Recent studies from CNBC and Housingwire lament the returns on real estate flips. For three quarters, returns have been dropping, largely due to increased competition with buy-and-hold investors in the search for properties priced under market value.
As markets nationwide experience rising prices, such deals are harder to come by and the need for traditional financing has caused many flippers to purchase properties at full market value, which has hurt their returns.
So when we consider trends like these and look at channels like HGTV where flipping is still big television, we can’t help but notice the dissonance. Many investors see the ideal presented by the media of a buy-and-sell strategy without knowing the full scope of challenges it presents, particularly in the current market.
In uncertain times, a certain strategy is required. In real estate investment, it doesn’t get more certain than a buy-and-hold strategy.
3 Reasons a Buy-and-Hold Real Estate Strategy is Superior
You’re not just relying on appreciation to profit.
We don’t want to pretend that flipping can’t be a good form of investment. For experienced flippers, it is! It can be a wonderful investment, and it can even be well-paired with buy-and-hold investments. But when it comes to flips, they’re one-and-done. You buy the property, renovate to force appreciation, and sell for a profit within one calendar year.
In a buy-and-hold strategy, you still renovate and improve your property. You might eventually sell the property. But appreciation is not the focus. It’s not your bread and butter. It’s a healthy bonus added to the bulk of your profits, which come from the passive income earned from tenants through rent.
Because you’re not relying on appreciation, it also means you’re not relying on market conditions to profit. There’s far less pressure to buy and sell at just the right time in just the right markets in just the right neighborhoods. While location still very much matters to a buy-and-hold investor, you don’t have the added pressure of jumping in with perfect timing or worrying that the market will take a sudden dive when you need to sell.
If you’re holding, you can just keep holding until it gets better again.
In another interesting comparison between flipping and holding, we have the idea of scalability and passive income. For real estate investors, true success comes when we scale and grow our portfolios. Buy-and-hold investors, start thinking about growing the number of properties in that portfolio! As long as we have those properties, they will generate passive income year-over-year.
By contrast, a flipper can flip 10 properties in one year and the next they’re starting back at ground zero. They have to constantly flip to generate income. The sale is their income. There isn’t a portfolio to scale.
For those holding properties, such as a turnkey investors, the limit is really only related to your own financial resources. You can acquire properties as your finances allow and increase your passive income earning potential accordingly. That’s how people become passively wealthy in real estate investment!
There are several tax benefits for passive real estate investors. One of the most notable benefits comes in the form of depreciation. When you don’t sell an investment property immediately, the IRS allows you to write off the value of any property over 27.5 years. Depreciation typically counts as “negative income” since it’s considered a loss of value, but since investors should be diligent to care for their properties and receive passive income, the “losses” don’t actually exist.
(It must be noted that this is an advantage only available to active investors.)
There’s also the opportunity to defer tax liability via the 1031 exchange and the ability to deduct mortgage insurances.
When you flip, you have to worry about paying Uncle Sam the taxes from your profit in a large chunk. Not fun!
There are plenty of other advantages to a buy-and-hold real estate strategy: like leverage, equity, and the ability to exit at any time. Ultimately, it is a strategy that affords investors the freedom to control their investments—not be controlled by them.
For real estate investors that want to earn passive income, it is the strategy to choose.
Want to buy-and-hold real estate as a passive investor?