What is Buy and Hold Real Estate Investing?
September 15, 2020
What does Buy and Hold Real Estate Investing mean and what are the benefits?
Buy and hold real estate is for a long term investment. You are not planning to flip it. You plan to rent out the property for rental income and hope for a better return than the stock market which fluctuates more rapidly. With buy and hold real estate, you are able to increase your income through annual rent increases over time while building equity. Basically, someone else is paying your mortgage and you are able to take a tax write-off for deductions for any repairs over the duration of the property. The benefits of the buy and hold approach are being able to ride out any dips in the market
Which types of property investments/vehicles are best suited for Buy and Hold?
ADU’s which is the acronym for Accessory Dwelling Units are becoming a great buy and hold investment property. Legislation implemented in California and other states including Washington, Oregon, Washington D.C., Virginia, Colorado, Illinois and many others have drastically reduced or waived permit fees for ADU’s.
Homeowners can now build ADU’s (up to 1200 sq. ft) and Jr. ADU’s (up to 500 sq. ft) on their own property to rent out. This means that if you are a homeowner, investing in your property and renting out the additional units can financially pencil out as a profit for you and have your own home result in being paid off. If you are solely an Investor, you no longer need to live in one of those units. That means, you can buy a property and build a triplex that the state incentivizes and make money long term. This is unprecedented in the United States. The turn-around time for permit approval is only 60 days which gives you a quicker ROI.
Historically, real estate investments have provided a 6.4% annual return per the National Association of Realtors median price. The 6.4% reflects the appreciation in the value of properties but if you consider most homes are leveraged with mortgage, the return on a person’s invested capital can be significantly higher.
What are the top rules Investors should keep in mind when investing in real estate from a Buy and Hold perspective?
- Investors need enough of a cash cushion to afford the expenses of the home even if they are not getting rental income or if rents go down. (ie) mortgage, property tax payments, maintenance
- If investors get an adjustable mortgage, they are at risk that their monthly expenses could exceed your rental income.
- Consider if they are looking for monthly cash flow or price/capital (value) appreciation?
What mistakes should Investors watch out for?
Watch out for financial mistakes. Make sure you choose a location where it will be easier to rent out the property like a University or College campus, where businesses are prevalent, a good school system or a city that historically doesn’t lose value.
If you’d like to evaluate the financial return of your potential investment property, try the ADU financial tool that makes Sen$e App.ADUROI.com.
Written by the ADUROI Team, to help you understand if an ADU makes financial sense.