One advantage of investing in real estate is that there are a large number of strategies available. These strategies range from long term to short term methods, with each containing many different approaches.
As an investor, you may ask, “Which investment strategy is the best?” Unfortunately, there is no universal answer to this question as it depends on your goals, financial situation, age, risk tolerance, etc.
However, one of the most common strategies used and recommended is the buy and hold investment strategy. The majority of real estate experts agree that this is one of the best ways to diversify your investment portfolio, especially for beginners.
Continue reading to learn what the buy and hold strategy is and why it has a track record of being successful.
What Is the Buy and Hold Strategy?
The buy and hold strategy is exactly what the name suggests. An investor buys a property, rents it out, and holds onto it for the long term – typically five years or longer.
It can be a great strategy to start with if you’re a beginning investor. This is primarily because it is one of the simpler investment strategies, as compared to others such as the fix and flip strategy which requires a greater pool of experience to locate the best properties to invest in.
Why Use the Buy and Hold Investment Strategy?
The buy and hold strategy is one of the best real estate investment plans because it allows for both short term and long term benefits. Let’s take a look at some of the benefits property investors receive from using this strategy.
- Appreciation: Appreciation is the increase in a property’s value over time. While appreciation is not always guaranteed, over time real estate values have steadily increased in America, averaging about 3% per year over the past century.
The best places to invest in for the long term are those where homes are likely to appreciate in value. In these housing markets, rental properties will be worth more in the future than at the time of purchase. The best investors know what signs to look for, such as the location, local economy, plans for future development in the area, and the overall appearance of the neighborhood. Ultimately, investors who use the buy and hold method are rewarded with great returns when they decide to sell their investment properties in the future.
- Cash Flow: Steady cash flow is another huge upside to holding on to a property for the long term. When an investor holds on to a property and rents it out to long-term tenants, he or she will collect rent each month, which is a source of steady passive income.
Property investors can use the rental income to pay off their mortgage. So, technically, when you use the buy and hold strategy, your tenants are building equity in the property for you.
- Inflation: Inflation is the increase in the price level of goods and services over a period of time. There is a strong correlation between inflation and the cost of housing. As inflation occurs, property values go up. Since rental rates keep pace with inflation, property owners can also charge more for rent as it occurs.
Luckily for property owners, inflation has no effect on mortgage payments – as the amount of rent you charge tenants will go up over time, your monthly mortgage payments will not.
- Tax Deductions: There are several tax deductions that come with renting out a property. Rental real estate provides more tax benefits than almost any other investment. These benefits can make the difference between losing money and earning a profit on a rental.
Interest payments, depreciation, repairs, insurance premiums, and several other expenses are all deductible. Taking advantage of these deductions will ensure that you are not overpaying taxes on the income generated by your rental property.
The buy and hold investing strategy is the most straightforward way to start your real estate investing journey. It is a game that requires patience but pays off in the long run. As your investments earn you more capital to work with, you can use this strategy to acquire multiple income properties that will allow you to grow your wealth over time.