There is more than one way to invest in real estate. While most investors focus on rehabs and flipping, there are other options available. One of those options is buy and hold real estate. This exit strategy probably wouldn’t make for good TV, but it can do wonders to your portfolio. Five, ten and even twenty years comes quicker than we would like. By positioning yourself in the market now, you set yourself up quite nicely for the future. There are also other benefits of rental properties that are often overlooked. Before you quickly dismiss a buy and hold property, you need to know all the benefits.
There are many horror stories from disgruntled landlords. Between damage to the property to parking cars on the front lawn, if you own a rental you have probably heard it all. Being a landlord can be frustrating and difficult at times. The reality is that if it was easy, everyone would do it. Like any other investment you make, you need to weigh the risk vs. the reward. The risks, or downside, are that you need to be on call at all times and constantly take care of your property. If you don’t treat your property like an investment, it will come back to haunt you. For every horror story, there is one from an investor who retired off the rental property they bought years ago. Here are some of the positives with buy and hold rentals.
Cash Flow: The ideal rental property is one that leaves you with surplus money at the end of the month. This surplus is called cash flow. One of the ways that landlords get in trouble is by not knowing all the numbers. In addition to your loan repayment you need to add all utilities, insurance, taxes, seasonal costs and maintenance. If you lowball these numbers your bottom line cash flow will be reduced. After you add up all your expenses you deduct that from your rental income leaving you with your cash flow. We are currently in a peak rental market with rental demand at an all-time high. This number may not stay this way forever. Your cash flow will vary from year to year but you should be able to have an idea of where it will be. The idea of a tenant paying down your mortgage and leaving you with extra every month is very appealing. What you do with your cash flow will go a long way in determining what kind of an investor you are. With the right property and a good grasp of your numbers you can have cash flow every month for the foreseeable future.
Equity: Building equity does not happen overnight. It wasn’t that long ago that people bought houses as a way of saving for retirement. The goal wasn’t to use their property as a piggy bank when the market turned. This same strategy can be applied to your rental portfolio. With a rental property your tenant is paying down your mortgage for you. Essentially someone else is paving your path to retirement. Depending on what type of loan you have this could take 15, 20 or 30 years to happen. You also have the option of selling at any time before you own the property free and clear. The more equity you have the greater your options are. The best part is that you do not have to come out of pocket to make this happen. Your tenants are building your equity for you.
Tax Benefits: This is the most overlooked benefit of rental properties. Not every rental is going to produce massive cash flow every month. In some markets it may take years to see a significant amount of equity. Every year you own a rental you will see the tax benefits. Uncle Sam lets property owners write off mortgage interest on your tax return. Rental property owners also can use depreciation and other rental expenses as a write off as well. A property with so-so cash flow can look like a home run after you factor in the tax benefit at the end of the year. Here is where a good accountant can save you thousands of dollars. By doing nothing but taking advantage of the tax breaks rental owners are allowed you will see the impact.
Owning rental property is not for everyone. For starters you need to be able to manage the property or pay someone to do it for you. Secondly, not every property makes a good rental property. You need to have an understanding of your market and what renters desire. Lastly, you need to be able to deal with tenants. The process of finding tenants and working with them can be frustrating at times. Dealing with a bad tenant will cost you time and money. Unfortunately you never know what type of tenant you have until they start their lease. While there are negatives and obstacles associated with rental properties the rewards are great to. Some of the most successful investors made their money through buy and hold properties. Cash flow, equity and tax benefits are just some of the reasons to buy rental properties. They may not be as appealing as a sweet rehab deal but can do more for your portfolio. If you have been ignoring buy and hold rental properties is may be time to take a look.