Welcome, fellow real estate enthusiasts! Today, we’re diving into the world of buy and hold real estate investing, a long-term investment strategy that aims to generate recurring rental income and build wealth over time. As a potential investor, you might be asking yourself a few questions. How does this strategy work? What are the advantages and disadvantages of buy and hold properties? How can I implement this strategy effectively? In this blog, we’ll answer all these questions and more, so stick around!
What is Buy and Hold Real Estate Investing?
The concept is pretty straightforward – you buy a property and hold onto it for a long period of time, renting it out to tenants and generating monthly income. The idea is that the property will appreciate in value over time, and you can eventually sell it for a profit. Simple, right?
Are Buy and Hold Properties Good Investments?
The answer is a resounding yes! While there are many other real estate investment strategies, there are very few that can match the combination of consistent cash flow from monthly payments, control over the asset, and tax advantages of a good buy and hold property. Additionally, a property bought at the right price will appreciate in value, providing not just a great return on your investment, but the ability to use that equity for other investments.
How To Buy And Hold Real Estate Investing In 5 Easy Steps
- Find a profitable property: There are several factors to ensure that you find a profitable property. Location is critical – look for a property in an area with a high demand for rentals and a growing population. Ensure that cash flow is sufficient to cover not just the mortgage, but also allocate a monthly buffer for repairs and maintenance. Also, consider projected appreciation over the hold period. In case something goes wrong, you should always be able to sell the property for a profit.
- Finance your new Property: There are many ways to finance your purchase, including traditional loans, private lenders, hard money lenders, or seller financing. When deciding on which financing option is right for you, investors should consider factors like interest rates, loan terms, down payment requirements, and the length of time they plan to hold the property. It’s also important to evaluate the potential return on investment and ensure that the property’s cash flow will cover the monthly mortgage payments and other expenses.
- Make Upgrades To The Property: This is key to attracting high-quality tenants and keeping them happy. Some popular upgrades include kitchen and bathroom remodels, adding square footage, updating flooring and lighting fixtures, and enhancing curb appeal with landscaping and exterior improvements. To determine which upgrades will provide the most value, resources like Remodeling Magazine’s Cost vs. Value report can be useful. This report provides a detailed analysis of popular renovation projects and their return on investment, which can help you make informed decisions about which upgrades to prioritize. Additionally, consulting with a local real estate agent or appraiser can provide valuable insight into what upgrades are in high demand in your area and can help maximize your property’s value.
- Manage The Property: Whether you do it yourself or hire a property management company, it’s important to keep your tenants happy and your property in good shape. One option is to manage the property yourself, which can save money on property management fees but requires a significant time investment. Another option is to hire a professional property management company to handle tasks like rent collection, maintenance, and tenant screening. While this option can come with a cost, it can also save time and headaches for investors who don’t have the expertise or time to manage the properties. To evaluate which option is best, investors should consider their own availability and expertise, the size and complexity of the property, and the costs and benefits associated with each option. You can also consult with other real estate professionals and experienced investors to get a better understanding of the pros and cons of each approach.
- Be Ready For The Unexpected: Whether it’s a tenant who doesn’t pay rent on time or unexpected repairs, it’s important to have a plan in place for dealing with any issues that may arise. As a new investor, one should create a reserve fund to cover unexpected expenses and have a plan for managing unexpected vacancies. Additionally, it’s important to stay up-to-date with local and national real estate market trends to anticipate any changes that may impact the property’s value or rental income. Finally, having a strong network of professionals, including property managers, contractors, and real estate attorneys, can help new investors navigate unexpected challenges with greater ease. By being prepared and proactive, new investors can increase their chances of success with a long-term buy and hold property.
Advantages of Buy and Hold Real Estate
On the plus side, buy and hold properties provide a reliable source of monthly income and have the potential to appreciate in value over time. The beauty of this strategy is that it allows you to generate passive income and build long-term wealth. Plus, it provides a hedge against inflation, as rental income tends to increase over time. Another great thing about buy and hold is that it’s a relatively hands-off approach to investing, as opposed to other strategies we’ll touch on later, that require lots of active work. Overall, buy and hold is a tried-and-true strategy that can help you achieve your financial goals in the long run.
Disadvantages of Buying and Holding Properties
There are a few potential downsides to the buy and hold strategy. For one, it can require a significant amount of up-front capital to purchase a property, especially if you’re looking for a property in a desirable location. Additionally, if you are self-managing, handling rental properties can be time-consuming and can require a significant amount of effort to maintain the property and keep tenants happy. There’s also the potential for unexpected repairs or vacancies that can eat into your profits. Finally, it’s important to remember that the real estate market can be unpredictable, and there’s always the risk that the value of your property may not appreciate as much as you’d hoped. Despite these potential drawbacks, however, many investors have found the buy and hold strategy to be a successful long-term investment strategy.
