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Long term rental properties are widely considered one of the best ways to diversify any real estate portfolio. The right buy and hold real estate can yield both short term gains and long term appreciation. There are many investors who are intimidated or confused with how to get started. However, I can assure you that buy and hold real estate may be one of the best investments you make, if you mind due diligence before you jump in. To that end, the following should serve as a beginner’s guide to buy and hold real estate for investors looking to get started.
Buy and hold real estate is a long term investment strategy, where an investor purchases a property and holds on to it for an extended period. The owner may have the intent to sell it down the line, but will usually rent out the property to help with buy and hold real estate financing.
Investors considering a buy and hold real estate strategy should mind their due diligence by calculating the potential income to be generated by renting out the property. The bottom line here is that the monthly revenue should exceed monthly expenses specific to the property, such as mortgage payments, interest, taxes, fees, and maintenance costs. In addition, if the investor plans to sell the property down the line, the potential profit should also be considered. Finally, the cost of taking out buy and hold real estate loans or other types of buy and hold real estate financing must be factored in. For assistance in making these calculations, simply use a buy and hold calculator such as the one on Calculator.net.
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A key component to buy and hold real estate lies in an investor’s ability to choose the right market area. In order for a buy and hold property to be successful, investors must identify an area with a promising rental market and property appreciation. This will help minimize risks that could undermine the profitability of a given investment (namely, vacancy rates or property depreciation). Anyone considering buy and hold real estate should conduct a thorough market analysis before committing to one area.
Luckily, there are a few factors that can help investors identify potentially strong real estate markets. Look out for areas with new jobs and industry expansion. See what companies are based in the area, and which employers dominate the job market. This will directly influence the next factor to look out for: population growth. To help ensure a buy and hold property stays occupied, and grows in value, watch for expanding markets. Research population changes and get a feel for how quickly the market is growing. Lastly, keep an eye on affordability as it will not only influence future market growth, but it could also impact your ability to make an initial investment. Together, these factors can signal a healthy, expanding real estate market.
According to a study published by RealWealth Network, there are a number of markets that present the above qualities. Here are some cities expected to offer promising opportunities for buy and hold investors:
The right buy and hold real estate business plan can help establish a framework to guide you through every step of the process. As you identify which market you plan to operate in, keep in the following steps in mind:
Whether you are looking to buy a property for rental or rehab purposes, you need to get the best possible deal. With rehab properties, there is an increased emphasis on making offers that can maximize your bottom line. The same should be the case with a buy and hold property. Your monthly cash flow is directly dependent on your housing expenses, which are then based on the purchase price. You should negotiate the same way you would for a rental property as you would for a rehab. While price is always important, it is more important to get the right property. Not every house will make a good rental property. You can get a great deal on price, but if there is no demand you will have a tough time finding tenants. Focus on areas that are on the rise, even if this means paying a slightly higher price. Look at the layout of the property in the eyes of a potential tenant. Before you make an offer, do some homework on area rental properties and see what they offer. A good buy and hold property starts with finding the right property.
One of the great misconceptions of buy and hold financing is that you can’t use hard or private money to fund your purchases. Buy and hold properties offer all of the same methods of financing, just structured a little differently after a few months. You can still use any of the following buy and hold real estate financing options:
Traditional financing is one of the most well known ways to finance a real estate property. Investors seeking this option will need to go through a credit check and application process in order to be approved. They may also be required to make a down payment of up to 20 percent or higher. While traditional financing is a viable option, it is important to consider that it may require steeper interest rates and a larger down payment when compared to other financing methods.
If you are just starting out, you may be able to use an FHA loan with a 3.5 percent down payment to acquire a property. Government backed loans, such as an FHA loan, can be more difficult to acquire if they are not your primary residence. However, buyers are allowed to purchase up to four unit properties as long as they live in one of the units. To take advantage of this opportunity simply live on one side and rent the other unit until you are ready to move on.
Hard money offers another opportunity to finance the acquisition of a buy and hold property. Although remember that after you purchase the property, there is a minimum waiting period before you can refinance the loan at the new appraised amount. This can be anywhere from 90 days to a full year, depending on your lender. You can use hard money to get into the property and after six months refinance, pay off the loan and go from there.
Private money and business partners can also provide the chance to break into buy and hold real estate. In order to secure funding from another investor or business partner, you need to have a strong deal analysis with the numbers to back up your pitch. It is also a good idea to prepare case studies from your portfolio if you have worked with other properties. To identify potential private lenders and partners, try networking at real estate events in your area. Remember, if you are creative there are a handful of ways to access buy and hold loans that you may not be aware of.
In one sense, rehabs and buy and hold properties are similar in that you need to add value. There are very few good turnkey rental property deals out there. These types of properties often go as close to full asking price as possible. If you want a good buy and hold deal, you need to be willing and able to put some work in. You don’t need to give the property a full face-lift, but you need to make it appealing to live in. At the very least, you need to update the flooring, paint the walls and improve the kitchens and bathrooms. These expenses need to be factored into your budget before making an offer. With some subtle upgrades, you can increase your rental amount 25 to 30 percent.
One of the reasons that investors stay away from buy and hold properties is because of the tenant horror stories they have heard. For every ten tenants, however, nine are typically great. That remaining one could turn a good property into a nightmare. The best way to avoid this is by working with a property manager. Whether you decide to go this route or opt to manage the unit yourself, you need to have a system in place before you buy. You can just find a tenant and expect to collect rent checks every month. There is a good amount of time, effort and patience that is needed to run a rental property. The long term rewards are great, but getting there takes management skills and dedication.
Things can often change a rental property in a moment’s notice. One day you are praising your tenants for their timely payments, and the next day the furnace breaks down. It is not uncommon to go several months without any issues, then out of the blue get hit with two or three major expenses. It is important to maintain a healthy reserve fund to brace for unexpected occurrences. Without reserves, you will be forced to scramble to find funds to pay for these items. This can come from high interest credit cards, personal funds or money earmarked for other projects. It can also cause you to run the property in a way that loses good tenants and may cost you more money in the long run.
Buy and hold real estate is a smart choice for investors with well planned business and financial goals. When done correctly, this long-term investing strategy can yield impressive results, making it one of the most popular avenues in real estate. As you consider buy and hold real estate, be sure to mind your due diligence and question how a property will affect you.
Make note of the ways it will impact your day to day business operations. Are rental properties performing well in the market you operate in? What is your preferred level of involvement? What type of property will best suit your investment goals? Answer these questions, and you may have a clearer picture of whether or not purchasing a buy and hold property is right for you (and the best way to go about doing so).
Do keep in mind that buy and hold properties can be flexible to your specific needs. For investors seeking a lower level of involvement, a property manager can oversee regular operations. For those with more open schedules, operating a multiunit investment property alone may be the right fit. There are numerous options that can help make your goals of buy and hold real estate a reality, if you decide this strategy is right for you.
One or two buy and hold properties a year will transform your portfolio in a positive way. Fortunately, getting started with them is not as difficult as you may think. Follow these five guidelines to help you get on the right track. Before you know it, buy and hold real estate might even become your new favorite real estate investing niche.
Have you tried your hand at buy and hold real estate? Perhaps you have some tips and advice to share for beginners. Comment in the section below.