âBuy and holdâ is a popular investment strategy that can also be applied to real estate.
Buying a rental property or other long-term investment property can have many advantages.
âRental properties, such as multi-family units, provide investors with rental income and asset appreciation at the same time,â says Christopher Dixon, managing partner at Oxford Advisory Group.
Owning real estate that generates continuous cash flow can add diversity to your portfolio as well as an income stream that could carry you into retirement and beyond. There is also potential for more stability compared to short-term, fixed and reversible real estate investments.
âA buy and hold strategy helps protect investors from fluctuations in housing prices when selling property for a quick profit,â says Dixon.
When you envision an investment that spans decades, rather than an investment that may last a year or less, time is on your side to weather the ups and downs of the housing market. And real estate’s low correlation with stocks means your investment can continue to do well during times of widespread volatility.
In a sense, investing in buying and holding real estate isn’t all that different from investing in the stock market, says Michael Morgan, president of TBS Retirement Planning in Bedford, Texas.
âWith real estate, you buy a property and hold it with anticipation of its value,â says Morgan. âLike choosing stocks, you want to choose good properties. “
Knowing how to choose good properties is essential in developing your rental property investment approach. If you are interested in buying and holding real estate, keep these rules in mind:
- Start with your exit strategy.
- Consider leveraging your individual retirement account.
- Evaluate the potential of a property.
Start with your exit strategy
Focusing on your exit strategy first may seem backward, but it’s a smart approach to take when considering real estate as a buy and hold investment, says Eric Swanson, vice president of EP Wealth Advisors in Torrance, California.
âWith any long-term investment, market prices fluctuate,â Swanson said. âIf the investor is experienced enough, he will put in place an appropriate exit strategy before buying the property. “
You should consider how long you plan to own a property before looking for locations or rental markets in which to invest. This can be a crucial step.
Swanson says investing in smaller, more affordable properties can create a bigger buyer’s market, which is beneficial for investors when it’s time to sell. But choosing a property purely on the basis of affordability doesn’t necessarily make it a good investment.
Developing an exit plan early can also help you determine if buy and hold real estate investments are right for your portfolio and investing style.
âWhen buying properties, you always have to be prepared to become a homeowner,â says Morgan, which means staying in the game through thick and thin.
âWhat if the property does not bring the price to generate a profit? What if the real estate market collapsed like in 2007? If you aren’t ready to own a home, investing in real estate might not be for you, âhe says.
Leverage your IRA
Rather than taking out a loan to buy a rental property, you can leverage your retirement assets through a self-directed IRA. This type of IRA allows you to steer your investment choices beyond stocks and bonds to real estate and other alternative investments.
âInvestors can use their retirement funds to invest in undeveloped land, income generating properties, residential homes or even commercial buildings, while adopting a buy and hold strategy,â says Kelli Click, president of STRATA Trust Company.
âIn most cases, the IRA should have a sufficient balance to cover running expenses, such as taxes and repairs,â Click explains.
More importantly, you are not allowed to inhabit or use the property, nor can you benefit from any âsweat equityâ associated with the improvement or personal maintenance of the property. You also cannot pay yourself a salary to act as a property manager.
These types of activities fall under the umbrella of self-operation, which is a “no-no IRS”. But assuming you follow the rules, using your IRA to invest in buying and holding real estate could see you reaping cash flow and appreciation benefits, in addition to tax benefits. .
Evaluate the potential of a property
As with any investment, it is important to calculate the numbers before pursuing a real estate investment to generate cash flow. For example, Dixon says investors should look for properties they can buy at a discount while taking location into account.
âInvestors should look for income-generating properties and slightly distressed properties,â he says. And when it comes to location, it’s all about traffic.
âYou look at the traffic patterns; the more traffic the better, âDixon says. “No traffic means no tenants.”
Buying properties at market value is a costly mistake to avoid, as is not looking at the overall housing situation in a particular market.
âInvestors should look at the percentage growth in community housing year over year,â Dixon says. âYou want to see a positive growth percentage of people moving into the area rather than outside. “
This is an indicator that a real estate investment might be a good choice to buy and hold if growth is on a steadily upward trend.
Last but not least, it’s important to make sure you’re working with the right people when you get into the game of long-term real estate investing.
âOne of the biggest mistakes I’ve seen is that investors don’t turn to professionals every step of the way in the buying or selling process,â Swanson says.
He says you could set yourself up for failure if you don’t have the right people in the right places when making a long-term rental property investment. This includes the presence of a real estate agent or broker, a general contractor and a real estate lawyer. Your financial advisor can also help guide your real estate investment decisions.
The bottom line is, there are too many moving parts involved in buying a property, Swanson says. Having a team behind you can help ensure the success of your investment over the long term.