Several real estate investment strategies are available to people interested in making money in real estate, particularly in buying and selling properties. One of the approaches to earning money is the buy and hold strategy in real estate.
The article below shares everything you need to know when adopting a buy and hold strategy. It also offers valuable suggestions on how you can succeed at buying and holding properties.
What Is the Buy and Hold Real Estate Strategy?
The buy and hold strategy is an approach in which an investor purchases rental property/properties with high potential to provide multiple long-term benefits and holds on to it for a long time.
Adopting such a strategy requires getting a good understanding of the market and a keen awareness of real estate price movements. You would want to know the market fluctuations so you can buy your investment properties at a low rate and earn higher returns. Also, you can regularly check the real estate appreciation to know when to sell.
A sound real estate market analysis will also help you determine the marketability of an asset, which influences your income potential. The income potential increases depending on the marketability of each asset; your potential earning increases as your property becomes more marketable.
Income Streams
Through the purchased property, you can choose from two income streams:
- Asset appreciation. You can decide to keep and maintain the property and wait until its value appreciates before selling it. However, some investors decide to keep the property even if the property’s market value has reached a high level.
- Rental. You can rent out the property to earn through rental income, but at the same time, your property’s value also appreciates.
Benefits of the Buy and Hold Strategy
Real estate may go through highs and lows because of several factors, but it always rebounds. The buy and hold investment strategy will enable you to build wealth over time. Specifically, investors who use the buy and hold approach can enjoy the following benefits:
- No experience required. Buy and hold is a good strategy to get started with real estate investing. Besides not requiring any expert knowledge or experience in buying real estate, several financing options are available to you, e.g., all-cash, hard money loans, conventional loans, and more. All you need is the readiness and willingness to learn the ropes. Learning should not be difficult because user-friendly and reliable real estate investment tools are available. Tools such as the ones offered by by Mashvisor will surely help you understand and evaluate the real estate market effectively.
- Immediate, short-term gains. Suppose the property you purchased does not need repairs and fixes. In that case, you can immediately turn it into an income property by renting it out, allowing you to earn regular income.
- Easy expansion of real estate investment portfolio. Waiting for the property’s value to appreciate is not the only way to build your wealth. Suppose you’ve fully paid the mortgage on your first property. You may now save the income from your first property to use as a down payment later to buy a second property. With two properties bringing in income for you, it will be easier for you to pay for the monthly mortgage and purchase another property. As you add a property to your real estate investment portfolio, the easier it becomes to seek other real estate investments, and the risks become more manageable.
- Flexibility. A buy and hold strategy affords you the flexibility of how
you want to earn from your property. As mentioned earlier, you can choose from two income streams. If you think you are not cut out to be a landlord, you can choose to earn passively from asset appreciation. On the other hand, if you would like to be more aggressive in growing your real estate investments, you can rent out your property and, later, buy more properties to invest in.
- More stability. Despite the risks that come with real estate investments, a buy and hold real estate strategy is less volatile and, therefore, comes with fewer risks. The cash flow is also more predictable.
- Reduced task liability. Buying a rental property to buy and hold entitles you to tax deductions that include maintenance and repair costs, property management fees, and even the cost of driving to or from your property. The property is also taxed as investment income with reduced tax rates. If you sell the property after owning it for over one year, your taxes will be computed using the long-term capital gains rate.
Drawbacks of the Buy and Hold Strategy
Like any other investment scheme, the buy and hold strategy comes with its own disadvantages. Here are some of them:
- Vacancy Risks. Owning a rental property means looking for tenants annually. Whether you do it yourself or avail of property management services, there are certain costs attached to finding a tenant. Suppose you don’t get a tenant soon enough and your property remains vacant for a certain period. In that case, you will need to get your monthly mortgage payment from somewhere else, unless you’ve allotted a few months’ worth of mortgage payment before buying the property.
- Management-intensive. Buying and holding a rental property is not for investors who lack a knack for management and administrative work. Investors, especially the new ones who are not well-prepared for the demands of being a landlord, can find the strategy too stressful. Admin and legal concerns must be adequately managed if you want to ensure a continuous positive cash flow from your income property.
- Illiquidity. The buy and hold scheme will not work for investors who want immediate cash in exchange for their properties. It takes some time before the value of the property appreciates. Although you can immediately rent it out, screening and finding a tenant for your property may not happen right away.
- Risks of loss. Should you decide to rent out your property, the risks include losing your income because of vacancies or getting a tenant who fails to pay the rental. You also need to deal with the eviction process if a tenant defaults, which can be another stressful event.
