Long term rental properties are widely considered one of the best ways to diversify any real estate portfolio. The right buy and hold real estate can yield both short-term gains and long-term appreciation. So what does buy and hold real estate mean? Although investors may be confused or intimidated at the thought of getting started, buy and hold real estate can become one of the best investments you make if you mind due diligence before you jump in. The following should serve as a beginner’s guide to buy and hold real estate for anyone looking to get started.
What Is Buy And Hold Real Estate?
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. The owner typically intends to sell it down the line but will rent out the property until then to help with buy and hold real estate financing.
The buy and hold real estate strategy is one of the most common investment options due to the promise of long-term gains and short-term cash flow. Rental income from the property generates short-term income that can be used to pay off the mortgage and put cash in the investor’s wallet. The property value will appreciate over time, allowing investors to profit when they are ready to sell the property down the line.
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Buy And Hold Real Estate Calculator
Investors considering a buy and hold real estate strategy should mind their due diligence by calculating the potential income of renting out the property. The bottom line here is that the monthly revenue should exceed monthly expenses specific to the property, such as mortgage payments, interest, taxes, fees, and maintenance costs. If the investor plans to sell the property down the line, the potential profit should also be considered. Finally, the cost of taking out buy and hold real estate loans or other types of buy and hold real estate financing must be factored in. For assistance in making these calculations, simply use a buy and hold calculator such as the one on Calculator.net.
Best Buy And Hold Real Estate Markets In 2022
A key component to buy and hold real estate lies in an investor’s ability to choose the right market area. For a buy and hold property to be successful, investors must identify an area with a promising rental market and property appreciation. This helps minimize risks that could undermine a given investment (namely, vacancy rates or property depreciation). Anyone considering buy and hold real estate should conduct a thorough market analysis before committing to one area.
Luckily, there are a few factors that can help investors identify potentially strong real estate markets. Look out for areas with new jobs and industry expansion. See what companies are based in the area and which employers dominate the job market. This will directly influence the next factor to look out for: population growth. To help ensure a buy and hold property stays occupied and grows in value, watch for expanding markets. Research population changes and get a feel for how quickly the market is growing. Lastly, keep an eye on affordability as it will influence future market growth and impact your ability to make an initial investment. Currently, the national average home price is around $316,000 while the average monthly rent is roughly $1,879.
Based on the above factors, investors have their work cut out for them in the year ahead. A recent study from RealWealth revealed a number of potential real estate markets for 2022. The following list outlines some of the best places to buy rental properties this year:
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Albuquerque, NM: Albuquerque is projected to have strong job and population growth in the year ahead. Already the largest city in New Mexico, Albuquerque is known for its strong education institutes, government institutions, and as the home to numerous tech-related companies. Estimates show over 20,000 jobs were added to the local economy in the last year. Investors will find an average home price of $277,530 and an average monthly rent around $1,385. This sets Albuquerque apart from the national average in terms of affordability.
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Atlanta, GA: As the third-largest metro area in the Southeast, Atlanta has been a prime market for real estate investors in recent years. All signs point to continued growth for the city, as the population and local economy continues to grow. Research shoes that the population has grown almost 14 percent in the last decade. Currently, the average home price is around $330,218 and the average monthly rent is $1,875. Investors who are able to break into this market are expected to enjoy high rates of appreciation in the years to come.
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Baltimore, MD: The average home price in Baltimore currently sits around $351,500, with an average rental price of $1,740. Both population and job growth rates are increasing, and housing is considered more affordable than many markets in surrounding areas. The federal government and military are two main employers in the Baltimore area, though there are significant health care, finance and insurance industries as well. Baltimore also features a number of higher education institutions. As a whole, the city has a number of factors that signal a healthy (and growing) real estate market.
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Birmingham, AL: Birmingham is a surprisingly affordable metro area right now, with median home prices at $215,449. The average monthly rent is around $1,300. The consistent population growth over the last several years is largely a result of Millennials moving to the area. The city is establishing itself as a hub in publishing, construction, medical research, and service-based companies. The current job growth rate is around 3.63 percent, and the economy is showing positive signs for the year ahead.
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Charlotte, NC: Charlotte is one of the fastest growing cities in the South. The city is known for its expanding job market and affordable housing. Currently, the median property price is around $329,961 and the average monthly rent is $1,693. Investors hoping to tap into this market may want to act fast, the median prices are already above the national average. However, with the continually growing population and jobs many expect housing prices to continue their upward trend.
