Buy-and-Hold Investing: Real Estate Investing
About the author: Diana Eastman is a professional freelance writer from Orlando, Florida who writes content for dozens of real estate, property management, travel, and finance companies across the country and internationally. She has also helped well-known motivational speakers, authors, and self-help professionals create web content and blogs that are meant to inform and inspire.
The beautiful thing about real estate investing is that there are so many different avenues to explore; from house flipping investors to landlords managing rental properties. One type of property investment strategy may work better for you than others, and that is the exciting part of working within this industry. The goal for almost every property investor is short-term gains and long-term appreciation. One of the best ways to achieve both is by investing in buy-and-hold real estate.
What is buy-and-hold real estate?
One way to diversify your real estate investing portfolio is by investing in buy-and-hold real estate. This investment strategy happens when an investor buys a property, and instead of aiming to fix it and sell it right away, they hold on to it. Usually, the goal is to sell it eventually, but the immediate plan is to rent out the property to generate income until then.
An investor often plans to hold this type of real estate for five years or more. During this long-term holding process, the investor benefits in two ways: they earn an income from long-term tenants, and they hold onto the property to take advantage of long term real estate appreciation.
Types of buy-and-hold real estate
You can implement a buy-and-hold strategy for almost any kind of property, such as:
A vacation rental is one example of buy-and-hold. This involves an investor purchasing a property and renting it out to vacationers to generate passive income. They also benefit by being able to use the vacation home themselves. Throughout the years that a property is used as a vacation rental, it will (hopefully) appreciate, and when the time is right, the investor can sell the property for profit and continue to expand his or her portfolio.
Another popular type of buy-and-hold real estate is a single-family home. This involves buying a property and renting it out to long-term tenants. This is a little bit easier than owning a vacation rental or multi-family unit because you’re only dealing with one tenant or a single family.
Turnkey real estate
Turnkey real estate is another type of buy-and-hold strategy. This involves investing in move-in-ready homes that already have a property management company taking care of it. It may even already have tenants in it. This is a popular investment strategy for new investors, as it requires very little legwork to get started.
You simply purchase the property and start earning income. One of the best ways to find turnkey property is to connect with a turnkey provider. These are real estate professionals, local to your area, that are in the business of finding, renovating, and managing rental properties. This is a popular option for first time investors that want to jump right into real estate investing without having to worry about any additional work, repairs, or renovation. Of course, you can invest in turnkey properties without working with a provider, but their job is to do all of the leg work so you don’t have to.
If you’ve invested in a few vacation rentals or single-family homes and are looking to expand your portfolio, a multi-family residence may be your next step. This type of buy-and-hold investment strategy involves purchasing a building with more than one housing unit in it. These usually require a higher upfront cost, but because you’re renting out to multiple families, it means you’re getting multiple streams of income each month.
Commercial real estate
If you’re ready to step your game up even more, you can expand your buy-and-hold investment strategy from residential real estate to commercial real estate. Because this type of investment requires more complex leases, more complicated maintenance issues, and higher upfront costs, it’s typically not a go-to investment for beginning real estate investors. However, if you’re up for a challenge, this could be an extremely profitable buy-and-hold investment strategy.
Benefits of buy-and-hold
There’s a certain excitement and rush that comes with house fix and flips; from buying a house, fixing it up, and turning it around to sell for profit. But there is also a feeling of calm and security that comes with buy-and-hold. While it may take some time and resources to find the right buy-and-hold property, once you find it, get high-quality tenants, and hire the right property management team. Then, you can sit back and wait for the steady income to come in. Besides consistent rental income, other benefits of buy-and-hold property include:
As a property owner/landlord, it’s your responsibility to put money into the property to make sure it is safe, livable, and clean. There are many maintenance expenses associated with owning an investment property, but thankfully, many of them are tax-deductible. You can even write off things such as depreciation, mortgage interest, and loan fees.
If you want to get technical, you could even write off the little things that contribute to how you operate your buy-and-hold investment, like the pen and paper used to write down your notes or the laptop you use to communicate with tenants.
When you own a property and rent it out for the long-term, your renters end up paying down your mortgage significantly. Sometimes, the rent that you receive each month will even cover the interest on your mortgage. This is why it is so important to find high-quality tenants who are reliable and have a history of paying their rent on time.
One of the risks you take as a property investor is appreciation. The goal is to hold onto a property until demand is higher than supply, and your home value shoots through the roof. If you go into purchasing a property knowing that you’re going to have it for the long term, dramatic market fluctuations won’t scare you.
If you’re planning to hold on to a house fix and flip for a long time, you can wait out any drastic shift in the market and wait until home values rise again. When they do, you can decide whether or not to sell. While there’s no set formula for buy-and-hold appreciation, you can typically expect an annual rate of 3 to 5% appreciation for this type of residential real estate.
Discover if buy-and-hold is right for you
When you first get started in investing in real estate, you spend a lot of time finding your niche. You explore different types of real estate to find the one that works for your lifestyle and financial goals. If you’ve been looking into buy-and-hold real estate and wondering if it’s the right strategy for you, consider these three things:
1. You are ready to make a change
Buy-and-hold is a smart investment strategy if you are in a place in your life where you’re prepared to make a change. If you’re ready to make more money by doing less work and want more flexibility and monthly income, buy-and-hold might be the right strategy for you.
