Buying & Selling Houses

Why Buy & Hold Is Such a Powerful Investing Strategy

Expertise: Mortgages & Creative Financing, Business Management, Landlording & Rental Properties, Commercial Real Estate, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Personal Development, Real Estate News & Commentary
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As I’ve noted before, the current market is not a particularly good one for newbies or for big moves by seasoned investors. But that doesn't mean one should abandon the idea of buy-and-hold real estate investment.

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Indeed, I am convinced that buy-and-hold real estate investment is the best investment around. It is, as my dad likes to say, the best way for someone of modest means to become independently wealthy.

The IDEAL Investment

The way we like to think of it is that buy-and-hold real estate is the “IDEAL” investment, which is an acronym for why it’s so good.

I: Income

The income from real estate is just the cash flow that an investment property brings in. This should be seen as the cherry on top, though. Many new investors think that they can buy enough properties to just live off the cash flow on a beach somewhere. Yes, this is possible. But if you use debt, it will take quite a while and quite a few properties.

But that doesn’t mean the extra income isn’t nice. Many stocks don’t give out dividends and no bonds do. So the cash flow is definitely a nice bonus. But that’s what it is — a bonus.

D: Depreciation

The government considers a property to depreciate in value from the purchase price to zero in 27.5 years. (39 years for commercial real estate, and this only includes the property, not the land. The property is usually 80% of the price and the land 20%.)

Thus if you buy a property for $275,000 (assume no land value here), every year it “loses” $10,000 of value according to the government. This means if you make $10,000 in income with your property, you made nothing according to the IRS and owe no income taxes.

This also goes for other income if you are an “active investor,” namely if investing in real estate is your career rather than a form of passive income. The rule is you need to spend 500 hours a year to be considered an active investor. (Talk to your accountant about this if you are not sure you qualify.)

When you sell, you have to pay taxes on whatever depreciation "losses" you recapture, but there are two ways out of this. You can do a 1031 exchange and continue to defer that gain into another property, or you can pass it onto your heirs and the basis will start over.

There’s also the mortgage interest deduction. So yes, there are a lot of tax advantages to holding real estate.

Related: The Beginner’s Guide to Buy & Hold Real Estate Investing

E: Equity

What got my father first interested in real estate was looking at an amortization table. One of the big things successful buy-and-hold investors do is get long-term bank debt on their properties and get rid of private loans, and especially hard money loans, as soon as possible.

Yes, in the beginning, particularly with a 30-year loan, you are not paying off much principal. But each month you pay off more and more principal and less and less interest. So there is a bit of exponential growth here.

And it’s nice to have some forced savings through principal paydown rather than paying all of it away as you would with an interest-only loan or rent.

Close up of unstable stack of coins on world map.

A: Appreciation

In the long run, real estate goes up in value. Yes, there are exceptions like the 2008 financial crisis. But usually, it goes up, and over the long-term, it basically always goes up.

Usually, when real estate goes down in value, it’s a fairly small decrease. Generally, real estate appreciates at a pretty steady rate and has, historically, beaten inflation by a small amount.

Appreciation also acts in a bit of an exponential way. For example, a property bought for $100,000 goes up 5% in year one, so it goes up by $5,000 and is now worth $105,000. Next year, it goes up 5% again. Well, that’s a gain of $5,250, so it’s worth $110,250. The next year, it would be an increase of $5,512.50 and so on.

L: Leverage

One of the big advantages of real estate is leverage: the ability to use OPM (Other People's Money).

For example, if you buy a property for $100,000, but get an 80% loan, you only put down $20,000. Now if the property goes up in value by 5%, your return is actually 25% ($5,000 / $20,000). Which is a huge return, especially with the rest of the advantages listed above!

Now yes, leverage is a two-edged sword. Real estate can go down, which would lead to a 25% loss. But two points work against this. One, real estate goes up in value over the long run as listed under “A,” which is why buy-and-hold real estate investment is a “get rich slow scheme.” And two…

businessperson showing unbalance between stacked coins

Built-in Equity & an Inefficient Market

Unlike the stock market, real estate is a very inefficient market. The biggest so-called “disadvantage of real estate,” namely that property is relatively illiquid, provides a great opportunity.

