All you have to do is turn on your TV and flip around a bit to find a reality show featuring a team of people buying and flipping real estate. The formula seems simple: the stars find an old, rundown house, buy it for a steal, and then through the power of television, a seemingly magical transformation takes place in less than half an hour and the newly-updated and unrecognizable home is sold at a profit.
The timing and financial realities of buy-and-flip real estate aren’t always what they seem on reality TV, which is why savvy investors often opt for a more conservative, long-term option: buy-and-hold real estate. As its name implies, buy-and-hold real estate involves buying a piece of property and holding onto it over a period of time to take advantage of the appreciation before selling it. It’s a slower-paced and less risky form of investment with the added plus of being able to generate passive income by using the property as a rental while you hold onto it. Here are some things to know about buy-and-hold real estate investments.
The key to a successful buy-and-hold real estate investment is doing your research. You want to avoid purchasing at the top of the market in an area that’s already booming. Instead, the best purchases for this type of strategy are properties in an area that’s just ahead of a boom. Take a look at the real estate market in an area to see if prices are beginning to rise. One good indication of an excellent location for buy-and-hold properties is if an increasing number of surrounding properties are being bought up and remodeled or completely rebuilt before resell. Even if the area is undervalued now, it’s likely to demand top dollar once the neighborhood really begins to transform.
The best type of buy-and-hold real estate is a turnkey property in a highly sought-after location. Turnkey properties are rental properties that are ready to be rented out as soon as you make the purchase; they don’t need extensive remodeling or renovations to bring them up to speed. Some turnkey properties come with a renter already in place. The important factor is that with a turnkey property, there’s no period of time where you lose out on passive income as the property sits vacant while updates and repairs are made. These properties generate income from day one.
While property appreciation takes time, the immediate reward for buy-and-hold real estate is the passive income you can generate from rentals. This depends, of course, on keeping a tenant in the property at all time. You can help ensure this by being a good landlord. Take steps to increase the value and appeal of the property by doing things like ensuring that the appliances are modern and up to date. Create a beautiful and usable outdoor space for your tenants to enjoy. Most of all, be thoughtful and communicative and consider whether you’re creating the kind of rental experience that you would want to have as a tenant. This will help you prevent vacancies and avoid gaps in your monthly passive income.
Changes to the 2017 tax code brought about some real advantages for real estate investors. Many investors structure their real estate rentals as LLCs, which are categorized as “pass-through organizations.” As of 2017, owners of pass-through organizations can deduct 20 percent of their business income. The changes also dropped the pass-through tax rate from 37 percent to 29.6 percent. This makes buy-and-hold real estate an increasingly attractive endeavor for those seeking to make money through real estate investments.
While buying and flipping houses sounds glamorous, this style of investment comes with a great deal of stress and risk. Meanwhile, the financial benefits of buy-and-hold real estate are more realistic and easily obtainable. The best part? It provides a constant passive income over a long period of time before you finally sell.