Why Buy & Hold Is Such a Powerful Investing Strategy

Buy-and-hold real estate investment is the best investment around. It is the best way for someone of modest means to become independently wealthy.

The way we like to think of it is that buy-and-hold real estate is the “IDEAL” investment, which is an acronym for why it’s so good.

I: Income

The income from real estate is just the cash flow that an investment property brings in. This should be seen as the cherry on top, though. Many new investors think that they can buy enough properties to just live off the cash flow on a beach somewhere. Yes, this is possible. But if you use debt, it will take quite a while and quite a few properties.

But that doesn’t mean the extra income isn’t nice. Many stocks don’t give out dividends and no bonds do. So the cash flow is definitely a nice bonus. But that’s what it is — a bonus.

D: Depreciation

Real estate depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property placed into service by the investor. Depreciation is essentially a non-cash deduction that reduces the investor’s taxable income. Many investors refer to it as a “phantom” expense because they are not actually writing a check. It is merely the CRA allowing them to take a tax deduction based on the perceived decrease in the value of the real estate.

Real estate depreciation assumes that the rental property is actually declining over time as a result of wear and tear. But we know this is not typically the case. Not many other forms of investment offer comparable depreciation deductions. As a result of real estate depreciation, the investor may actually have cash flow from the property but may show a tax loss.

E: Equity

What got me first interested in real estate was looking at an amortization table. One of the big things successful buy-and-hold investors do is get long-term bank debt on their properties and get rid of private loans, and especially hard money loans, as soon as possible.

Yes, in the beginning, particularly with a 30-year loan, you are not paying off much principal. But each month you pay off more and more principal and less and less interest. So there is a bit of exponential growth here.

And it’s nice to have some forced savings through principal paydown rather than paying all of it away as you would with an interest-only loan or rent.

A: Appreciation

In the long run, real estate goes up in value. Yes, there are exceptions like the 2008 financial crisis. But usually, it goes up, and over the long-term, it basically always goes up.

Usually, when real estate goes down in value, it’s a fairly small decrease. Generally, real estate appreciates at a pretty steady rate and has, historically, beaten inflation by a small amount.

L: Leverage

One of the big advantages of real estate is leverage: the ability to use OPM (Other People's Money).

Leverage is a two-edged sword. Real estate can go down, which would lead to a loss. But two points work against this. One, real estate goes up in value over the long run as listed under “A,” which is why buy-and-hold real estate investment is a “get rich slow scheme.” And two…

Built-in Equity & an Inefficient Market

Unlike the stock market, real estate is a very inefficient market. The biggest so-called “disadvantage of real estate,” namely that property is relatively illiquid, provides a great opportunity.

Because real estate can’t just be sold in a day by pressing “sell” on E-Trade, it means that you can find those motivated sellers and value-add deals and buy under market. With stock market investing, it’s possible but very, very difficult. 

If you get a good deal, that insulates you from the risk of leverage.

For these reasons, I strongly believe buy-and-hold real estate is the best investment around. At the time of this Newsletter, it may not be the best thing to jump into headfirst. But the market will normalize soon enough. Therefore, buy-and-hold real estate is definitely something you should consider investing in (or investing more in) going forward.