy and hold real estate, these figures are gross income, vacancy rate, net income, expenses, and cash flow. One of the most important factors is the potential income to be generated by the rental property; investors should mind their due diligence by calculating it before investing. Real estate investors are looking for an income property with monthly revenue exceeding expenses. The cost of taking out loans or other types of buy and hold real estate financing must also be factored in to reflect true returns.
Accurately calculating all the numbers involved could prove to be overwhelming. That’s why investors should take advantage of the many real estate investment tools Mashvisor has to offer. Our real estate investment calculator gives you all the important numbers and valuable insight. Start out your 14-day free trial with Mashvisor now to try it out.