By Eric Lorimore
The Buy and Hold strategy, as it applies to real estate, is and always has been responsible for creating more millionaires than any other strategy in existence. The main reason is because it allows you to develop equity through appreciation over time. There are many short term strategies such as lease options, wholesaling, and flipping that can create some cash in your pocket, but in no way will it improve your net worth over time.
I have found in my 20+ years of investing that the process of purchasing real estate is the most important part of the ownership cycle. Selling is easy in the right market, and the only time in the real estate transaction you become responsible for commissions and capital gains tax. It can kill the whole deal if done improperly and at the wrong time.
Your goal in real estate investing should be to develop as much equity as you can in the property while still having enough passive income to get you there. As long as you own the property, you will have the additional benefit of tax sheltering that you cannot obtain from any short-term strategies. THIS is the fundamental reason why the Buy and Hold strategy is #1.
Most people fall within the 20%-36% income tax bracket, and for all you Californians out there, California has one of the highest state income tax rates. What’s even scarier is that most people work the first 4 months of each year just to pay their taxes! The fact is, you will never get ahead financially until you learn to shelter your income from taxes. The wealthy population in this country know how to shelter their income from taxes, which is why so many of them practice the Buy and Hold strategy and own rental properties.
As time passes and you pay off your loan, you get the benefit of additional cash flow which comes in handy in retirement. You may choose along the way to do what is called a 1031 Exchange into a larger, more valuable property that produces heavier cash flow. The beauty of a 1031 Exchange is it defers the capital gains tax (which increased 1/1/13) into the future and allows you to transfer more of your equity to the new purchase. This is another benefit to building wealth in real estate that only the Buy and Hold strategy offers.
Historically, properties have doubled in value every 7 to 10 years going back 50 years in time. Imagine your equity position if you hold a property for 20 or 30 years!
Once you sell, you not only loose out on future appreciation, but you have to pay commission and capital gains tax. I look back to some of the first properties I owned and wish I had never sold them. While I sold them for a profit at the time, their value today is 2 or 3 times as much. It really made no sense to sell and let the next owner make all that appreciation. I managed not to sell one property I purchased many years ago and finally paid it off. The cash flow on that one property today is over $1200.00 per month after expenses. That’s more than the average social security check, plus rents have gone up thanks to inflation. I never thought I would actually like inflation until I started owning real estate!
At a recent Marshall Reddick Real Estate Network Millionaire’s Club dinner, I was seated at a table next to a gentleman who had been investing in real estate with them since 1999. He never sold any of the homes he bought. Many of these properties have doubled in value over time and he is now considering using 1031 Exchanges to move into larger properties. The cash flow and tax shelter he has received over time have been a great asset to him, and now for estate planning purposes he is consolidating his holdings into larger properties to one day will to his heirs. His plan was to leave a legacy to his children and grand children. The Buy & Hold strategy allowed him to realize his dreams.
True wealth in real estate is realized through appreciation. Cash flow, although a necessity, is the glue that holds the deal together to allow you to wait until the value grows. Let your tenants cover your monthly payments and make you rich!