Build Wealth With Rental Properties Through Buy & Hold Investing

December 15, 2024

What Is Buy and Hold?

Buy and hold is a residential real estate investment strategy in which an investor buys a property they plan to own over a long period—anywhere from five to 30 years. The value increases over time, and the investor enjoys a stable monthly cash flow from the rental income. These properties can be single-family homes, apartment buildings, or other multifamily options like duplexes and triplexes.

Once the property’s value exceeds the money the investor put into the property, they can sell for a profit. (Or keep receiving rental income.)

Skipping the “rental” portion of buy and hold isn’t typically an option. In most cases, investors can’t leave rental properties vacant over time and make money. If they do, the property can fall into disrepair and reduce or eliminate the investor’s profit when they decide to sell.

Buy and hold cash flow should cover, at a minimum, the cost of owning and maintaining the rental property—including the monthly mortgage payment. Essentially, the monthly rent income exceeds the property’s monthly ownership cost. If so, the investment property provides the investor with monthly positive cash flow.

That’s why, in a buy and hold strategy, an investor makes money in both the short and long terms.

Let’s get started.

Buy and Hold vs. Other Investment Strategies

Buy and hold is one investment strategy, but real estate investors have a few other options.

Fix and Flip vs. Buy and Hold

Deciding between flipping vs. renting can be a challenge. A “fix and flip” is when an investor buys property with the intent of selling it for profit as soon as possible. Often, investors following this approach purchase single-family real estate that needs rehabbing to make it livable or more desirable to buyers. The idea is that the investor buys a property that, with some work, they can sell for more than the cost of the house and its rehabilitation.

Getting the property fixed up and sold quickly is crucial. Investors don’t want their equity—or the value of their investment—tied up in a property for longer than necessary. Plus, if they financed the purchase, they’re accumulating interest on that loan. The longer the investor owns a fix-and-flip property, the more they pay.

And fix-and-flip investors don’t usually rent out their properties, which means they don’t have monthly cash flow. Instead, they want to make a profit by selling it.

Many investors use both fix and flip and buy and hold strategies to grow and diversify their portfolio.

Value-Add Strategy vs. Buy and Hold

Purchasing and renovating an underperforming property is another common investment strategy. It typically requires a few years to turn the property around, but the increase in the property’s cash flow and value is gratifying. One common value-add strategy is BRRRR, or “buy, rehab, rent, refinance, repeat.”

Relative to buy and hold, a value-add deal requires more experience and is riskier. Renovating units is not as simple as it sounds—you need a good understanding of the market to know exactly what the local renters want in terms of finishes and needs. Adding a new swimming pool or washer/dryer in the units, for example, is even more difficult.

Real Estate Investment Trusts vs. Buy and Hold

Investing in a real estate investment trust (REIT) is often the easiest and least risky way to invest in real estate. A REIT makes money by building, owning, managing, or financing real estate.

Just like with other companies, you can buy ownership shares—or stock—in a REIT. The value of your REIT shares goes up if the REIT does well. Most REITs pay a regular dividend, so you can earn some money while owning a REIT stock.

But shares in a REIT usually generate less return on investment (ROI) than owning real estate. And any dividend you earn through a REIT will be less than the rent you can collect from a buy and hold property.

Wholesaling vs. Buy and Hold

Wholesaling is when an investor finds a property for sale for less than market value. The wholesaler contracts with the home’s seller, then finds a buyer for the property.

With wholesaling, an investor can make money in a short amount of time—and they don’t have to deal with rehabbing a property or being a landlord. But wholesaling requires strong sales tactics. The wholesaler must convince a property owner to sign a contract with them and then find a buyer.

Real estate wholesaling also comes with a lot of pressure. For example, a wholesaler may get stuck with a property if they fail to find a buyer or lose money if they cannot find a buyer willing to pay their asking price.

Buy and Hold vs. BRRRR

The BRRRR method is actually a slightly fancier version of buy and hold. BRRRR stands for “buy, rent, rehab, refinance, repeat”—the main difference being the rehab and refinance portion of the process.

Advantages To The Buy and Hold Strategy

Not sure if you’re ready to dive into residential investments? Learn the advantages of this strategy before you get started.

Appreciation

Over the long term, real estate usually appreciates, or grows in value. This appreciation is the main reason an investor pursues buy and hold rental properties. The longer they own the property, the more it's worth increases.

Rental Income

Investors can make money from their buy and hold properties by renting them out, creating consistent monthly cash flow. Plus, this means they don’t have to wait to sell the real estate to generate revenue.

Many buy and hold properties produce 4% to 10% return on investment (ROI) from rental income alone, depending on the market location.

Financing

Owning real estate can help fund other investments. For example, an investor can leverage the equity in their buy and hold rental properties to finance other real estate investments.

Principal Pay Down

The principal is the amount of money owed on a loan. Investors can use rental money generated by their buy and hold investment property to pay down the principal on that property’s mortgage. The loan earns interest based on the amount of principal remaining—so the faster you pay down the principal, the less interest you’re charged over the loan’s lifetime. Plus, you’ll have more equity!

Tax Benefits

Owning real estate, including investment rental properties and personal single-family homes, provides tax benefits. Tax deductions you’re eligible to take on an investment property include:

Hedge Against Inflation

Properties appreciate over time, especially if inflation goes up. That’s why the buy and hold strategy can protect your investment portfolio if inflation rises.

Increasing Profits Over Time

Rent increases alongside cost of living. However, the cost for expenses such as administration, maintenance and repair, and property management fees also goes up over time. Luckily, debt service and property tax stay relatively the same, so in the long-term, your profit margin widens.

Passive Income

If you hire a great rental property management company, buy and hold investments are reliable sources of passive income through consistent cash flow. In addition, your investment portfolio can provide money during retirement or for medical or family emergencies.

Flexible Exits

The idea of a buy and hold strategy is that you own an investment property for an extended period. But in most cases, you can sell whenever you want. No contract or agreement forces you to own a buy and hold property for a specified length of time. But, of course, if you used a loan to buy the property, you’re obligated to pay off that mortgage.

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