One reality of real estate is that it is a finite commodity. You can’t make any more. You can develop existing real estate for more productive purposes and you can stretch the boundaries into still uninhabited territories. But you can’t create any more of it. This and other factors could be behind the low inventory of properties for sale and could factor into the future for both homeowners and investors.
The last amendment to the original Homestead Act of 1862 was passed in 1909. Since then, the federal government has not given away any substantial amount of free land. Generally, developers only develop more property when the cost of new developments is more attractive than the cost of existing developments. The cost of new developments face more regulation, remaining lands are more costly to develop, buyers are preferring homes closer to urban centers rahter than far-flung suburbs, and other reasons have resulted in less new development.
Unpredictable real estate bubbles, too high of mortgages that go underwater, mass foreclosures on over priced homes, and many other reasons are convincing existing owners to stay put.
For the common homeowner, never selling means never again paying the associated buy/sell transaction costs. It means always knowing what the fixed rate loan cost will be for the next 30 years. It means paying off the mortgage and never having that payment again. It means passing the homestead on to heirs that will never have any of those costs. It means heirs might buy more real estate to add to the family wealth. After all, we know the values are going to go up because no one is making any more real estate.
Never selling doesn’t mean you can’t enjoy the wealth that comes with appreciated value. You don’t have to sell to qualify for a second mortgage (or a new first mortgage after the original is paid off) or a line of credit. Those highly secured loans come with great interest rates to finance a boat, vacation home, dream vacation, or whatever the homeowner wants – and still own the homestead.
Most investors strive to buy low and sell high. But what if you bought low and never sold? Bought when there is blood in the streets and held on forever? Today, you would be collecting constantly increasing rents while your investments costs started low and expenses remain low.
Investors can use that reliable income to execute the dollar cost averaging method at any time. That’s putting aside a set amount of your rental profits at regular intervals. Then buying another property at regular intervals regardless what the current market is doing. Or waiting for another blood in the streets opportunity. After all, you know the value is eventually going to go up because they aren’t make any more real estate.
Of course, there are many more financial advantages to never selling. Just like homeowners, the investor doesn’t have to pay buyer/seller transaction costs on property that is held forever. Never pay capital gain taxes. Use the depreciation to defer taxes on the income from the property. But never pay the recapture tax. Once the mortgage is paid off, all of cash flow comes straight to you... FOREVER!
Having equity means you can take out the same second mortgages or line of credit as a homeowner. Use it to make more investments or to finance your dream of a lifetime.
Of course, you could choose to combine a never sell strategy with another conservative strategy. Constantly monitor your portfolio over several years. Only when the time is right, sell only your lowest performing properties to finance your way into higher performing properties.
Real estate investing strategies are only limited by your own creativity. Today’s best strategy could be not waiting to buy investment property. Instead, buy investment property but never sell it. It’s at least worth considering.
Please leave a comment if this article was helpful or if you have a question.
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for seven years. He also draws upon 35 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. In the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.