- Maintenance costs. Several ongoing costs come with buying and holding a property. Such costs include property taxes, electrical repairs, ground maintenance, plumbing, roofing, and more. As the owner, you will be responsible for fixing any property damage.
- Commitment-dependent. The buy and hold approach can take painstakingly long before achieving your investment goals. So, if you are just testing the waters to ascertain if you are keen on investing in real estate, the buy and hold strategy may not be for you.
- Disappointing return on investment. The value of your property may not appreciate as much as you expected. Although you will still earn from it, your financial gains may fall below your expected returns, which is why a thorough marketing analysis is imperative.
Related: Buy and Hold Real Estate Investment Strategy: A Beginner’s Guide
Types of Buy and Hold Properties
The type of property you invest in plays a crucial role in a successful buy and hold strategy.
Single-family homes are best for buy and hold investments, especially for new investors. More experienced investors would also be interested in other types of properties, but some still stick to single-family homes. Here, we cover the two major property types and why they are good for the buy and hold investments.
Single-Family Homes
Single-family homes are real estate properties – a house or a condominium – that stand alone on a lot and can be rented out to a single tenant. They are ideal for newbie real estate investors who want to go the route of buy and hold. Ssingle-family homes are attractive to investors because of the following benefits:
- Affordability. They are less expensive, so you will need less capital even if you choose to purchase in cash.
- Immediate return on investment. Once you’ve fixed up the place and rented it out, you can immediately earn from your property.
- Regular passive income. Turnover of tenants happens only at least once yearly, which means less time and work looking for and turning over the property to new tenants. It’s also easier to get a tenant for single-family homes, so you are almost always assured of income.
Multi-Family Homes
A multi-family home refers to a one-building property designed to house more than one family living separately. A duplex, triplex, and quadruplex are considered multi-family homes, which may also work well for a buy and hold strategy. Some investors favor such type of property because of the following:
- Easier to Finance. Multi-family homes may be more expensive, but banks and lending institutions are more likely to approve loans for this type of property. This is because of the considerable monthly cash flow that multi-family homes generate.
- Quicker to build a portfolio. Investors who hurry to grow their real estate investment portfolio would do well to purchase a multi-family home. Unlike a single-family home where you need to wait for the first property to get fully paid before purchasing a second property, buying a multi-home gives you 2 to 4 investment properties right away.
- Financially- viable property management services. Renting out a property requires specific administrative skills, and if you do not have them or do not have the patience for it, it is wiser to hire a property manager to take care of all the admin stuff. The positive monthly cash flow generated by a multi-family home enables you to do that.
Whether you are buying a single-family home or a multi-family home, you need to invest in the upkeep of your buy and hold property to make potential tenants fall in love with your property.
Multi-family homes can be a good alternative to investors planning to adopt a buy and hold strategy
When to Sell a Buy and Hold Property
Unless your investment goal has changed and you have opted to keep the property for good, you should hold your investment properties for at least ten years before you sell it. Several factors must be considered when selling buy and hold properties. Let’s discuss some of these factors.
- Loan term. Sell your property when your loan term is about to end.
- Real estate market. Learn about the prices of comparable homes within the same neighborhood. It’s a wise move to list your property for sale if it’s a seller market in which property prices are high.
- “Frozen” rental income. You may find yourself in a situation where raising the rental rates is impractical, if not impossible. It is wiser to sell than keep the property when you reach this stage.
- Increasing property taxes. When property taxes are increasing in your investment property’s location, you may go ahead and sell your property to avoid the high tax rates.
- A better investment opportunity. Sell your property if you are sure that you can invest the money into a more profitable venture.
Top 5 Places to Purchase a Property for the Buy and Hold Strategy
To get you started on your search for a profitable property, we are featuring five of the best places to invest in real estate, based on the latest data from Mashvisor.The best places are classified as the locations with the highest cash on cash return for properties rented out on a monthly basis.
1. Austin, Texas
- Median Property Price: $536,000
- Price Per Square Foot: $225
- Traditional Cash on Cash Return: 10.70%
- Traditional Rental Income: $1,372
- Real Estate Forecast: Sales will increase 4.7%.
Real estate experts deem Austin as an excellent location of real estate investment. The city continues to see a high appreciation of home values mainly because of its economy that is fueled by tech companies its robust job market. Check out Millwood, Northwest Austin and Windmill Run, Southwest Austin.
2. Birmingham, Alabama
- Median Property Price: $200,000
- Price Per Square Foot: $178,52
- Traditional Cash-On-Cash Return: 5.43%
- Traditional Rental Income: $1,343
- Real Estate Forecast: Combined sales and price increase by 13%.