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Chicago, IL: For the second year in a row, Chicago represents one of the best markets for real estate investors. The current average home price is around $287,131 and the average monthly rent is $1,730. These are already pretty significant changes compared to last year. While job and population growth rates are not as high compared to other markets on the list, Chicago consistently boasts a strong price-to-rent ratio. Further, the city has experienced consistent rental demand.
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Cincinnati, OH: Cincinnati is another market featured last year for its affordability and potential. The current median home price is around $238,813 and the average monthly rent is $1,362. These rates are slightly below the national averages, helping to make this a relatively affordable market for many. The city is quickly developing into a corporate hotspot, with over 17 Fortune 1000 companies headquartered in the area. The local economy is also known for its healthcare and transportation sectors.
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Cleveland, OH: The second Ohio city on our list, Cleveland is making waves for its affordability as well. The median home price is just under $200,000, coming in at 37 percent below the national average. The average monthly rent is $1,278, and the 1-year job growth rate is at 1.53 percent. Cleveland is known for its IT, manufacturing, and healthcare sectors. Notably, the city is experiencing an influx of younger demographics including Millennials and Gen Z, who are likely following the jobs and affordable prices.
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Dallas, TX: Dallas is currently experiencing rapid population growth as a result of its economic performance. Dallas is currently attracting a number of new corporations for its business-friendly policies, which include lower tax rates and reduced business regulations. The local economy features significant oil, gas, manufacturing, and aviation sectors. The average home price is right around $339,190 and the average monthly rent is $1,696. While the median purchase price is somewhat higher than the national average, the rent remains 15 percent below the average.
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Dayton, OH: Dayton is the third Ohio city to make our list, and much like the previous two it has a number of positive signals for the year ahead. Dayton currently has a median home price of $175,148 and an average monthly rent of $1,159. These features make the market notably more affordable when compared to the national average. Dayton is expected to be a hot market in the years ahead because of continued population and job growth. Investors should also take note that a large portion of the market is made up of renters. This can create a unique opportunity for passive income investors looking to quickly break into the area.
Best Buy And Hold Real Estate Markets In 2021
According to a study published by RealWealth Network, several markets suggested promising outcomes. Here were some of the biggest opportunities for buy and hold investors in 2021:
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Orlando, FL: Located in the “sunbelt” of Florida, Orlando has numerous perks that have caused the population to grow in the last several years. Even more importantly: new residents have been looking to rent and not buy. A recent study showed that the rental rate rose over six percent in 2020, a climb that is projected to continue. The median sale price of a property in 2021 was around $230,000, with an average monthly rent of about $1480.
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Tampa, FL: Tampa is the second most populated city in Florida and is expected to keep growing as the financial and healthcare industries expand in the area. Economists speculate that the job rate could increase to 42 percent over the next ten years. Not only does Tampa attract new job seekers, but it also remains to be a popular tourist destination. Investors should know the median sale price in 2021 was around $225,000, with some ideal investment properties coming in right around $150,000.
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Jacksonville, FL: Jacksonville, FL: With low property taxes, no state income tax, and a growing healthcare industry it’s no wonder three Florida cities made the list. Jacksonville has been yet another destination for job seekers, tourists, and retirees—making this a desirable option for buy and hold investors. The average home price in 2021 was 15 percent below the national average, at around $189,000. The average monthly rent last year was between $1,200 and $1480, signaling potentially high profit margins for those who choose the right property.
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Pittsburgh, PA: Pittsburgh has been seeing an increase in employment thanks to gains made in education, health, and STEM sectors of the local economy. Investors will be happy to know these increases have translated positively into the real estate industry. The median home price in 2021 was around $141,000, with an average monthly rent of $1,100. Savvy investors may find this equates to sizable profit margins in a short period.
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Huntsville, AL: This southern city has a median home price of around $158,000 and an average monthly rent of $1,075. Money Magazine recently named it one of the most affordable cities in the nation, making it attractive to renters and investors. The Huntsville economy is most known for its space, defense, and tech industries, contributing to a growing population.
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Houston, TX: Houston is yet another city that made waves in 2021 as a result of job growth and affordability. The median house price was 21 percent below the national average, at around $175,000, and the average monthly rental price was about $1,500. This signaled a highly profitable market for buy and hold investors. Adding in the 2.59 percent projected job growth, and Houston will continue to remain a desirable market in the years ahead.
