Long term rental properties are considered by some to be a really good way to diversify an investment portfolio. 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. An investor may have the intent to sell it down the line, but will usually rent out the property for income and use refinancing to help with more property acquisitions. Capital appreciation will happen if you do it right, but income from rents is the primary intention.
Long term rental properties are considered by some to be a really good way to diversify an investment portfolio.
When you are considering a buy and hold real estate strategy, you should be cautious and thorough when calculating the potential income to be generated by renting out a property. Monthly revenue has to exceed monthly expenses specific to the property. Don’t look at income versus revenue across your entire property portfolio. Each property has to stand cash-flow positive on its own. Expenses will include mortgage payments, interest, taxes, fees, and maintenance costs. If you get this right, you could be cash-flow positive (pocketing money) from day one, or soon after. If your plan is to sell the property down the line, potential profit should also be considered. If you don’t plan to sell it later, do that math anyway. Those numbers should be a part of your decision making. The cost of loans or other types of real estate financing must be factored in. For help making these calculations, use a calculator, like the one on Calculator.net.
A key component to buy and hold real estate will be choosing the right market area. In order for a buy and hold property to be successful, you’ll need to choose an area with a promising rental market and property appreciation. Choosing well will minimize risks that undermine the profitability of a given investment (stuff like vacancy rates or property depreciation). Anyone considering buy and hold real estate should conduct a thorough market analysis before committing to an area.
Once you’ve picked a market, you have to pick a property. You need to get the best possible deal. Your focus should be on maximizing your bottom line. Cash-flow will depend on the deal you make and the financing younger for that deal. 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 investment 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 as fix-and-flip properties, just structured a little differently after a few months. You can use any of the following real estate financing options:
Traditional financing is the best known way to finance a real estate property. You will need to go through a credit check and application process to get approved. You 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.
With hard money, 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 are generally more interested in more experienced investors. The risks are real Rookies are scary. 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 of other properties you’ve worked with. To identify potential private lenders and partners, try networking at real estate events in your area.
Hopefully you’ve gotten the sense that this is not a set-it-and-forget-it retirement income plan. Managing a property portfolio is work. None of that is to discourage you if you’re considering real estate investing. I’m just saying it’s not easy. Done well though, it could be nicely remunerative. A solid buy and hold real estate portfolio can yield both short term gains and long term appreciation. To be successful, you have to do your due diligence going in and then abide that due diligence going forward. As with all investing, responding emotionally leads to bad decision making. (Except with art. It totally works with art.)
W Skeet Jiggetts