There are many varieties in real estate investing among those buy-and-hold is one of the best investment strategies. The aim of every real estate investor is to achieve short-term gains and long-term appreciation. And buy-and-hold real estate investing gives you both. So, as a beginner, you can go with this buy-and-hold strategy to achieve success in the real estate market. This blog will serve as a beginner’s guide to buy-and-hold real estate
What is a buy-and-hold real estate strategy?
A Buy-and-hold strategy is considered the most common strategy to diversify your real estate portfolio. In buy-and-hold real estate, the investment properties are bought with the intention of holding them for a long span of time. In this investment method, you are not purchasing the property for the short term. It’s a long-term investment process in which the investor holds the property for a considerable future.
During the “hold” period the asset can earn passive income by setting it up as a rental property. You can use that cash flow for paying the mortgage. As the value of the real estate increases over years. Investors can sell that property at a high value by holding it over years. Hence, buy-and-hold investment is a solid choice for investors.
Types of buy-and-hold real estate:
Buy-and-hold property can be of different types and purposes. To achieve the best deal you must choose the best type of property as per your needs.
1. Vacation rentals:
Vacation rentals are one of the main examples of buy-and-hold properties. An investor purchases a property and rents it to tourists. As a result, this generates rental income, a true source of passive income. And whenever a suitable time arrives you can sell the property. Henceforth, you can expand your real estate portfolio.
2. Single-family homes:
Single-family homes are also popular buy-and-hold real estate examples. In this type, the investors buy a property and rent it out to long-term tenants. Renting out single-family homes means dealing with a single tenant. Therefore it is much easier and simpler than owning multifamily units or vacation rentals.
Read Lilypads’ article on Single family rental investments here.
3. Turnkey real estate:
Turnkey real estate is a type of buy-and-hold strategy in which the investors purchase a ready-to-move property. And this property already has a property manager to look into it. The turnkey real estate can also have tenants before purchasing. These property types are a good deal for beginners to invest in real estate.
The best way to find a turnkey property is by connecting with a turnkey provider. These professionals help in finding, renovating, and managing the property. This is a good option for beginners.
4. Multi-family buildings:
After investing in vacation rental the investors can opt for multi-family buildings. This type of buy-and-hold strategy involves purchasing a building with multiple housing. It requires a huge capital since you are renting it to multiple families. And since it generates high rental income it’s a source of greater cash flow.
5. Commercial Real Estate:
If you want to expand your investment portfolio then you can switch to commercial real estate other than residential properties. Investors can purchase the property for using it as office buildings or retail stores. It’s usually not for beginners but if you want to take a challenge then you can go for it.
How to buy-and-hold real estate?
To get the best buy-and-hold property you have to consider two things: the rental potential and the appreciation potential. To know the steps of buy-and-hold let’s illustrate the following steps:
1. Find the right buy and hold real estate property:
Getting a good neighborhood is also equally important with the property. If your objectives are long-term investments and you prefer high-quality tenants, you must buy a property that people will prefer to live in.
Population growth, job growth, and market affordability are some of the important factors to consider while searching for a perfect property. Cities with a price to rent ratio of over 16% and an appreciation rate of over 5% are an ideal choice for buy-and-hold.
2. Figuring out your ideal buy and hold real estate property type:
Once the area and locality of your property are finalized it’s time to select the property type. Since your objective is not to fix and flip, you can undertake a property in good condition. Hence, turnkey properties are a good option and investors should look for more or less ready-to-move property. If the property area is good then the availability of the renters will always be there along with a constant flow of passive income.
3. Finance the buy and hold real estate property:
Buy-and-hold investments offer various methods of financing other than direct cash payment. They are as follows:
- Traditional Lender Financing
- FHA Purchase Loans
- Hard Money Private Money
- Seller Financing
Traditional financing is a quite popular financing method in buy-and-hold investments. If you are a beginner then you can go for an FHA purchase loan with a 3.5% down payment. Hard money also gives an opportunity to acquire the property. Furthermore, private money lenders or business partners can help you to get into the investment. There are various options, the only thing is that you have to choose accordingly.
4. Find similar local properties and negotiate:
Now, it’s time to do a comparative study on various properties of similar types. If you acquire an idea about similar properties then you can negotiate with the prices and fix a suitable price.
5. Upgrade the property:
There are very few turnkey properties so whenever you purchase a property it needs some upgrading. You don’t have to renovate the property to its full but still, the basic renovation is required to make it appealing. You have to keep the expenses of this upgrade in your budget. Moreover, this upgrade can also increase the rental amount to 25%-30%.
6. Manage the property:
Sometimes buy-and-hold properties tend to be difficult due to tenants. So, to avoid these hazards you can appoint a property manager to look after the property. Therefore, to run the property smoothly you have to give your time, effort, and patience. Because to achieve a long-term reward you must have good management skills.
7. Prepare for the unexpected:
Unexpected expenses and unwanted accidents can come at any point in time and are a hassle to the owner. Hence, it’s important to prepare an emergency fund for any mishaps. Without funds, you can face a lack of money during times of need. Thus, to run the property smoothly without losing good tenants always be prepared.
8. Find renters:
After finalizing everything the next procedure is to find the best tenants. If you have appointed a property manager then they will handle this for you. But if you’re managing the property on your own, then you have to find good renters. The tenants must have a good track record of paying their rent on time and taking care of their possessions.
9. Sell the buy and hold real estate property :
The last step of a buy-and-hold is selling the property. Generally in buy-and-hold, the holding time of a property is roughly 10 years or more before you sell it. Nevertheless, you must be particular about all the possible situations. Sometimes certain tax code advantages arise for example if you can sell the property and buy another one without paying capital gains. Then you must sell the property.
When you become familiar with the market and your loan terms are going to end you can sell the property. If the property taxes are rising then it’s better to sell the property. But, if you are confident enough to use the selling amount for better investment then you can absolutely sell the property.
The Lilypads Bottomline
Buy-and-hold is a smart choice for investors, this impressive strategy can yield impressive results along with tax deductions when done correctly. Buy and hold real estate investing in real estate can be a good experience for beginners. As it requires less capital to begin with and is somewhat predictable. When done well, it can be rewarding and profitable provided you do your due diligence decently.