Create Wealth With Buy and Hold
Renters Warehouse Blog
Are you looking to gain financial freedom? Then look no further than buy and hold investing.
This strategy essentially involves purchasing real estate (either commercial or residential) as a long-term investment. It usually involves holding the real estate long-term while it appreciates in value. One of the great things about this strategy is that when done right and in a growing market, you can generate both long-term appreciation –and immediate cash flow in the form of rental income.
Buy and hold investing is different from house flipping; that is, buying a house, fixing it up, and selling it for a quick profit. Instead, it’s a long-term way to grow your wealth and reach your goals of financial freedom. The long-term nature of it means that it carries a much lower risk as well. You’ll be able to weather any ups and downs in the market much more easily since you’ll still be generating rental income no matter what’s happening in the housing market. This is vastly different from house flipping, for example, where your returns are largely contingent on the market.
Of course, not all investment properties are created equal. Your success with investing is largely dependent on three things: the property itself, the financing that you secure, and how well you’re able to manage that property. With this in mind, let’s dive in and see how you can create wealth through buying and holding real estate –and see how you can set yourself up for success.
How to Create Wealth Through Buy and Hold Investing
Now, let’s see what you can do to get yourself off to a great start (and long-term success) with buy-and-hold investing.
- Find the Right Type of Property
First up, you’ll want to decide what type of property you’re going to be investing in. For some investors, this might include commercial property –or even apartment complexes. But for many investors, especially first-time investors, single-family residential rentals (SFR) are the property of choice. These properties are easy to get started with –and more affordable too. With SFR, you can choose a house –or a property such as a duplex or triplex. The great thing about a duplex is that you can live in one unit, and rent the other/s out –allowing you to live rent-free while generating an income. This strategy is sometimes referred to as house hacking and can be an excellent way to get your start with buy-and-hold investing.
- Consider the Market
The local housing market is one of the most important considerations when looking for an investment property. You can change a lot of things about a property, but the location is something that will always stay the same. So make sure you find an area that fits your investment goals. You’ll want to first determine what you’re looking for in an investment: cash flow, appreciation, or both. Then, look for the right market. Different housing markets, for example, areas just outside of busy metropolises, tend to be good for appreciation, while other housing markets –many places in the Midwest, for example, don’t experience much appreciation but they do generate very good cash flow. Look at the market conditions before you buy to ensure that you’re investing in a place that’ll produce the returns that you’re looking for. Most investors look for an emerging market –a place that’s showing signs of growth, but hasn’t yet become too hot. To see what your rental’s market is doing, take a look at the Renters Warehouse Research Center. You’ll be able to find information on local housing appreciation, employment prospects, population growth –and more, in order to find a market that’ll generate the returns that you’re looking for.
- Try to Secure a Good Deal
Next up, try to secure a good deal. When buying an investment, it makes sense to ensure that you’ve found a property that’s undervalued, that is, below market value. While this can be tricky during a seller’s market (which is what many parts of the country are in right now), there are still good deals to be had. You just need to look harder for them. Fixer-uppers can be a good way to secure a property that’s below market value. Just make sure you know what you’re getting yourself into if you’re thinking about going this route. See: Warning Signs to Look for Before Buying an Investment Property.
- Assess Potential Upgrades
Before you buy, you’ll want to consider potential upgrades that you’ll need to make. Buying a home that’s below the market value will mean that it will most likely be in need of some repairs. This is fine, as long as you know exactly what you’re getting into. Just make sure you’re clear on how much time and money you’ll need to put into the place to get it rent-ready. It’s also important to ensure that you have a professional inspection done, just to rule out any unexpected concerns –like major unexpected foundational issues.
Not sure where to start when looking for an investment property? See: Spotting a Good Investment Property.
Next, you’ll want to consider how you’re going to finance the property. This is important as the type of financing that you’re able to obtain will impact your returns and your long-term success with the property. While it’s true that you could just buy a property outright all-cash –if you had enough cash sitting around and wanted to go that route, most investors use financing to obtain their investments. While financing does carry a certain level of risk, it can be an excellent way to grow your property portfolio. It’s a great way to make your money work for you by allowing you to use a concept that’s known as leverage. With leverage, you use other people’s money (namely, the bank’s) and put it to work for you as well. This means that instead of just generating returns on the portion of funds that you personally contributed, you can generate returns on the value of the entire investment.
It breaks down like this:
Let’s say you contribute $100,000 cash to buy a property outright, and rent it for $1,000 a month. After expenses, you take home $600 a month, or $7,200 per year.