2. You want to diversify your portfolio
Most investors understand the power of a diversified real estate investing portfolio. Learning new investment strategies and expanding your reach can help you make more money and be more successful. A buy-and-hold property is a long-term strategy that enables you to diversify your portfolio and make you money at the same time.
Within the buy-and-hold strategy, there are different ways to diversify your portfolio even further. If you’ve mainly been working with buy-and-hold real estate in the form of vacation rentals, you can expand your portfolio by moving on to single-family homes or commercial properties. With this type of investment strategy, there’s always room to grow.
3. You’re thinking about retirement
Whether you’ve been in the property investing industry a while, or it’s something you’re thinking about doing as you enter retirement, buy-and-hold real estate can be a smart and profitable investment strategy for retirees. This type of investment strategy allows you to purchase a property, find qualified tenants, and either manage it yourself or hire a property management company to do it for you. This means you continue to generate income, even after you stop working.
How to buy-and-hold real estate in 8 steps
To find the best buy-and-hold property, you need to consider two things: the rental potential and the appreciation potential. If you can find a property that will bring in a decent amount of monthly income and is likely to appreciate in value at the same time, you’ve found the right property. This is everything you need to get started:
1. Research neighborhoods
Finding the right buy-and-hold property doesn’t start with the property at all. It starts with the neighborhood. If your goal is to purchase a property for the long-term, entice high quality renters, and take advantage of future appreciation, you have to buy a property in a place that people want to live.
As you research certain cities and neighborhoods for the right buy-and-hold property, it’s important to consider population growth, job growth, and market affordability. Statistically, cities with a "price to rent ratio of over 16% and have strong real estate appreciation rates of over 5%" tend to have the most success with buy-and-hold real estate.
2. Determine your ideal property
Once you know the area and the neighborhood in which you want to invest, it’s time to narrow down the type of property that will work best for your financial goals. Since your plan is not to fix and flip this home, you’ll want a property that is already in good condition. While turnkey properties require the least amount of work, you should be on the lookout for properties that are as close to move-in ready as possible. Of course, the nicer the home and the nicer the area, the more you’ll be able to charge for rent, the better the chances for consistent application, and the more money you’ll make.
3. Crunch the numbers
It can be easy to make an investment decision based on feelings instead of facts. You may love a property’s design or layout, you may have an emotional attachment to the neighborhood or the city in which the home is located, but these aren’t reasons to buy a real estate investment property as part of your real estate investing business plan.
You have to crunch the numbers, analyze the data, consider the comparable properties in the area, and make your decision based on the facts. It may be a charming little house, but if its location makes it hard to find high-quality renters, or you’ve done the math, and you’ll just barely make enough to cover the mortgage, it’s not the right property. The right buy-and-hold property will generate positive cash flow and maximize your ROI quickly.
4. Figure out finances
Unless you’re paying for your investment property in cash, chances are you’ll be financing the purchase of your investment property. One of the most popular ways to do this is through rental loans. These loans are designed with buy-and-hold investment buyers in mind, and combine long-term investment strategies with low rates and flexible terms. Rental loans:
- Are approved faster than many other loans
- Often result n a quick close and lower offer prices
- Don’t impact your credit score or require detailed income history
- Allow you to have more leverage during the buying process
Once you decide how you’re going to finance your investment property, you can move on to comparing, negotiating, and finally making an offer.
5. Compare local properties and negotiate
It is time to do a final comparative analysis and start your negotiations. If you’re working with an agent, have him/her draw up a comparative market analysis so you can see how the property you are interested in compares to other homes for sale in the area. This allows you to make negotiations on price and settle on a fair price.
6. Real estate agent vs. doing it yourself
Since buying a buy-and-hold property is much more about the data and statistics than it is about emotions and the long term experience associated with the home, some real estate investors choose to skip working with a Realtor and handle the buying process on their own.
This decision is entirely up to you. If you’re new to buying property, a Realtor may be able to guide you through the process and help you find properties that will maximize your ROI. If you’ve been in the business for a while, you may be able to use your experience and market expertise to find, finance, and purchase investment properties without the help of a real estate professional.
7. Property manager vs. self management
While finding and buying a home on your own may be something you’re willing to do, managing the buy-and-hold property is a whole other story. If you plan on using your property as a vacation rental, prepare to be very involved in the day to day aspects of marketing, maintenance, scheduling, and accounting. Or hire someone to do it.
This is the same for single-family homes. If you have the time, energy and resources to screen tenants, collect rent, schedule and perform basic maintenance, be on hand for emergencies, and handle evictions (if necessary) you may be able to manage the property on your own. However, if you weren’t planning on being this hands-on with your property, you may consider hiring a property manager.
8. Find tenants
The last step in finalizing your buy-and-hold property is finding tenants. If you’ve decided to work with a property manager, they will take care of this part for you. If you’re managing the property on your own, you will be responsible for finding high-quality tenants who have a history of paying their rent on time and taking care of their rentals. To find these long term tenants, you can:
- Post availability on rental websites
- Post availability on social media
- Advertise on local bulletin boards
- Put a for rent sign in the yard
- Tell people you know to spread the word
The bottom line
Real estate investing is exciting. It can be challenging and fast-paced, but it is also gratifying and profitable if done correctly. Whether you want to expand your existing real estate portfolio or you are a new real estate investor, buy-and-hold real estate is a great way to own property and make money at the same time.