Buy and hold vs. other investment strategies
Buy and hold is only one of several strategies. Here are a few of the most common:
– Flipping properties is a common strategy where homes are bought significantly under market value and then fixed up in a short period of time for resale.
– Value add strategy involves buying a property that needs some work, making improvements to increase its value, and then holding onto it for the long-term.
– The BRRR strategy (buy, rehab, rent, refinance) is like value add, but after making the improvements, the investor refinances the property to pull out their initial investment while still holding onto the property for cash flow and appreciation.
– Real Estate Investment Trusts (REITs) involve investing in companies that own and operate income-generating real estate properties.
– Wholesaling involves finding discounted properties and quickly assigning the contract to another investor for a fee.
Let’s see how each of these strategies stack up to the buy and hold approach.
Buy and Hold vs. Flipping Properties
Flipping properties involves buying a distressed property, renovating it, and then selling it for a profit. This strategy can be lucrative, but it requires a significant amount of time, effort, and capital upfront. In contrast, buy and hold real estate involves purchasing a property and holding it for an extended period, typically renting it out for consistent cash flow. While it may require more patience and commitment, buy and hold real estate offers several advantages, including greater asset control, long-term appreciation, and significant tax advantages. Flipping properties may be more appealing to investors looking for quick returns but buy and hold real estate provides a more stable and passive income stream over time. Additionally, finding good deals for flipping properties can be more challenging than for buy and hold properties, as the competition for distressed properties can be fierce.
Value-add strategy vs. buy and hold
Buy and hold and value add are both popular real estate investment strategies, but they differ in their focus and the level of involvement required. Value-add strategies involve identifying properties with potential for improvement, making necessary renovations or upgrades, and then transitioning to a Buy and Hold or resale. These strategies typically require a larger initial investment and a more hands-on approach, as well as a longer timeline to see returns. However, they can also provide significant upside potential and a higher return on investment. Buy and hold, on the other hand, is a more passive strategy that involves purchasing a property typically in a stronger value position, typically for rental income and appreciation. While buy and hold requires less time and effort, it also offers less potential for a quick return on investment.
Real estate investment trusts (REITs) vs. buy and hold
REITs allow investors to buy shares in a company that owns and operates income-generating real estate properties. This means that you can benefit from the cash flow without having to manage the property yourself. However, REITs come with fees and limited control over the underlying properties. On the other hand, buy and hold real estate provides greater control over the asset and allows for long-term appreciation. Plus, it provides more tax advantages than REITs. So, if you want to be in control and reap the benefits of long-term appreciation, buy and hold is the way to go.
Real estate Wholesaling vs. buy and hold
Another real estate investment strategy to consider is wholesaling. Wholesaling involves finding discounted properties and then quickly assigning the contract to another investor for a fee. This can be a low-risk, high-reward strategy as it doesn’t require large capital investments or renovations. However, finding good deals can be challenging, and it’s important to have a solid network of investors to assign contracts to. Buy and hold, on the other hand, provides consistent cash flow from monthly rent payments and the ability to use leverage to increase returns. Plus, it allows for greater control over the asset and provides more tax advantages than wholesaling. So, if you’re looking for a more hands-on approach and want to build long-term wealth, buy and hold is the way to go.
Buy and hold vs. BRRR
While both strategies have their merits, buy and hold is generally the better option for most investors. Why? Because it offers consistent cash flow, long-term appreciation, and greater control over the asset. BRRR can be riskier and more time-consuming, especially in finding the right properties to renovate, and not to mention, refinancing can come with higher interest rates and fees. With buy and hold, investors can build wealth steadily over time without the added stress and effort of constantly finding new deals. Ultimately, the choice between these two strategies will depend on your investment goals and risk tolerance.
ADPI Pro Tips
When it comes to picking a real estate investment strategy, there are a few things you need to consider.
- Resources: How much capital do you have to invest? Can you handle the risks associated with certain strategies?
- Network: Do you have access to good deals and reliable partners?
- Time horizon: Are you looking for short-term gains or sustainable, long-term cash flow?
Whether you’re a new investor or just looking to build wealth through sustainable long-term cash flow, buy and hold properties are a great choice. With buy and hold, you can benefit from consistent rental income, long-term appreciation, and greater control over your asset. It’s also a relatively low-risk strategy, especially if you focus on acquiring properties in strong rental markets. Plus, you don’t have to be a real estate guru to make buy and hold work – with a little research and a good team, anyone can do it! So, if you’re new to the game or looking for a smart long-term investment, give buy and hold a serious look. Your future self will thank you!
This blog was written in collaboration with our absolutely amazing DoD SkillBridge employee: Seneca
