When you hear the words “buy and hold,” you probably subconsciously insert the word “forever” at the end of the phrase. Most real estate investors do. However, there is far more to buy and hold investing than simply purchasing an investment property, making the mortgage payments for decades, and then either passing the property on to your heirs or selling it off during retirement to generate a cash windfall.
Here are just a few of the options and outcomes available to buy-and-hold investors:
Cash-Flowing Rental Properties
Most investors who purchase and hold real estate over the long term do so with the intention of paying the monthly mortgage payments and other maintenance costs on that real estate via rental income. Anything left over is “the cherry on top” for the traditional buy-and-hold investor, but today’s passive and active turnkey investors often flip that view and consider monthly cash flow to be of primary import while long-term appreciation is the “bonus.”
Profitable Vacation Properties
Buy-and-hold investors often purchase second homes, vacation homes, or retirement homes using the same rental strategy as above. It works in many cases, but be aware that your renters will pay top dollar probably about the same times of year you want to use the property yourself.
Potential Refinancing Opportunities for Portfolio Expansion
Over time, as you pay down your mortgage and your buy-and-hold property appreciates, you may opt to pull equity out of the property to purchase more property. Just be careful: If you’re counting on that equity being present in 20 or 30 years, you shouldn’t pull it out too often.
Long-Term Appreciation and The Associated Perks
Say, for example, that you purchase 10 rental properties and hold them all for 25 years. The odds are reasonably good that at the end of that 25 years, if you have made your payments and kept the properties occupied and updated, you could sell them for a substantial sum and use that sum in your retirement. Of course, unless you have been careful with your business structure, you are going to owe some pretty hefty taxes.
Strategic and Market Flexibility
Long-term investing strategies like buy-and-hold involve committing yourself to holding properties for a long time, but they do not mandate that you ignore great opportunities to sell should they come along. Always be clear about whether an investment strategy is still meeting your needs or is just old and comfortable. If the latter, consider whether the time may have come to make a sale and invest elsewhere.
One Investor’s Take
“Real estate is a great way to build wealth, but can be an awful way to keep it [if you cannot make yourself step back from buy-and-hold investments]. The ‘magic’ is simply the leverage that is unique to real estate and allows you to build wealth fast…If you are in your 60s or 70s and still feel the need to self-manage, repair things, screen tenants personally, or appeal taxes, I advise you ring the cash register and enjoy life.”
– Steve Laube, a long-time advocate of buy-and-hold investing, but only so long as the market and strategy are a good fit for the individual investor’s goals and lifestyle.