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9 Big Advantages Of Long Term Buy And Hold Strategies
In the world of real estate investors, people usually formulate their overall strategies by focusing on long term or short term.
Both methods have their own pros and cons. There cannot be a correct answer.
But for those who have yet to grasp enough experience expertise to attempt quick flips for profit, the long term strategy is often the preferred choice compared to new insurance.
There is also a general stigma attached to short term investors. Outsiders who don’t understand real estate often label them as speculators or even land squatters. This is why a long term perspective on real estate is more commonly labelled as the smarter way to invest.
Other than that, here are 9 big advantages of having a long term wealth building strategy towards real estate.
If you have no financial or investment background, it could be very difficult for you to understand why depreciation is something positive rather than negative.
Common sense tells us that if an asset loses value, we lose money. So it can be a real eye-opener when you hear about how depreciation is played in the real world.
In accounting standards and principles, depreciation is classified as an expense incurred by the business.
So even though you did not incur a real cash expense for your operations, you can deduct depreciation from your profits. This will result in a lower net profit for tax assessment while improving your cash flow.
You should talk to your accountant if you are unsure of what you are doing.
2) Remodeling to increase value
Over the years, of holding onto your property, you will have improved or replaced parts of it.
Rehabbing can greatly increase the value of your property if you know what you are doing. You don’t need to be an expert builder to know that replacing the roof with a new one will make the house a more valuable one.
Other building works that increase value include, modernizing the kitchen, building a new extension to increase the living space, converting extra space to bedrooms, etc.
3) Deductible property tax
The property taxes you pay of your properties may be tax deductible depending on where you conduct your business.
This means that the amount of property tax you pay could be legitimately used to offset your taxable income when calculating your tax assessment.
Sounds confusing? Just take this example.
If the property tax you pay is $2500. And your personal chargeable income for income tax is $30000, you can deduct the $2500 from it and end up with $27500 as chargeable income.
This will mean a lower income tax expense especially if the deductible takes you down a whole tax bracket.
4) Deductible mortgage interest
The same deductible principle can be used on your mortgage interest expense.
Just remember to check with your accountant when you are unsure. Different states have different tax regulations and you don’t want to be stepping on the toes of the law.
5) Capital gains tax
For properties held for over a year, you might qualify for capital gains tax instead of the personal income tax rate.
For example if a $15000 portion of your income is classified as capital gains, this $15000 might enjoy a lower tax rate than if it were a regular personal income tax rate.
The numbers you might save can be staggering.
6) Economies of scale
If real estate is your chosen vehicle of investment and you are a long term player, it won’t be surprising that you eventually build up a portfolio of multiple properties over the years.
This would mean that you enjoy the leverage of lower costs for managing each property with economies of scale.
For example, instead of hiring a management company to manage 1 house, you can get better rate for them to manage 5.
The same can be said of materials, furniture and equipment you purchase.
7) Stable cash flow
With tenancy contracts signed with tenants over the long term, you can have a more predictable cash flow to plan your expansion.
Nothing breeds more confidence to business decisions than having a certainty of the amount of cash being deposited each month. Rental collections are one of the most stable sources of cash flow.
Surely your tenants wouldn’t want to be chased out of the house. And even if you do end up with tenants that don’t pay, you have the security deposit to fall back on. But do remember that there are laws that specify what these deposits can be used for.
Don’t do anything that you are unsure of to regret it later.
Just because you are the landlord and the property belongs to you does not mean that you will emerge from every dispute victorious.
8) Value appreciation
Real estate value appreciates over the long term. This has been proven throughout history. You would be really be down on luck if the properties you buy devalues over time.
But generally speaking, the longer you hold onto a house, the higher the value rises.
Value appreciation is a focal point to fully realize the potential of a buy and hold strategy.
The common concept is to get tenants to pay rental which will be used to fund the mortgage payments.
The leftover, if any, is a small profit that you accumulate or reward yourself with. The full benefits will then come to reality when you cash out by selling the house that you basically paid nothing for.
You can of course choose to hold onto the property forever and reap the cash flow constantly flowing into your pockets. But if you are retiring, maybe a huge cash injection will enable you to do everything you have ever wanted to do.
This is the beauty of real estate.
Still don’t feel like entertaining the thought of selling? Don’t despair.
There are many credit products offered by banks and other lenders that allow you to cash out without selling out.
9) Using equity
You don’t need to sell your house to gain access to the equity that is locked inside. The financial world have created many types of products that allow you to tap into your equity.
They come in the form or HELOCs, home equity loans, reverse mortgages, etc.
The availability of credit facilities secured against property is a big reason why real estate is a favorite asset among investors.