Because real estate can’t just be sold in a day by pressing “sell” on E-Trade, it means that you can find those motivated sellers and value-add deals and buy under market. With stock market investing, it’s possible but very, very difficult. After all, Warren Buffett beat a hedge fund manager in a bet by simply buying an index fund!

Related: The Ultimate List of Ways to Finance Buy & Hold Property

If you get a good deal, that insulates you from the risk of leverage.

For example, if you buy that hypothetical deal above for $100,000, but the property is worth $120,000, you have a $20,000 cushion right off the bat. If the property goes up in value by $5,000, you made 25% (assuming you got an 80% loan). But if it goes down in value by $5,000, you still have $15,000 of built-in equity and haven't lost anything.

For these reasons, I strongly believe buy-and-hold real estate is the best investment around. At the time of this writing, it may not be the best thing to jump into headfirst. But the market will normalize soon enough. Therefore, buy-and-hold real estate is definitely something you should consider investing in (or investing more in) going forward.

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Tell us why or why not in the comments.

Andrew Syrios has been investing in real estate for over a decade and is a partner with Stewardship Investments, LLC along with his brother Phillip ...
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    Rich Weatherford
    Replied 3 months ago
    In an environment where the MLS is overpriced and without a healthy amount of bank foreclosures then move to other acquisition channels... We have 3 or 4 local whole sellers, county auctions, private deals through locals brokers/attorneys for estate sales... Their are going to be a lot of pent up foreclosures when the lift the CDC order on foreclosures and cash buyers are in the drivers seat... The demand in almost unmatched in our history for housing with shortages in the millions of houses... not sure why all the advice for new folks to avoid the market... Great time to get involved in helping fix the biggest housing shortage in our history... We're doing great and part of that was moving our money out of Seattle real estate when the brought in the leftwing wacko mayor (the summer of love) and moving it to Georgia... Do your homework and cash is king...
    Chris Cooper Investor from IL
    Replied 3 months ago
    Way to bring your politics into this, so helpful! SMDH
    Craig Anderson Investor
    Replied 3 months ago
    If you buy right, below market or in a market the generally appreciates no matter life circumstances, then buy/hold is a great strategy for building wealth. Practically any investment that you have the mindset of holding for a long-term will pan out in the investors favor.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 3 months ago
    Amen! (Although you should be more cautious and demand a larger margin in a market that appears to be near the peak like ours is currently.)
    Kunal Sampat Real Estate Investor from San Jose, California
    Replied 3 months ago
    Great insights. It was helpful to get your perspective on the current market conditions as I consider myself a newbie.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 3 months ago
    Thanks Kunal, I'm glad you found this helpful. Although as I said at the beginning, remember to be very, very careful in this market as we are likely near the peak of the real estate cycle.
    John Daley Real Estate Investor from Kansas City, MO
    Replied 3 months ago
    Great article, Andrew. I do sometime have to remind myself to hold more properties as it is a strategy that will continue to pay off for years to come. It can be very tempting to cash out of a good purchase by flipping or wholesaling it, but ten years from now the buy and hold properties will give me a much better return than taking a short term gain. It’s the best of both worlds if you do enough deals to work both strategies simultaneously.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 3 months ago
    Thanks John and absolutely, the quick buck is very tempting. But real wealth comes from holding long term.
    Tim Parker Investor from Bremerton, Washington
    Replied 3 months ago
    Absolutely if you buy right. It is possible to buy at 70% (allowing for renovation) of ARV with cash and then refinance. If you do your homework and are PATIENT you get cash flow and fantastic COC. What more can anyone ask for?
    Wes Salous Investor from Oklahoma city
    Replied 3 months ago
    Sure, good solid slow secured investments that pays back thru time. I became to believe in tangible assets better than electronic investment suck as stocks and bonds.
    John Wickham
    Replied 3 months ago
