One of the things that makes real estate very appealing is the diversity of investments. Just take a look at all of the different real estate investment strategies. That being said, what is the best real estate strategy? Easily, that title belongs to the buy and hold strategy. And it’s even better when it is combined with a rental strategy. Why is it better to buy and hold real estate and rent it out?
What Is Buy and Hold Real Estate Investing?
First, let’s explore what buy and hold real estate investing is. As the name suggests, a buy and hold real estate investment strategy involves buying an investment property for the purpose of holding onto it for a few years and ultimately selling it. Many real estate investors choose to rent out the property rather than leaving it vacant. As a result, investors profit in both the short-term and long-term. In the immediate short-term, an investor makes money in the form of monthly rental income. The long-term profits, on the other hand, are due to equity and appreciation of the property’s value. So once the property’s value has exceeded its initial purchase price, a real estate investor can sell the property and for a large profit.
What Are the Benefits of Buy and Hold Real Estate?
The buy and hold strategy combined with renting out property has been the go-to strategy in real estate for many good reasons. Here are some of the benefits of buy and hold rental properties.
Positive Cash Flow
As mentioned, the short-term form of profit with buy and hold investments that are rented out is rental income. Once expenses are deducted from rental income, what’s left is called cash flow. Positive cash flow is when there is a net positive income. Negative cash flow, on the other hand, is a net negative (expenses are higher than income).
Buy and hold investment properties can be excellent positive cash flow properties. Because rental properties are typically in high demand (depending on the location), they can generate consistent rental income, ensuring investors receive a high rate of return on a rental property. In the right location, these rentals can have high tenant retention and occupancy rates. Selecting and screening the right tenants, however, is key to the success of buy and hold real estate.
Real Estate Appreciation
One of the long-term benefits of the buy and hold rental property investment strategy is appreciation. Real estate appreciation is an increase in the fair market value (FMV) of a property over time. While appreciation can fluctuate from one year to the next, a property’s value almost always increases in the long-term. The main driver of real estate appreciation is a good location. There are many features that good locations have. These include high demand, low supply, a strong economy, a good school district, tourist destinations, and much more. With such factors, real estate appreciation can uptick year-to-year.
Buy and hold real estate investors also benefit from equity in the long run. Like real estate appreciation, equity involves the fair market value of a property. Equity is the difference between the FMV of a property and the mortgage amount needed to be repaid. It is best understood using this formula:
Equity = Asset (Property) – Liabilities (Mortgage)
With high equity and appreciation, buy and hold investors will hit the bank with a rental property sale.
Real estate investors also benefit from the various tax benefits they are eligible for. These benefits, mostly tax deductions, allow investors to save money when investing in rental properties. Some tax deductions, such as those for property taxes and mortgage interest costs, vary based on state and local regulations. There are many other tax deductions with buy and hold investments. These include:
- Maintenance and repair expenses
- Legal and accounting expenses
- Traveling expenses for property repair and management
Be sure to consult with a professional to take advantage of these tax benefits.
Various Property Types to Choose From
One of the strengths of the buy and hold strategy is the fact that many different types of investment properties can be used with it. So you have plenty of choices and can find something that fits your budget and skills. The most common of the property types is the single-family home. These one-unit properties are the staple of traditional investing for novice and experienced buyers. Its counterpart is the multi-family home or properties with multiple units. With more units, multi-family homes, such as fourplexes, can be more profitable than single-family homes. Vacation rentals such as Airbnb properties also fall into the buy and hold strategy.
Finally, the strategy is not limited to residential real estate. Commercial rental properties, for instance, are particularly profitable for experienced investors.
For investors, real estate is one of the best recession-proof assets out there. However, not all real estate strategies are profitable during tough economic times. Trying to flip a property, for instance, is generally not advisable during a recession. On the other hand, owning a rental property that produces positive cash flow can help you weather through. Still, not all rental strategies are lucrative during recessions. Traditional buy and hold rental properties are the best option. Even during the current COVID-19 pandemic, traditional buy and hold real estate has remained profitable, specifically residential real estate.
How to Find the Best Buy and Hold Rental Properties
With all that being said, how can you find the best buy and hold rental properties? The answer is simple: by using Mashvisor! Mashvisor’s real estate investment software is all you need for finding and analyzing rental properties for sale. Its heatmap allows investors to scour the US housing market for neighborhoods with profitable investment properties. Then, you can use Mashvisor’s buy and hold rental property calculator to study the expected performance of a particular property. The calculator breaks down everything you need to know about the property. Its listing price, traditional and Airbnb rental income, and buy and hold returns are all displayed. In addition, the tool calculates the investment payback period or the number of years it takes the property to pay back the amount invested into it. With Mashvisor, you’ll be able to easily and quickly find the best buy and hold rental properties out there. To start your 7-day FREE trial with Mashvisor, CLICK HERE!