To those who have only known the real estate investment world from afar, the concept of flipping an investment (buying property and quickly reselling at a healthy markup) can seem glamorous. It’s the kind of shrewd activity that the movies often hype, and it has irresistible attraction.
While property flipping certainly can be highly profitable activity, good opportunities can be hard to come by on a regular basis. It also takes a great deal of work to learn the skills needed for buying and selling. Unlike what the movies show, property flippers do not usually depend on such investment methods for long-term income – they tend to be an adjunct to more regular ways of making money, performing best when the stock markets are slow. When you need a bread-and-butter approach to profitable engagement with the property market, the buy-and-hold method makes much more sense. While it tends to be much more long-term method of making money, it is easier and less risky.
What is the buy-and-hold method?
The buy-and-hold recipe is the oldest real estate investment method in existence, and has fuels nearly every old money portfolio in the world. If you’re willing to stay with an investment for decades, it will absolutely grow, even if periods of slow growth come about. Land is a limited resource, and demand tends to always rise.
While being successful with buy-and-hold does require less skill overall than the flipping or stock market methods do, it does involve considerable hassle. When you buy and hold, for instance, you do need to deal with finding tenants, and managing them. Rental income is vital to the viability of the buy-and-hold method. Nevertheless, lettings agents and property management services do help (see here for more information). Success with the buy-and-hold method, then, comes with minimal risk, and requires minimal skills.
The advantages of the buy-and-hold method
If you’re unsure about what exactly the buy-and-hold method offers you, here’s a short listing of the main benefits.
There’s passive income: The buy-and-hold plan is one of the best maintenance-free income plans possible. When you have a property management and accounting firm taking care of responsibilities to do with finding tenants and managing the property, all you need to do is to watch the money roll in month after month.
Property gives you high levels of leverage: If you held $100,000 worth of stocks and gold, you couldn’t consider yourself very well leveraged. If you were to walk into a bank for a loan, you would receive less than half the value of your holdings. With $100,000 worth of property, though, you could usually find financing for 80% of the value.
Tax benefits: Real estate allows some of the best tax deductions possible. Not only do you get to deduct mortgage insurance, you get to deduct depreciation on your property, as well.
It is always possible to cut and run: While buy-and-hold does require a long-term strategy, you are never locked in. You can always sell when more lucrative options appear.
It’s important to draw up a proper five-year investment plan
A successful buy-and-hold plan requires a detailed personal financial roadmap. You should put down your financial goals for the next five years, your plans for a growing family, job or career switches, information about your current income and expenses, plans to do with how exactly you will leverage your existing resources to pay for the new down payments, and your plan for what kind of property situation you hope to find yourself in, in the future — say, ownership of four or five different properties.
Your plan should include information on how you will prepare for every potential financial challenge, such as the rise in mortgage rates and unemployment.
Finally, you want to know where you are heading with your investments — are you planning to be able to run a property business, to retire early or to pay for college education of the child? Knowing your goals helps you time your investment plan correctly.
Jude Godfrey helps manage a property portfolio and likes to share his ideas on different aspects of property investing with an online audience. He is a regular writer for several property-related websites.