Maybe you’re new to this real estate investment thing. You’ve heard about a “buy and hold” strategy, and you’re wondering… how long do you really have to hold a property? Many of our investors are in it for the long haul, but even buy-and-hold investors know the value of a good exit strategy.
Here’s everything you need to know about holding investment properties.
4 Reasons People Hold Real Estate
1. Reaping long-term gains
At the minimum, investors should plan to hold any given property for at least a year. Five years is the most common minimum benchmark, but we say a year because of capital gains taxes. The sale of a property means paying these taxes, but the rate is considerably higher if you sell before that first year is up. It’s a typical issue flippers contend with, but no worry for a buy-and-hold investor.
2. Scaling net worth
Owning real estate is a great way to cushion your net worth in an inflation-resistant, income-generating structure. As you buy more properties, your net worth compounds. Holding on to properties isn’t particularly liquid, but it allows you to a) leverage wealth and b) appreciate it over time while c) generating passive income.
3. Securing generational wealth
Holding real estate isn’t about reaping the rewards in the present, though it can certainly do that. For most, buying real estate is more about securing lasting generational wealth. You’re buying these properties not solely for yourself but for your children and their children. Many investors include their properties in estate planning, passing on these assets (and their cash flow) to the next generation.
4. Benefiting from the passive income/appreciation combo
Buy-and-hold SFRs have a two-pronged approach to wealth-building. (Three if you want to talk about the tax advantages!)
First, owning that property and letting it appreciate builds equity. Over time, you pay off your mortgage and reap the benefits of increased property value. Then, there’s cash flow. Your residents provide a steady stream with which to maintain and pay off the home. Later, when the mortgage is gone, there’s a bigger share of the cash to build your portfolio and do what you want.
4 Reasons People Sell Early
Buy-and-hold investing works. That doesn’t mean it’s always the best choice to hold your rental properties until the end of time. There may be times when selling a property is prudent. It may allow you to grow your portfolio in new ways that better suit your evolving financial goals.
Part of having an effective exit strategy is knowing when to execute it. Here are some signs you might want to sell a property:
1. The Property Is Consistently Problematic
Every investor hits a snag or two along the way. Instances like these aren’t reasons to jump ship, but consistent problems and difficulty profiting are red flags. If your rental becomes a money sink and more of a risk than an asset, it may be time to exit gracefully.
2. You stand to make a killing
Sometimes, the market puts you in an excellent position to sell. There’s great earning potential when you hold properties for a long time. Think about those fortunate Californians who bought their homes in the 50s and 60s for under $100,000. Today, those properties are worth ten times more, at least.
That said, you must consider if the cash from a sale beats out the combined benefit of your existing equity and cash flow.
3. You're no longer interested in a particular market
You might see the market turn in a way you don’t like. Now, market conditions are temporary and ever-changing. We mean long-term trends and watching for the writing on the wall – not minor, inconvenient fluctuations.
For whatever reason, you might not want to invest in the same place anymore. It might be time to sell your assets in that area and capitalize on the new locations that pique your interest and provide better opportunities.
4. Your depreciation benefits run their course
27.5 years. That’s how long the IRS deems you can claim depreciation benefits on a property. So, in short, it helps you pay fewer taxes. Looking for a new property might be a good idea when that benefit runs out. Just remember – depreciation isn’t free money. Like all things IRS, there are nuances and complexities to consider. We recommend consulting with an experienced, investor-friendly CPA who can help you maximize Uncle Sam’s incentives, programs, and tax breaks.
Our advice? Go in with the intent to hold. Know what you do and do not want in investment properties and your investing experience. When your goals and metrics are clearly defined, you can better know when executing an exit strategy is appropriate.
Regardless of your short or long-term goals, REI Nation makes investing in real estate stress-free.