There are generally two methods of real estate investing: flipping and buy-and-hold. Flipping means buying a property and selling relatively soon to earn capital gains. A buy-and-hold strategy will have you hold on to the property for a longer period of time to earn rental income. More conservative-minded investors tend to prefer the buy-and-hold strategy.
The following are some of the pros and cons of a buy-and-hold investment strategy that you should take into consideration:
Pro: Continuous income stream
One advantage of the buy-and-hold strategy is being able to collect income from renting out your property. This provides you with an ongoing stream of income that you can use to pay for any costs related to managing the property while also earning a return on your invested capital.
Pro: Appreciating property valuations
Real estate is more likely to increase in value over longer periods of time. This means that your investment will likely function well as a hedge against inflation in the long run. Inflation will usually increase the value of the property while the money borrowed through the mortgage will decrease as you continue to pay the debt. Also, the appreciated value can bring you significant capital gains when you finally decide to sell the real estate.
Pro: Tax benefits
Utilizing a buy-and-hold real estate investment strategy allows you to save on taxes in a variety of ways. The income you receive from rent will count as ordinary income. However, you are able to reduce your tax liabilities by deducting expenses related to the management of the property. This can include maintenance costs, repairs, hiring a property manager and your travel to and from the rental property.
Con: Vacant rental property
One of the risks of having a rental property is the possibility of not being able to find a suitable tenant. Even if you hire a property management company this can still happen. Every month that your property does not have a tenant you will still be required to pay the mortgage while it
remains empty. A way to prepare for the possibility of this predicament is to maintain a reserve of cash to cover from one to three months of vacancy per year.
Con: Legal issues
Another risk you should be aware of when dealing with a rental property is the possibility of being sued by a tenant. If you fail to comply with all of the relevant rules for landlords you may end up losing significant money when a tenant takes you to court. Each state has different laws when it comes to what a landlord must provide for a tenant. Make sure to fully research these rules before investing in a property that you plan to rent.
Is a buy-and-hold strategy right for you?
Whether or not it is best for you to employ a buy-and-hold property investment strategy will depend on your particular personal situation and your financial goals. If you are aiming to retire soon, investing in a rental property can be a great way for you to bring in a stream of income after you have stopped working full-time. On the other hand, being a landlord and all of the responsibilities that come with it is not for everybody.
The information contained within this document has been obtained from sources considered to be reliable, but we do not guarantee the foregoing material is accurate or complete. Any opinions are those of the author and not necessarily those of RJFS or Raymond James. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.