The real estate industry can provide new and seasoned investors with the opportunity to build great wealth, and this especially holds true for those who have an interest in rental properties and utilizing the power of leverage. Why is this the case? Because this particular investment type allows for the use of leverage, offers incredible tax advantages, as well as a high ROI, and has proven to be an outstanding hedge against inflation in an unstable economy. With that said, let’s dive into the top benefits of buy and hold real estate that has driven investors to realize just how lucrative and stable this investment vehicle really is, especially when leveraging other people’s money and time.
Top Benefits of Investing in Buy and Hold Real Estate Using Leverage
Most individuals who are seeking out wise investment choices seem to gravitate towards rental properties. In fact, buy and hold real estate is responsible for creating some of the wealthiest people in America who were able to grow their wealth utilizing other people’s funds, as well as their time. With that in mind, below, we will discuss the use of leverage and the most notable benefits of investing in rental real estate:
1. Harness the Power of Leverage
Leverage is a powerful investment strategy that allows you to utilize other people’s money and time to successfully build your buy and hold portfolio – even those who have more than enough money and time to make a deal happen, still turn to outside resources. It’s the smart thing to do so you are not tying up your own resources that can be used elsewhere.
Leverage with Money:
Real estate is the only investment vehicle that you can leverage and use someone else’s money to such a great extent. 100k can buy you 400k worth of real estate! You can 4-5X your buying power. With real estate investing, you just have to come up with the down payment and the bank will secure the rest; try doing that on the stock market!
Leverage with Time:
When investing in passive real estate, you can leverage other people’s time. An active investor has to find a deal and manage it while a passive investor is using other people’s time! For instance, you are leveraging time when you have property managers do the work by collecting the rent and managing the tenants. This allows you to have more time doing what you enjoy most while your investment grows.
Leverage a Team’s Experience:
If you don’t have the experience needed to invest in real estate on your own, you can leverage a team’s experience to educate yourself, help avoid mistakes and select the right properties that match your needs. For example, utilizing a full-service real estate company is an incredible use of leveraged time in which a lucrative property is located for you, a reliable tenant is placed, as well as a property manager, all while you learn the ins and outs of making it happen.
2. Buy and Hold Properties Can Produce a High ROI when Using Leverage
With the ability to leverage, you can create a higher return on your investment. Real estate investors earn four streams of income: Appreciation, Principal Reduction, Tax Benefits/Depreciation, and Cash Flow. This creates double-digit returns in ways that are not possible with other asset classes.
3. Real Estate Investors Greatly Benefit from Property Appreciation
Real estate is an asset class that appreciates over time. For instance, if you used 100k to buy 400k worth of real estate, as the investor, you get appreciation on the 400k rather than just your down payment; this is powerful. According to Case-Shiller, the average appreciation rate on real estate is 3%, and 3% of 400k is a 12k annual return! On a 100k investment, that = 12% ROI on appreciation alone!
4. Allows for a Steady Stream of Positive Cash Flow
Cash Flow is what most people are familiar with and what they are striving for. Fortunately, Buy and hold properties and cash flow go hand-in-hand. In reality, most investment types can take a considerable amount of time to start generating cash flow, while rental properties can start cash flowing the first month a tenant is placed, and this is why cash flow has made it to our list of top benefits of buy and hold real estate.
So, what exactly is cash flow? In simple terms, it’s Rent minus expenses & mortgage payments = Cash Flow.
The goal, of course, is to have a positive cash flow when making a real estate investment.
On a long-term hold and when using leverage, it’s important to look at the cash flow for:
- Additional reserves for future expenses
- Use to pay off the property faster
- Use to acquire more properties
The real cash flow, in this case, is when the property is paid off, unless you paid for the property all in cash. If you leverage, the goal is to allow some time to pass by to pay off the property, giving you more equity (which is the 3rd stream of income below) every month and eventually paying off the property.
5. Take Advantage of Debt Pay Down (Principal Reduction)
When buying an investment property with leverage, as opposed to all cash, you will get a higher rate return, use less of your own money, and you also will get the benefit of principal reduction. In addition to this, every time you pay down the principal, you are building equity, and you are also getting a return. The average return on debt pay down is about 4% when paying down your loan!
The good news is, on an investment property, the goal is to have your tenant be the one making the payments during a long-term buy and hold. The longer you hold the property, the higher the percentage is being allocated to principal pay down. Once the debt is paid down, it goes away and your property reaches stage three of actual cash flow!
6. Buy and Hold Real Estate Yields Incredible Tax Benefits Such as Depreciation
Owning real estate allows for depreciation of the property itself, with the benefit of keeping more of your money in your pocket! You can build wealth through tax strategies that utilize depreciation such as a cost segregation study, which can save you thousands of dollars, or a 1031 exchange opportunity that defers tax liability forever while still investing your funds in new investment properties.
