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Many people want to invest in real estate but do not know how to do it. The risk of buying the wrong property is a massive problem for all property investors and even negatively affects the overall real estate sector. Here is a simple checklist and guide on buying and holding real estate and its benefits.
What is a Buy-and-Hold Real Estate Strategy?
Buy-and-hold property investment is an excellent way to broaden your investment portfolio and reduce risk. This type of investment strategy occurs when an investor purchases a property intending to repair it and resell it as soon as possible but instead chooses to retain it. Typically, the long-term goal is to sell the property, but the immediate priority is to rent it out to generate income while waiting for that to happen.
An investor intends to hold it for at least 5 years or longer. Throughout this long-term retaining period, the investor gains in two ways:
- generate income from long-term renters
- retain ownership of the property to benefit from long-term appreciation in the property’s value.
Various Kinds of Buy-and-Hold Property
The buy and hold strategy can work for different types of properties like:
Single-Family Dwellings
A single-family home is another common type of buy-and-hold property. It entails buying a home and renting it to long-term tenants. As you’re simply handling a single-family or one tenant, this is relatively easier than operating a holiday rental or a multi-family property.
Turnkey Properties
These homes are ready to move into and have already been taken care of by a property management firm. It might have people already living there. It is a prevalent investment option for people who are just starting. It doesn’t take a lot of work to get it rolling.
Rentals for Vacations
One form of buy-and-hold is a holiday rental. Buying a property and renting it out to holidaymakers to gain passive income. When you use a home as a vacation rental for several years, it will (ideally) rise in value, and when the time comes, the investor can trade the property for a profit and extend their portfolio.
Commercial Properties
If you want to go even a notch higher, you can move your buy-and-hold strategy out of the home and into the business world as well. It has more complicated leases, maintenance issues, and higher upfront costs. If you’re willing to take a risk, this could be a very lucrative buy-and-hold investment option.
Multi-Family Homes
It is a form of buy-and-hold investment plan in which you buy a building that has more than a single housing unit inside it. It costs more to start with, but since you’re renting to several families, it means you get more money per month because you’re getting a lot of different monthly earnings.
Smart Tips How to Buy-and-Hold Real Estate
Before you set out to buy and hold real estate, consider two critical components which will serve as your guiding pillars; the appreciation and rental potential of the property. As long as these two are perfect, then you can settle on an estate of your choice guided by the tips below:
Locate the Right Property
You need to identify the kind of neighborhood that you would like to see the property. Your target market will be a significant determinant in this. If you want high-end renters, you will have to consider a neighborhood that’s more likely to appeal to such individuals.
Scale down to the specific type of buy and hold the property you desire. It is best to select a property that doesn’t require much renovations and remodeling before it gets occupied. Note: the property you settle for will significantly determine or justify the amount of rent you attach to it.
Do the math. A property might be attractive and ideal from all points of view, but can you get profitable returns from it? From a tenant’s perspective, look at the property, whether it would be worth renting out and if its pricing is fair. Consider other properties within the area and their charges. Once you can strike a balance between the buying price and repair costs with the expected returns, you can proceed to make your offer. Sometimes, it could be better to buy a slightly expensive property, provided it can eventually give you all the positive returns.
Finance the Property
When you have already settled the most critical bit, you need to consider your finances. You can use cash to purchase your buy and hold property. You can also evaluate other financing options like:
- FHA Purchase Loans
- Private Money
- Hard Money
- Partners
- Mortgages
With ready finances, you can make the purchase either as an individual or with the help of real estate professionals.
Upgrade and Manage Your Property
You will need to make a few adjustments within the home to make it more habitable, depending on its state.
It is best to work with a property management company to ensure that you are doing everything right. You will also have to set aside some funds to help with any emergency that might come up, so you’re not caught off guard.
The Right Time to Sell
It might be best to hold your investment property for about 10 years or more. If you are considering selling your buy-and-hold investment property, keep in mind the following:
Tax breaks: There are several tax benefits to know. Investors can use a tax-deferred transfer to trade one property and acquire another without paying taxes on capital gains.
Tax increases: If your local property taxes are rising, selling your home may be the best option.
Market: Familiarize yourself with comparable housing pricing. If prices are rising and it’s a good market, consider selling now rather than waiting for the next cycle.
Loan term: You can sell whenever your loan repayment period is coming to an end.
Stagnant rental income: Realtors should consider trading if their property income makes healthy rate increases unfeasible.
Pros of Buy-and-Hold Real Estate
Continued Income
Renting out your property ensures a steady income regardless of your location or what you do. Land ownership accumulated a lot of “old money” in the US and elsewhere. Because land is scarce, land values have always risen in the long run.
Higher Property Values
The longer you own your real estate investment, the more inflation benefits you. It will increase the home value while decreasing the mortgage loan amount. Assume you could buy in a purchaser’s market and sell in a seller’s market. Then there’s the possibility of a substantial return on investment.
Taxes
Renters have tax benefits not accessible to flippers, like reduced tax rates on investment income. You can deduct expenses like repairs and maintenance, property depreciation, mortgage interest, and many others. If you sell your home after a year, you’ll also be taxed at the long-term capital gains rate.
Exit Alternatives
A purchase and hold strategy involves owning real estate for a long time. But you can usually sell when you want. Neither a contract nor an agreement compels you to have a buy and hold property. If you bought the home with a loan, you must pay back the amount.
Paydown of Principal
Investors might use rental income to pay down the principal to buy and hold real estate. The loan interest accrues depending on the remaining principal. Paying down the principal faster reduces the total interest paid.
Cons of Buy-and-Hold Real Estate
Vacancy Fees
Among the drawbacks of possessing the rental property is tenant vacancy. You are obligated to pay the mortgage if your estate remains empty for extended periods. Ensure your budget covers up to three months of vacancy annually before purchasing a buy-and-hold home.
Management and Law
Long-term property ownership requires managerial skills that many investors lack. Particularly first-time landlords are unprepared for the duties and legal concerns accompanying the title. Finding good tenants and addressing their requirements can be unpleasant and time-consuming. However, successful real estate management is required to ensure consistent cash flow.
Conclusion
Buy-and-hold real estate is ideal for investors who want to enjoy steady income even as they amass wealth from their investment. The process for obtaining such properties is not complicated. You only need to conduct more research and base your decisions on facts to have a successful venture.