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Cleveland, OH: In recent years Cleveland has undergone what many researchers call a “brain gain.” That is, the city has seen an increase in residents with bachelor’s degrees. The impact this has had on the area reaches the job market and consequently the real estate market. Cleveland has seen population increases and an increase in job growth. The median home value in 2021 was around $138,000, and the average monthly rent was around $1,143.
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Cincinnati, OH: Cincinnati is seeing big changes as a result of incoming millennial residents. The city is known for its manufacturing, retail, and transportation industries, contributing to the 2.06% job growth rate. The median home price in 2021 was around $165,000. Buy and hold investors may still find that these properties have high chances of appreciation as the metro area continues to grow.
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Chicago, IL: The median home price in the Windy City was at $210,000 in 2021, whereas average rents were between $1,400 and $1,700. Many real estate investors find larger markets hard to break into. After all, they can be known for low inventory and high competition. However, those who were able to act last year in Chicago may have scored properties for as low as $130,000. The right investment could enable buy and hold investors to continue to turn over large profits in this market area.
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Indianapolis, IN: Believe it or not, Indianapolis is the second-largest city in the midwest (after Chicago of course). The growing population is a result of a strong job market and an established education system. In fact, the Indianapolis job market is only projected to grow stronger as new technology and bioscience companies move and expand in the area. In 2021, the median purchase price for a property was around $165,000 and the average rent was at roughly .71 percent of the purchase price.
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Kansas City, MO: Kansas City is a strong pillar in the healthcare, manufacturing and automotive industries—with a job growth rate around 1.67 percent in 2021. The city has continuously seen an increase in rental demand as new talent moves to the area. The median home price last year was $162,000, with an average monthly rent of about $1,200.
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How To Buy And Hold Real Estate Investing In 5 Steps
The right buy and hold real estate business plan can help establish a framework to guide you through every step of the process. As you identify which market you plan to operate in, keep the following steps in mind:
1. Find The Right Property
Whether you want to buy a property for rental or rehab purposes, you need to get the best possible deal. With rehab properties, there is an increased emphasis on making offers that can maximize your bottom line. The same should be the case with a buy and hold property. Your monthly cash flow is directly dependent on your housing expenses, which are then based on the purchase price. You should negotiate the same way you would for a rental property as you would for a rehab. While the 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 you will have difficulty finding tenants if there is no demand. 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 starts with finding the right property. Adam Garcia, founder of The Stock Dork, states that “patience is key to buying and holding property. The concept is based on an incredibly simple fact: property appreciates over time. This is even considering economic crashes such as the 2007-2008 crash.. While holding the property, you’ll be, of course, renting it out. Ultimately, the purpose is to sell it at a much later date, such as in 20 years. You’ll want to get a property that is a bit more traditional and family-friendly. A 3 or 4 bedroom house is ideal for this reason. You’re also going to want to buy in a safe area. Doing this will ensure that you have long-term renters”.
2. Finance The 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, just structured a little differently after a few months. You can still use any of the following buy and hold real estate financing options:
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Traditional Lender Financing
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FHA Purchase Loans
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Hard Money
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Private Money
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Seller Financing
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Partners
Traditional financing is one of the most well-known ways to finance a real estate property. Investors seeking this option will need to go through a credit check and application process to be approved. They 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 starting, 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 can purchase up to four-unit properties as long as they live in one unit. To take advantage of this opportunity, live on one side, and rent the other unit until you are ready to move on.
Hard money offers another opportunity to finance the acquisition of a buy and hold property. Although remember that after you purchase the property, there is a minimum waiting period before refinancing 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 can also provide the chance to break into buy and hold real estate. 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 if you have worked with other properties. To identify potential private lenders and partners, try networking at real estate events in your area. Remember, if you are creative, there are many ways to access buy and hold loans that you may not be aware of.
3. Upgrade The Property
In one sense, rehabs and buy and hold properties are similar in that you need to add value. There are very few good turnkey rental property deals out there. These types of properties often go as close to the full asking price as possible. If you want a good buy and hold deal, you need to be willing and able to put some work in. You don’t need to give the property a full face-lift, but you need to make it appealing to live in. At the very least, you need to update the flooring, paint the walls, and improve the kitchens and bathrooms. These expenses need to be factored into your budget before making an offer. With some subtle upgrades, you can increase your rental amount by 25 to 30 percent.
