Why Buy and Hold is the Best Real Estate Strategy
Many people when they get into real estate want to start flipping houses, and this is because they have been watching TV shows on HDTV. These shows show people flipping one house and they profit $40,000-60,000. Which is as much as someone makes in one year just with one project. While this is the case and there are many real estate investors out there who are investing like that and making great returns, there are a couple of pitfalls when it comes to doing these flips where the buy and hold strategy is superior.
The reason why the buy and hold strategy is better is because you’re not relying on appreciation to profit. For example, if a real estate flipper flips ten houses in one year, next year he is on ground zero and he has to start all over again. Yes, he may have more cash in the bank and stuff like that, but the flipper has to go find ten more deals, has to rehab those deals and sell those deals. So he essentially has to start from ground zero.
On the other hand, a buy and hold investor who bought ten properties still owns those ten properties, those proprieties are still profiting, they’re still cash flowing, and they’re almost on autopilot. So I like to say that a real estate flipper created a job for themselves, while a buy and hold investor has a business generating revenue for him, a passive income stream.
The buy and hold strategy therefore develops the possibility of scaling. Now with the buy and hold investments you have this cash flow coming off from these investments, that cash is going into your bank account. You can eventually use that cash flow to buy more and more properties.
Of course it is slower rate than flipping a house, but you are growing your wealth and your cash balance, which then allows you to use that cash balance to buy and hold properties. Which allows you to grow your portfolio and therefore cash flow even more and even more. It is a compounding effect of buy and hold investments that make it much better for the long-term.
There are also many benefits to owning these long-term buy and hold rental properties, and that is the tax benefits. This comes in the form of depreciation. When you don’t sell a property immediately, when you don’t flip a property, the IRS allows you to write off the value of any property over 27.5 years. And this depreciation counts as negative income since it is considered a loss of value.
The difference between this and flipping a house is that when you flip a house you have to take part of your profits and give them to the government, because it was a short-term investment and there was a flip, and you have this capital gains tax that you have to pay on that investment property.
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