The Advantages and Disadvantages of the Buy and Hold Strategy
As a result of the downturn in the economy, more and more investors are turning to a buy and hold strategy in their approach to investing in residential property. The reason is simple -- in the long term this strategy is superior and yield high returns with low risk. With the real estate market at an all time low, it is the perfect time to buy. Of course, there are advantages and disadvantages to consider, and there are certain consideration in when to buy and when to sell. The savvy real estate investor knows these and knows the market.
Defining
When investing in residential property, many investors employ a buy and hold strategy. Basically, the idea is to purchase real estate at below market value and then hold onto the property for an extended period, perhaps years, until it reaches a point where a profit will be actualized. In the mean time, the owners will even rent the property bringing in a steady cash flow. As a result, these particular investors are not interested in a quick turn around and can see quite a profit with very little risk. The key is cash flow.
Advantages
A buy and hold strategy can offer several advantages to the knowledgeable investor. If the home is allowed to appreciate for long enough, the investor can generally expect a higher rate of return on their money than they would see with other investments. In addition, tenants actually end up paying the expenses and build equity for the owner on the home through rent, and this can provide the investor with a positive cash flow. The right tenant can also offer the benefit of watching over the property.
Disadvantages
Of course, there are also disadvantages to a buy and hold strategy. For one thing, this requires a great deal of patience as it might take years to see a return on the investment from appreciation. Plus, the investment cannot be easily liquidated. Other disadvantages include the cost of renovations, managing the property when tenants are unreliable, and being at the mercy of real estate cycles. The reality is there will be no profit if the investor is forced to sell when the market is low so always employ a positive cash flow situation or pass on the deal.
To Buy
The trick to turning a profit with a buy and hold strategy is buying the right house at the right time. This requires an investor to study the market and to know the value of homes in the area. Homes must be bought low when the market is depressed but more importantly it is the cash flow. Even if the home decreases in value after the purchase, the cash flow should carry the investor until appreciates in the future. Homes that have been foreclosed or need renovations tend to be good deals. However, be careful and know the true cost of these renovations or these repairs could eat up any profit.
To Sell
The end game to a buy and hold strategy is the selling point. Investing in residential property using this strategy means being very patient and waiting until the market has reached a high point. This may take years while the home appreciates in value. Once that point arrives, consider seeking the advice of a realtor with experience in residential properties with renters. Also, do consider a rent to own lease with the renter; this will guarantee you a stable renter and may lead to a sale.
Using a buy and hold strategy can result in considerable profit if the investor is willing and able to be patient. Before considering using such a strategy, do consider all of the advantages and disadvantages. Also do the homework and know when and what to buy and know how and when to sell. Making informed decisions and staying the course can net serious gains for the savvy investor.
About the Author:
With over 20 years of experience in northern Nevada real estate, Greg Hughes is an expert at Buy and Hold Strategy and investing in residential property. His business offers clients a great way to invest in real estate. Sign up for Reno real estate investment advisor Greg Hughes' special series of reports "The Power Wealth Collection."
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