A Beginner’s Guide to Buy and Hold Real Estate
Buy and hold real estate is a broadly applied strategy for long-term investing, and it is often defined as the best option to diversify the investment portfolio. This approach implies buying and holding a real estate property for a prolonged period, usually about five to ten or more years. A buyer of the property does not need to make great changes at once to increase the value.
This approach may bring both short-term profit and long-term benefits. Some of the advantages of this method are the compound effect of appreciation, easier management over time, goal planning, tax benefits, and stable net worth.
The investors often have some concerns about applying this strategy. Here you can find some tips for beginners that help to make a good investment in the apartment or commercial property. To start buying and holding property, you need to set long-term goals and then make up a step-by-step plan.
We offer some recommendations about buying and holding the strategy below.
- Put aside some money for a down payment.
- Find the right market area. Examine the locations outside of your home market.
- Build the team consisting of the real estate agent, mortgage broker, property manager in your target market.
- Start monitoring the properties in accordance with the 1% rule.
- Review the value of your portfolio each year to make certain that it correlates with your goals.
- Think of selling the properties if the appreciation is higher than the average index or in cases when the real estate does not meet your cash-on-cash criteria.
Let us take a closer look at each recommendation.
Calculate The Potential Income
Every investor should calculate the potential revenue of renting a property. The income per month should be higher than the expenses, including taxes, mortgage payments, fees and the costs for maintenance. If the investor wants to sell the property in the future, he should consider the potential profit.
Best Buy and Hold Markets in 2020
The key factor in this strategy is the choice of the proper area. The main characteristics of the right area are property appreciation and favorable market. Will this market be relevant in 10+ years?
The most suitable are areas with wide job opportunities and industry development. Conduct research on the job and salary growth in the area. Check the properties on the craigslist. Before purchasing a property find the information about the companies in the area and consider the diversity of the potential employers.
The other vital factor is population growth. Monitor the changes in population and you will understand how quickly the market is increasing.
Besides that, it is important to consider the age of the building. If it is quite old, check the condition of the roof, windows and some components like water heaters and boilers.
The last thing to keep in mind is affordability because it will influence your capacity to make an initial investment and also market growth.
Find The Right Property
If you are dealing with the property to rent you need to cut the best deal. The monthly income depends on the maintenance costs which are based on the price of the purchase. The price is not the only important factor here, you also need to take into consideration the other conditions that make a good property for a tenant.
Finance The Property
You can use various financing methods to buy and hold properties, for example:
- private money
- hard money
- seller financing
One of the most common ways of financing is traditional financing. In order to be approved, the investors should go through the application process and credit check. There is also a requirement to make a down payment that may constitute 20% or more. To compare with the other financing methods, traditional financing is the acceptable option, but it may require higher interest rates and higher down payment.
Another opportunity to purchase real estate is hard money loans. The only thing is a waiting period for a minimum of 90 days to a year before you can refinance the loan.
Loans from business partners are the other opportunities to buy and hold real estate. To secure the loan from the business partner or investor, you need to analyze the transaction or case studies from your portfolio if you have one. Networking real estate events in your neighborhood will help you to find potential partners and lenders.
Renovate The Property
The rehab properties and the properties for buying and holding are similar in terms that you need to add value. If you want to have a good buy and hold the property, you need to work on it. Include to your budget the repair costs: expenses for painting the walls and renovating the flooring. After these changes, you will be able to increase the revenue from 25% to 30%.
Hire The Realtor or Property Manager
The investors often avoid the buy and hold properties for the reason of the risk related to the tenants. The solution to this problem is to hire the property manager or consult with a real estate agent. Regardless of the approach that you will choose – to employ a manager, talk to broker or to cope with the issues by yourself – you need to plan everything ahead.
Prepare A Reserve Fund
When it comes to rental property, sometimes unexpected things occur out of the blue. You can encounter the difficulties related to the sudden breakages of the furniture or of the technics. In this case, you should have a fund for unexpected occurrences. It will help you to steady your nerves. This reserve fund may come from personal money or from high-interest credit cards.
Choose The Best Strategy
Well-planned business and clear financial goals are your keys to success in buying and holding real estate. If you apply the above-listed tips correctly and define a working plan, then you will achieve the impressive results.
You need to figure out how they buy and hold strategy will affect your daily business operations. Analyze the market and find out if the rental properties are performing well there. Think of your desired level of involvement. The buy and hold properties can depend on your specific needs.
For instance, if you are interested in a lower level of involvement, then you can entrust some regular operations to your property manager. Concerning the other investors who are seeking for more active management, operating a piece of a rental property by themselves may be a good decision. So, the best option here is to define the strategy that suits your needs and fits your work schedule.
How To Generate High Income
There is a number of ways that may help you to receive a larger income while applying buy and hold strategy.
Cashflow. This is the number of monthly earnings generated by the rental property. This income is similar to the interest you receive from your savings account. If you get a 10% cash-on-cash from the property, this is the amount of “interest” on your investment in the property.
Tax savings. In most cases, you do not need to pay taxes on the income from your property. This is how your investment becomes tax-free.
Equity. The equity is the share of the real estate in your possession. There are two ways to gain equity: when the tenants pay your mortgage for a certain amount of time and the appreciation of the property, when the appreciation of the property increases, the rise of the value depends on the general value, not only your share.
Rent appreciation. Rent appreciation depends greatly on the location and market conditions. However, the rents usually go up, on average, 2% per year. And this results in your cash flow increase.
It is vital to note that if you use buying and holding strategy, this does not necessarily mean that you will never sell it. One of the main motives to sell the property is to build wealth on the rapid appreciation. When the investor owns the real estate that brings income based on cash flow, he does not have the need to sell this property immediately. It is better to wait when the increase in property value occurs.
The Types of Buy and Hold Investments
This type of rental property is likely to appreciate if you hold it for a long period of time. Also, the investor will receive the monthly income. However, single-family rentals are not the best type of real estate to buy and hold. You need to put money into it every month and that is why it will take a longer time to reach financial freedom.
Multiple unit properties
With the property consisting of two or more units, you can cover the cost of the real estate. The management of this property will take a longer time, though it will be compensated by the income.
Other types of property
Buy and hold property is not necessarily residential real estate. This can be commercial properties, raw land or new construction homes.
Buying and holding rental property for a long time is a good way to build wealth and diversify the portfolio. You need to take into account the location of the property, the target market, the population, employment possibilities in the area and the age of the building.
Prepare a step-by-step plan that helps you track your progress. Calculate your potential income and costs for repair and maintenance of the property. Do not forget to include the extra costs and create a reserve fund for unforeseen circumstances. Choose the strategy that meets your needs – either high or low level of involvement. Hire a team of professionals who will help you to manage your issues.
To receive the higher income, take into consideration the strategies mentioned above. Determine the best type of property and conduct your own research in this matter.
You can use any type of property for the buy and hold purposes, including residential, commercial, new construction homes and raw land. Buy and hold niche is suitable even for first-time investors due to the low risks and high-income generating potential.
You can always sell the property if it does not meet your cash-on-cash criteria or due to the rapid growth of the appreciation. If you follow the plan the buy and hold can turn into one of your best investments.