4. Manage The Property
One of the reasons investors stay away from buy and hold properties is the tenant horror stories they have heard. For every ten tenants, however, nine are typically great. That remaining one could turn a good property into a nightmare. The best way to avoid this is by working with a property manager. Whether you decide to go this route or opt to manage the unit yourself, you need to have a system in place before you buy. You can’t just find a tenant and expect to collect rent checks every month. There is a good amount of time, effort, and patience needed to run a rental property. The long term rewards are great, but getting there takes management skills and dedication.
5. Prepare For The Unexpected
Things can often change a rental property at a moment’s notice. One day you are praising your tenants for their timely payments, and the next day the furnace breaks down. It is not uncommon to go several months without any issues, then get hit with two or three major expenses out of the blue. It is important to maintain a healthy reserve fund to brace for unexpected occurrences. Without reserves, you will be forced to scramble to find funds to pay for these items. This can come from high-interest credit cards, personal funds, or money earmarked for other projects. It can also cause you to run the property in a way that loses good tenants and may cost you more money in the long run.
Is Buy And Hold Real Estate A Smart Investment?
Buy and hold real estate is a smart choice for investors with well-planned business and financial goals. This long-term investment strategy can yield impressive results when done correctly, making it one of the most popular avenues in real estate. As you consider buy and hold real estate, be sure to mind your due diligence and question how a property will affect you.
Make note of the ways it will impact your day-to-day business operations. Are rental properties performing well in the market you operate in? What is your preferred level of involvement? What type of property will best suit your investment goals? Answer these questions, and you may have a clearer picture of whether or not purchasing a buy and hold property is right for you (and the best way to go about doing so).
Do keep in mind that buy and hold properties can be flexible to your specific needs. For investors seeking a lower level of involvement, a property manager can oversee regular operations. For those with more open schedules, operating a multiunit investment property alone may be the right fit. Numerous options can help make your goals of buy and hold real estate a reality if you decide this strategy is right for you.
Pros And Cons Of Buy And Hold
Buy and hold real estate is a popular investment choice, and for good reason, But, that does not mean it’s the right strategy for everyone. Read through the following pros and cons to learn more as you reflect on this option.
The biggest perk of any real estate strategy is the potential for stable monthly returns, but there are other benefits to be aware of. Here are some of the pros associated with buy and hold to learn about:
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Long-term appreciation as the property value increases with time
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Numerous tax deductions on anything from mortgage interest to appliance depreciation
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Real estate can offer your portfolio some protection as inflation increases
As with any investment, there are a few drawbacks to consider. Here are the top three cons to look out for when considering buy and hold real estate:
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Real estate takes longer to sell than many other investment types, such as stocks
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Property management will require time, or at the very least a reputable third-party company
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Real estate moves through multiyear cycles, almost requiring you to hold the asset long term to maximize benefits
Buy And Hold Vs. Flipping
While buy and hold is one of the most common real estate investing strategies, so is flipping houses. Flipping houses involves buying a property for below-market value and renovating it to sell for a profit. This strategy results in a one-time payout, and investors must consistently flip houses to generate cash flow. As you can imagine, flipping houses is much more hands on than buy and hold.
When deciding between the two, investors need to consider their overall risk tolerance. When purchased in an appreciating real estate market, buy and hold properties are thought to be lower risk than rehab properties. This is because there are so many more variables associated with flipping a house: securing a low purchase price, working with trustworthy contractors, staying on a renovation timeline, reducing holding costs, and ultimately selling for a profit. Flipping houses can also be said to require more capital upfront, as you have to fund the renovations after buying the property.
Note that some of today’s best real estate portfolios include a diverse collection of investment types. You may even find that flipping houses to eventually rent out combines the best of both strategies. Ultimately, buy and hold vs. flipping will come down to your preferred involvement level, risk tolerance, and the amount of capital you have to invest. Both opportunities can be highly lucrative when executed correctly.
Summary
Investors asking ‘what is buy and hold real estate?’ hopefully now understand how one or two buy and hold properties a year will positively transform your portfolio. Fortunately, getting started with them is not as difficult as you may think. Follow these five guidelines to help you get on the right track. Before you know it, buy and hold real estate might even become your new favorite real estate investing niche.
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