Flipping homes isn’t the only way to make a profit in real estate. In fact, purchasing a buy and hold investment property can be a less risky and much more profitable endeavor. Instead of depending on a quick post-rehab sale to turn a profit, your initial investment accumulates value over time.
Two Types of Buy and Hold Investment Properties
- A buy and hold investment property is a property that you purchase with the intent to hold (in other words, not “flip”) and use yourself. For example, you could invest in a loft in an urban area that’s undergoing gentrification.
- A rental buy and hold investment property is a piece of real estate you buy in order to rent it out for the long term. It can be a single- or multi-family residential property; but it can also be a commercial property with one or more rental units, such as a strip mall or an office park.
How to Make Money Off a Buy and Hold Investment Property
So how exactly can you make money off a buy and hold property? There are a number of ways, depending on whether you’re living in it or renting it out.
- Equity: Assuming you financed the property, you have the obligation to pay back the mortgage plus interest in monthly installments. Every time you make a payment, you’re building equity because your ownership percentage of the property increases and that of the lender decreases. It’s not surprising, therefore, that according to the 2013 Federal Reserve Survey of Consumer Finances, the median net worth of a family that owned a home was $187,000, while that of a family that rented was $5,400.
- Appreciation: While a property’s structure usually devaluates in the long run, land almost always increases in value when measured over a 20-year period or longer. So long as you own the land and you’re in a position to wait out any slumps in the market, your property should increase in value.
- Generate income from tenants: Turning a property into residential or commercial rental units generates monthly income in the form of rent. However, you need to make sure that your investment—including acquisition, rehab, management, and maintenance costs—can be recuperated over the same term as your mortgage at the most. If you can turn a profit faster, that’s even better.
- Tax matters: You can get several tax breaks depending on whether the property is for personal or business use. If you’re living in the property, the interest on your mortgage, as well as any points, are usually deductible. If the property is for commercial use, you can also deduct the costs of repairs, property management, any legal fees, and depreciation.
- Profit from sale: If you sell your property at a good time in the real estate market, you can make a significant profit. Keep in mind that if it’s a commercial property, any profit or loss is either taxable or deductible.
With the above information in mind, you can better decide what’s the right investment for you. Just remember: whether you’re planning on turning your property into a rental opportunity or not, buy and hold can be a profitable long-term strategy.
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