In the past months two friends asked my advice on their plans to purchase a new home and then sell their old home. I asked them if they had to sell the old home to purchase the new one and they said ‘no’. I suggested they keep the old home, turn it into an investment property, collect the rent, and depreciate the original purchase value of the home over the next 30 years off of their income taxes. Hopefully over the long run the value of the property will also increase thus building up equity. 

If they can do this every few years a considerable nest egg will be built up with a portfolio of many properties. Rents usually increase also over the years resulting in a positive cash flow. And…. if you leave the property in your estate for your children under present tax law much of the inheritance will be tax-free

On the other hand, I do not see people who ‘flip’ properties amassing great wealth.

I do see them make a little money and then purchase trinkets such as new cars, which only decrease in value as they age. On the other hand many homes and the underlying land frequently (but not always) appreciate in value. Los Angeles has many multimillionaires from accumulating ‘buy and hold’ property such as Jerry Buss, the owner of the Lakers basketball team and  Donald T. Sterling owner of the Clippers basketball team.

And, should you need some cash consider taking out a line of credit on one of your many properties.

Buy and hold – that’s for me!

– Ross Chadvick