In the feeding frenzy following the US real estate collapse of 2008 – 2011, house flipping made headlines around the country, as buyers seized on distressed properties being sold for rock bottom prices, repaired them and sold them quickly for higher prices. This appeared to be the way to make money by investing in real estate. But that kind of real estate purchase is speculation, not investing, with no avenue for creating long-term income.
As more and more foreclosed homes and distressed properties flooded the housing market as a result of many homeowners defaulting on payments, investors both seasoned and new applied the “buy-sell” mentality of the stock market to real estate, buying low and selling high while pocketing the difference.
But although house flipping and other kinds of buying and short-term selling strategies can yield an immediate profit, this is no true investment strategy. As Jason Hartman advises, the way to real wealth in rental real estate is to buy and hold as many properties as possible on a fixed rate mortgage, rather than sell them quickly for higher prices. Why?
Selling a property usually costs money. The flippers may be making a profit from the sale of a fixed-up house, but some of that profit will be devoured by the costs of closing a new deal. As often as the cycle is repeated, money will always be lost. Investors who purchase properties under whatever circumstances and keep them never have to factor those costs into their accounting once the initial sale takes place.
If you must make repairs on a house in order to sell it immediately, you most likely won’t be eligible for the tax benefits associated with the repair and long-term maintenance of an income property you’re holding on to. Those expenses will be essentially out of pocket, a risk taken in hopes of a big enough profit later on. Repairs and the costs of upkeep are tax deductible, with allowances for depreciation as well.
Short-term buying and selling of properties means you only take away the difference between your initial investment and the sale price, minus associated selling costs and the investment toward maintenance. But the income in income property comes from collecting steady rent checks from tenants over time, along with the associated tax breaks, bailouts and inflation-devalued debt. Buying cheap and selling quickly for less cheap offers no way to reap those benefits over the long term.
Income property investing is not without risks. A particular market may suffer a downturn, or a property may stand vacant without rents for a time. But as Jason Hartman points out, diversifying your holdings in a variety of markets offers a way to avoid those risks. Real wealth in rental real estate comes from making wise investments in viable properties that yield returns over the life of the investment.
The Jason Hartman Team