    Compound interest, the Eighth wonder of the world.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 3 months ago
    Amen... along with some principal paydown and depreciation writeoffs
    Daniel Pessin
    Replied 3 months ago
    All good points!
    Mitchell Brown from Concord, California
    Replied 3 months ago
    While the first post was accurate, it does not help find an investment that is not seemingly over priced. I have been watching a lot of gardening videos on YouTube, and I am investing my time and energy in growing fruits and vegetables. Has this investment in time and money paid off? Well, no, not really. There are a number of fungal diseases, insect pests, and hungry squirrels to combat before I can succeed. Has anyone from the U.S. tried investing in emerging countries? Is there a safe to invest in overseas markets?
    Jesse Mancuso Property Manager from Charlotte, NC
    Replied 3 months ago
    Great article!
    Lynda Wesch Investor from Colton, CA
    Replied 3 months ago
    If you consistently watch the market there are deals out there. Our daughter just purchased a home in CA with $20K in equity out the door. That being said it is a fixer upper, once the improvements are done which are cosmetic she should be in the $40-$50K equity range. She is a buy and hold lady, which we are working on a couple of improvements to allow her to take advantage of house hacking. Loved your article.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 3 months ago
    That's awesome Lynda! And it's key to get that built-in equity. It reduces the risk of using leverage if the market goes down. And especially now while the market is volatile and likely near a peak of some sorts, built-in equity is essential.
    Alan Mackenthun from Prior Lake, Minnesota
    Replied 3 months ago
    Some good information, but also problems. Starting off, the I for Income should never be slighted. Owning rentals is a business, and if your business isn't generating income, it's just a lousy hobby with clogged toilets. If your investment isn't generating income or at least cash flow, then sell it and find one that does. All the other acronyms only work if you're generating income. Depreciation doesn't do you any good if you haven't income to offset. Equity and Appreciation only count way down the road when you're selling; which will happen much sooner if you're not generating income to support vacancy, turnover, and improvements. Property maintenance gets old real quick if its not generating income. Finally, leverage just allows you to dig a bigger hole if your not buying right. Income is the most important part of any long term real estate investment.
    Joe Sampson Real Estate Investor from La Crosse, WI
    Replied 3 months ago
    I’m with you Alan. Roofs, furnaces, deductibles & down payments are all expensive. It’s a long game, but good luck convincing your wife to put down another $30k down payment from your savings account if you’re not making any money or continuously complaining about tenants & contractors.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 3 months ago
    It's not that the income part isn't important; it is. It's that you aren't going to be able to live off of it until you've accumulated a good number of rentals or have no debt. It's a slow process. Mostly I wanted to dissuade some people who think you can get incredible cash flow right off the bat, live off of that and be "financially free" with a few rentals or something like that.
    Anthony Pintaro Investor from Birmingham, AL
    Replied 3 months ago
    Love this, looking forward to the IDEAL journey.
    Ron Hardin
    Replied 3 months ago
    I started investing in long term buy and hold rental properties 17 years ago. Today, I control 78 units, most of which are SFHs. I can tell you, without qualification, and without exaggeration, it has been and still is an amazing way to build long term trans generational wealth. My one regret is that I did not start sooner. For sure, there are many ways to make money in real estate, but in my opinion the best way is the BUY AND HOLD FOREVER strategy.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 2 months ago
    That is awesome Ron, congrats and on to the next 78!
    Carlos Ptriawan
    Replied 2 months ago
    many people in USA don't realize how lucky they are when the gov. could provide 30-year financing with almost free mortgage and rental/value more than 1 percent. In other parts of the world, this is non-existent. So yes, buy-and-hold is the way to go. Even if the house price went down so what, there's always equity and the rental can always pay that. The amazing system actually.
    Puneet Juneja
    Replied about 1 month ago
    Would this strategy be applicable to convert primary (tax-free gain now) into rental (potentially taxable gains of selling later after 10 years)?