$7,200 / $100,000 (the amount that you invested) = 7.2% returns
Now, let’s say that you buy the same property but instead of paying cash and buying it outright, you make a 25% down payment and get a loan for the rest. You rent it for $1,000 and after expenses (which are slightly higher since you’ll have mortgage interest) let’s say you take home $300 a month, or $3,600 a year.
$3,600 / $25,000 (the amount you’ve invested) = 14%. So even though you take home less cash, your returns are higher since the amount that you put into the property was just $25,000 as opposed to the entire $100,000. So you have 75k that you could spend on something else (of course, that’s assuming that you have 100k just sitting around). Additionally, you could potentially refinance the property in a few years, take some cash out to use for another property –which would further increase your returns.
As you can see from this scenario, being able to use the bank’s money can be a great way to generate better returns. Just make sure that you don’t overleverage yourself. It’s a good idea to try to make a 25% down payment whenever you can, so that you have some equity in the property –just in case. Most lenders will want to see a higher down payment for investment properties anyway, but there are ways around this if you’re buying your first property.
Have a Plan for Management
Another factor that’s crucial for success is how well the property’s managed. It’s important to have a plan for management in place from the start. Will you be handling the management yourself or will you be outsourcing? While many landlords start out overseeing their property themselves, it’s important to keep in mind that as time goes on, it can be more challenging to keep up with everything –especially if you own multiple properties or invest in rentals that are out of state. If you do decide to outsource, it’s crucial that you find a reputable property manager –someone who will be able to ensure that there are airtight tenant screening policies and procedures in place, and who’s able to help keep your vacancy rates low. A good property manager should also be able to help you find the sweet spot for rent, so that your property will rent quickly while still commanding the best price possible. In short? They should be able to help you maximize your returns. Learn more about how hiring a property manager can help save you time and money in the long run.
Know When to Sell
So when should you sell? With long-term investing, it’s entirely up to you. You can hold the property and keep on generating cash flow each month –even after you retire. Or, when the time is right, you could sell. The great thing about real estate is that it gives you options.
Here are a few things to consider when it comes to knowing when the time is right to sell.
- Assess Your Goals
Are you considering selling? The first thing to do is to assess your investment goals. For instance, was your goal to wait for your property’s value to increase by a certain percentage before you sold? Maybe you’d like to build up a certain amount of equity first? What were you planning to reinvest the proceeds into? Or, maybe instead of selling, you had planned to do a cash-out refinance to obtain another property? If so, how much equity will you need to build up first? Your goals will help to guide your decisions, so take the time to revisit them if you’re thinking of selling.
- Consider the Market
Before you decide to sell, it’s a good idea to consider the market conditions. Determining whether it’s a seller’s market or buyer’s market can help to shape your timeframe. If it’s a buyer’s market, you might consider postponing your sale if you can to get the best returns. Likewise, consider the time of year. Spring and summer are good times to sell, where fall and especially winter can be difficult times to sell. Of course, if time is of the essence, then it might make sense to go ahead list your property anyway.
- Another Opportunity
Another reason for deciding to sell might be that another opportunity has come up and you need the cash. If you find that you have an opportunity to make even better returns, then you’ll be able to consider selling your current buy-and-hold to help finance that opportunity. Note that in some cases, you could also consider getting a home equity loan, and borrowing against the equity that you’ve built up in the property –instead of selling.
Grow Your Portfolio - Consider Using the Snowball Strategy
Finally, it’s worth noting that one rental property is a great start, and can make a difference in your financial situation –but having multiple properties is your ticket to long-term financial freedom. If you’d like to grow your rental property portfolio, then you’ll want to start by setting clear investing goals, on how much money you’d like to be generating and what type of returns you’re looking for with each property. From there, you can determine which properties you should invest in, knowing that you should only invest in ones that’ll meet your criteria and help you to reach your goals.
With the snowball method, you’ll be able to get yourself on track to invest in multiple properties by adding them to your portfolio one at a time. The idea is that you take the profit from one property and roll it into another. You keep going, adding properties to your portfolio as you go. Learn more about the snowball strategy.
See also: Growing Your Investment Portfolio.
While the buy-and-hold method isn’t for everyone, many people have found that it’s been instrumental in helping them to gain financial freedom. As long as you set clear goals from the start, and remember to ensure that you have a plan for buying the right property (in a good market), with the right financing, and have a plan in place for management, you’ll be able to set yourself up for success: both immediate and long-term with your rental properties.
Are you looking to get started with real estate investing? Download your FREE guide: The Stability of the Buy and Hold Method. Learn about the debt snowball method, house hacking, and BRRRR investing. See why buy and hold investing is an excellent opportunity to grow your wealth and your chance to obtain financial freedom.
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