You can read more about how a cost segregation and a 1031 exchange works by heading over to our post titled Tax Shelters for Real Estate Investors. It would also be a good idea to view the following video that discusses just how much money you can save by utilizing a cost segregation study:
7. Rent Increases Can Boost Your Cash Flow
Over time rent goes up, especially in growth markets. New jobs and a healthy economy allow the rents to rise in the market. Also, over time you may make property improvements that allow for a much higher rent to be collected. Even though this is a benefit, it is important to work with your property management team on timing. The goal is to prevent vacancy and keep great tenants renting and renewing for a long period of time.
Rent can also increase during an affordable housing crisis, which is what’s currently going on at this time. When housing is unaffordable, people turn to rentals, and eventually, there can be a shortage of available rental properties, and property owners tend to raise rents during a market such as this. When this happens, new construction properties come into play because there can be such a great need for rentals that new properties must be built, and there will generally be renters eagerly waiting to sign a lease. Take a moment to view the following article that we put together on the topic of increased rental property demand.
8. Protects Against Inflation
Owning investment properties and using leverage is a great way to hedge against inflation. If prices go up, so will the cost of your properties! Inflation has proven to benefit real estate investors and hurt those who invest in liquid assets. In addition to this, owning assets that rise with inflation is a great way to protect yourself against the risks of the volatile stock market.
9. Freedom Number – Retirement Plan
The goal of every buy and hold investor should be to not only create a net worth well into the millions, but to also live off the passive income of their portfolio. They can do this by using leverage and acquiring the right amount of properties and holding them. As time goes by, the investor will own properties that are free and clear that are generating cash flow they can live on, which enables them to pass this generational wealth on to others. How quickly this happens depends on how quickly investors take action to acquire the right amount of assets and time in the market to allow properties to be paid off. If you need help determining how many assets you would need to reach your freedom number, you can download our free Freedom Cheat Sheet.
10. Less Risk than the Volatile Stock Market
Real estate being a tangible asset is less risky when compared to the high risks of the stock market. You have more control of the properties you own versus the stock market, where you have zero too little control.
To put it simply, the traditional way of investing for retirement has proven to be broken:
Based on a survey conducted by Transamerica Center for Retirement Studies, the median retirement savings by age is:
- Americans in their 20s: $16,000
- Americans in their 30s: $45,000
- Americans in their 40s: $63,000
- Americans in their 50s: $117,000
- Americans in their 60s: $172,000
This is not just a problem but a crisis. However, you can avoid this altogether by ensuring you have enough to retire on by using your retirement funds to invest in real estate with a self directed IRA.
Benefits of Investing in Buy and Hold Real Estate with an SDIRA
Although we were taught that investing in the stock marketing using a 401(k) or traditional IRA is the wise thing to do, as I mentioned, this system is broken. Many people simply don’t have enough control over their funds utilizing these traditional retirement accounts, and most don’t know what an SDIRA is and how it can benefit them financially. With that in mind, let’s take a look at some of the advantages of using a self directed individual retirement account to take back control and build wealth the right way:
Protection – Safeguard Your Investment from the Risks of the Stock Market
- Protects the value of your dollars with the ability to hedge against inflation
- Offers protection against market volatility
- Allows you to truly diversify your retirement portfolio
Accelerate – Super Charge Your Investment Performance
- Provides three streams of revenue + tax incentives
- Enables you to leverage your dollars with the ability to buy more assets compounding your returns
Control – Take Back Control of Your Future and Begin to Create Legacy Wealth
- You gain access to the investment class that has been kept away from you
- You can plan the best strategy that will work for you and your family
- Allows for multiple personalized strategies and maneuvers
Transparency – No More Hidden Fees that are Affecting Your Overall Performance
- Stop battling hidden fees that are draining your retirement savings
- According to a 2012 study published by the progressive think tank demos, high 401(k) fees can drain $155,000 from an average household over a lifetime
For those who would like to dive into this topic more, you will be interested in reading our article titled Why Switching from a Traditional to a Self-Directed IRA is a Smart Strategy for Growing Your Retirement Funds.
We also have this informative video that goes over the differences between investing in stocks vs buy and hold real estate:
Now You Know Why Over 90% of the Wealthiest Individuals in the US are Invested in Rental Real Estate!
I hope this article on the top benefits of buy and hold real estate has inspired you to move forward with adding investment properties to your portfolio, especially if your goal is to become financially independent. Real Estate is really the most lucrative asset class to own, and when using leverage to obtain it, you can quickly build an impressive portfolio.
Whether you’re new to the game or a seasoned investor, we invite you to schedule a complimentary call to discuss your investment goals and see how our full-service real estate company can assist you in reaching your dream of owning a cash flowing rental property. Additionally, take a moment to check out all our real estate programs to get an idea of the various ways we can help you build wealth for you and your family.
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