There are three popular methods for investing and making money in real estate. Buy and hold, wholesale real estate, and flipping houses. By this point in your research, you probably understand the differences between those 3, and you’re wondering which one is the best to invest your money in.
There is a clear winner, whether you have $30k, $50k, $100k, $300k, or $1m.
Warning: There may be some bias. However, having a personal portfolio of cash-flowing rentals and seeing many investors succeed (and some fail) comes with experience.
What is buy and hold real estate?
Buying a house or multi-unit property and renting it out. The rental income pays for your PITI (principal, interest, taxes, insurance) plus covers a little extra maintenance, repairs, and vacancy. If you do it well, you’re left with some additional cash flow each money which is your “cash flow.”
Opening Thoughts
I’m going to try to keep this concise, but I’m obsessed with this method for making money, and more importantly, building wealth through real estate. Buy and Hold real estate investing is the common man’s path to obtaining great wealth. This is because the way your capital compounds in multiple ways when you buy and hold real estate. There’s a reason the majority of the wealthy people in the world exercise buy and hold investing.
Cash Flow
As stated above, if done right you can pay all monthly expenses, budget for future expenses, and still be left over with some cash flow at the end of the month.
Appreciation
When you hold on to the property and don’t sell it, the value of the home naturally increases in value. Being that they aren’t making more land, and it’s expensive to build new homes, and populations are increasing, the value of a house will generally increase around 3% each year for at least a few hundred years
Principal Pay Down
While you start with a loan on the property, then tenants rent covers your monthly principal until its down to zero. So even if nothing else, at the end of 30 years (assuming a 30 year mortgage) you will have an asset that’s worth more than what you bought for (appreciation) but it will be completely paid off (by the tenant)!
Tax Benefits
Rental property expenses are tax deductible. There’s also this thing called depreciation. You may/may not understand it, that’s a completely separate blog, however, at this point in the game, just trust that you pay WAY less taxes on rental property income. In short, this is because it’s a good thing for the economy so the government purposefully makes it advantageous to encourage good behavior through investing. Another huge one is cost segregation and accelerated depreciation. A bit more advanced but we can visit that later. Just know it’s out there and at some point you’ll need to learn to do it.
When you combine these four things, the amount of “wealth” you build in one year, ten years, and thirty years is compounded so greatly that it’s virtually unmatched by any other investment vehicle.
Pros
- Has been done successfully by many people. Therefore, there are lots of learning resources to copy
- Own a cash-flowing, appreciation asset that pays for itself while being subject to great tax benefits.
- Is more passive than wholesaling or flipping
Cons
- Not completely passive. You still need to be educated and skilled at doing it well.
- Need 20-35% for down payment and upfront repairs
Summary of Buy and Hold Real Estate
Clearly, there is some bias here. However, that comes with good reason. Wholesaling and Flipping are jobs, and not easy ones to boot. Buy and hold, while not necessarily easy, is mostly a process that can be easily repeated over and over to not only create extra monthly income but also be a fantastic course to build wealth.
Here at FIRE Realty Team, we are fortunate enough to be in the most incredible buy-and-hold market in the country. It comes with a relatively low cost to entry with the best price/rent ratios and solid investment neighborhoods that have been proven to be successful by many other investors.
-Insight from Joe Hammel
