“Buy and hold” is a popular investment strategy that can also be applied to real estate.
Buying a rental property or other long-term investment property can provide multiple benefits.
“Rental properties, such as multi-family units, offer investors rental income and asset appreciation at the same time,” says Christopher Dixon, managing partner of Oxford Advisory Group.
Owning real estate that generates steady 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 the potential for greater stability relative to short-term, fixed and reverse real estate investments.
“A buy-and-hold strategy helps protect investors from fluctuating housing prices when selling the property for a quick profit,” Dixon said.
When you’re looking at a multi-decade investment, rather than one that can last a year or less, time is on your side to ride out the ebbs and flows of the housing market. And real estate’s low correlation to equities means your investment can continue to perform well during periods of widespread volatility.
In a way, investing in real estate to hold isn’t all that different from investing in the stock market, says Michael Morgan, president of TBS Retirement Planning in Bedford, Texas.
“With real estate, you buy a property and hold it in anticipation that it will increase in value,” Morgan explains. “Like picking stocks, you want to pick good properties.”
Knowing how to choose good properties is essential to develop your approach to rental property investment. If you are interested in buying and keeping 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 retrograde, but it’s a smart approach to take when considering real estate as an investment to hold, says Eric Swanson, vice president of EP Wealth Advisors at Torrance, California.
“With any long-term investment, market prices will fluctuate,” Swanson says. “If the investor is experienced enough, they will have an appropriate exit strategy in place before purchasing the property.”
You should consider how long you plan to hold a property before researching locations or rental markets to invest in. This can be a crucial step.
Swanson says investing in smaller, more affordable properties can create a larger buyer’s market, which benefits investors when selling. But choosing a property solely on the basis of its affordability does not 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 investment style.
“When buying property, you always have to be ready to own,” says Morgan, which means staying in the game through thick and thin.
“What if property doesn’t bring in the price needed to turn a profit? What if the real estate market crashes like it did in 2007? If you’re not ready to own, investing in real estate may not be be not for you,” he says.
Leverage your IRA
Rather than taking out a loan to buy 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.
“Investors 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,” says Kelli Click, President of STRATA Trust Company.
“In most cases, the IRA should have enough balance to cover day-to-day expenses, such as taxes and repairs,” Click says.
Most importantly, you are not permitted to live in or use the property, nor are you eligible for any “sweat equity” associated with the personal improvement or maintenance of the property. . Nor can you pay yourself a salary to act as a property manager.
These types of activities fall under the umbrella of self-dealing, which is an “IRS no-no”. But assuming you follow the rules, using your IRA to invest in buy-and-hold real estate could allow you to reap cash flow and appreciation benefits, as well as tax benefits.
Assess the potential of a property
As with any investment, it’s important to crunch 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 considering location.
“Investors should look for income-generating properties and mildly distressed properties,” he says. And when it comes to location, it’s all about traffic.
“You look at traffic patterns; the more traffic the better,” says Dixon. “No traffic means no tenants.”
Buying properties at market value is a costly mistake to avoid, as is failing to look at the overall housing situation in a particular market.
“Investors should look at the percentage growth in community housing year over year,” Dixon said. “You want to see a positive growth percentage of people moving into the area rather than out of it.”
This is an indicator that a real estate investment might be a good choice to buy and hold if growth is steadily increasing.
Last but not least, it’s important to make sure you’re working with the right people when getting into the long-term real estate investing game.
“One of the biggest mistakes I’ve witnessed is that investors don’t use professionals at every stage of the buying or selling process,” Swanson says.
He says you could be setting yourself up for failure if you don’t have the right people in the right corners when investing in a long-term rental property. This includes having a real estate agent or broker, general contractor, and real estate lawyer on hand. Your financial advisor can also help guide your real estate investment decisions.
The bottom line is that there are too many moving parts involved in buying a property, says Swanson. Having a team behind you can help ensure long-term investment success.