Let’s talk about a feel-good rom-com movie many of us know and love: She’s All That. Let’s also talk about investing in real estate. Yes, as impossible as it seems, there is a connection. And yes, I’m going to sprinkle this Cinderella story with some real estate jargon. Hear me out.
Freddie Prinze Jr. plays Zack, a clichéd, all-American, homecoming king type of guy (think of Zack as the real estate investor). Rachael Leigh Cook plays Laney, a frumpy wallflower. Zack’s friends dare him to turn a homely girl into prom queen within a few weeks. Zack picks Laney as his target (think of Laney as the real estate property). Zack knows winning this bet requires that he attempt an extreme makeover on Laney. He enlists friends to completely “renovate” Laney by revamping her hair, makeup, clothes and personality so he can improve the odds that she becomes prom queen. Zack can’t wait to cut her loose after this is done and collect his winnings. In real estate terms, this looks like a classic fix and flip.
Fix And Flip: A Risky Quick Buck?
Imagine this: An investor buys a well-located property in need of some TLC. They give the kitchen some new cabinets and a pretty backsplash. They might even redo a bathroom and change the light fixtures. This is all so that after the fix, they can flip the property by selling to a new buyer at a profit.
Does this work? Sometimes.
Many people have pocketed a few shekels on a fix-and-flip strategy. You may even know one of them. Heck, HGTV has built an entire TV network on shows about fixing and flipping houses. That means this must be a great way to invest in real estate, right?
Well, not so fast.
Fix and flips require a short-term mindset and a willingness to overlook some risky variables, most notably market timing. The flipper sits at the mercy of market cycles and must feel confident in their ability to predict the future and sell at the right time. After all, every month of carrying the vacant property cuts into the quick bucks.
The Road To Real Estate Wealth: Buy And Hold
The buy-and-hold method has proven to be a low-risk strategy for accumulating real wealth across all asset classes, especially real estate. Experience and the numbers show that long-term buy-and-hold strategies have outperformed their market-timing strategy counterparts. Warren Buffett has become one of the country’s wealthiest men by buying stakes in good companies and holding them for the long term.
She’s All That
But I digress. Back to the movie.
Like all good rom-coms, the plot unravels. Once Laney becomes popular, her popularity (or market value) skyrockets. She’s a shoo-in to win prom queen. Zack stands to collect his winnings. Except Laney finds out that she was the subject of a bet, so she ditches Zack and the prom. The jig is up.
Laney never becomes prom queen. Zack realizes his mistake and, naturally, has fallen for Laney. Spoiler alert: He wins her back and dates her with the intention of keeping her forever because the long-term benefits were so much more attractive than the short-term ones. Sounds an awful lot like a buy-and-hold strategy, doesn’t it?
Who knew great investing advice could come from ’90s movies? You heard it here first.
The Investor Advantages In Buy-And-Hold
When you buy an apartment with the intention of holding it for the long term, there are countless reasons it’s a better way to invest in real estate.
Equity: As you repay the principal balance on your mortgage and property value increases, the equity in your property increases. You can use leverage to take cash out of this property and use it to buy more properties to grow your real estate portfolio — and eventually, your empire.
Cash flow: The few hundred bucks of profit you see at the end of the month from your single property might not seem like much at first, but keep your eyes on the long-term plan here. This amount will grow, and over time, your rental income will replace your 9-to-5 job. That’s the power of passive income.
Tax benefits: Owning property allows you to deduct certain expenses such as mortgage interest, insurance and property taxes, reducing the amount you owe.
Appreciation: Real estate is an asset class that truly holds its value and generally increases in value over time.
It’s just cool: It’s fun to invest in real estate in different areas around the world.
If you want your real estate investment to bring you benefits over the long term, the buy-and-hold strategy comes out ahead of the fix-and-flip approach.
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