Aside from being a “diverse city,” Birmingham attracts investors because of its low home prices and progressive economy brought about by around 500 tech companies headquartered in the city and being among the country’s largest banking centers. Its low income property taxes support the city’s position as the most affordable city for newbie investors. Keep Homewood, Vestavia Hills, and Mountain Brook in your lists of neighborhoods to explore.
3. Detroit, Michigan
- Median Property Price: $75,000
- Price Per Square Foot: $68
- Traditional Cash-On-Cash Return: 4.12%
- Traditional Rental Income: $990
Detroit is home to the “Big Three” auto companies, as well as DTE Energy, Ally Financial, and recently, Apple’s Developer Academy. The city is a magnet for real estate investors because of its low home prices and high home value appreciation rate. Investors looking for rental properties would even be more enticed with its high rental rate that can go as high as $2,800 per month. Take a closer look at East English Village.
4. Boise, Idaho
- Median Property Price: $529,900
- Price Per Square Foot: $296
- Traditional Cash-On-Cash Return: 3.50%
- Traditional Rental Income: $1,510
- Real Estate Forecast: Values will appreciate by more than 17%.
Boise’s been attracting young professionals because of its low unemployment rate, a flourishing job market, and a bustling social scene that features museums, modern restaurants and recreational facilities, annual festivals, and lots of outdoor space. Zoom in on East Boise, West Boise, Meridian, Northend, Downtown, and Central Bench.
5. Chicago, Illinois
- Median Property Price: $329,900
- Price Per Square Foot: $242
- Traditional Cash-On-Cash Return: 1.58%
- Traditional Rental Income: $2,019
- Real Estate Forecast: Real estate will remain solid
Several factors make Chicago a good place to invest in real estate. Aside from a high housing demand, the city enjoys low capital rates and mortgage rates. Its high employment rate and the affordability of its metro area contribute to the continued favorable home sales in the city. Two neighborhoods to watch out for are Roger Park and Humboldt Park.
Related: What Traditional Cap Rates by City Should Real Estate Investors Expect?
Making the Buy and Hold Strategy Work: Helpful Guides
Despite the simplicity of the buy and hold real estate investment strategy, not all investors succeed. So, let us share with you some tips on maximizing your earning potential.
- Choose your property’s location wisely. Look for neighborhoods with upcoming or ongoing major infrastructure and economic development projects, which will boost the appreciation value of your property.
- Consider buying a distressed property. Foreclosed properties are sold at prices below market value so that you can save on your purchase cost.
- Look for other property payment options. Know that a housing loan is not the only alternative to cash purchase. Explore the possibilities of self-directed IRAs and retirement funds so you do not need to worry too much about your monthly mortgage payment.
- Perform real estate market analysis and investment property analysis. These analyses should lead you to the location and the property that will bring you maximum returns and allow you to make informed purchasing decisions.
- Rent out your property. You will earn from the monthly rental while the value of your property appreciates.
If you think the buy and hold strategy is for you, sign up for Mashvisor and take advantage of its wide range of tools: the Heatmap to help you find the best location that will meet your investment goals and the Property Finder to guide you to high performing properties to buy and hold, and more. You can also book a demo to get more adept at using Mashvisor’s tools.
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As an experienced real estate investor with a deep understanding of various investment strategies, I can confidently delve into the concepts discussed in the article on the buy and hold real estate strategy. I've successfully navigated the real estate market, employing buy and hold strategies to build wealth over time. My expertise is grounded in practical experiences, market analysis, and a comprehensive understanding of the factors influencing real estate investments.
Now, let's break down the key concepts mentioned in the article:
1. Buy and Hold Real Estate Strategy:
- Definition: The buy and hold strategy involves purchasing rental properties with long-term benefits in mind and holding onto them for an extended period.
- Key Requirements: Understanding market fluctuations, real estate price movements, and conducting a sound market analysis.
2. Income Streams:
- Asset Appreciation: Holding onto the property until its value appreciates.
- Rental Income: Renting out the property to generate regular income while the property value appreciates.
3. Benefits of the Buy and Hold Strategy:
- No Experience Required: Ideal for beginners, with various financing options available.
- Immediate, Short-Term Gains: Can generate income quickly if the property doesn't require extensive repairs.
- Easy Expansion: Allows for the growth of a real estate portfolio over time.
- Flexibility: Offers the choice between passive income through asset appreciation or active income through renting.
- More Stability: Compared to other real estate investment strategies, buy and hold is less volatile.
- Reduced Tax Liability: Entitles investors to tax deductions and lower tax rates on long-term capital gains.
4. Drawbacks of the Buy and Hold Strategy:
- Vacancy Risks: Annual challenges of finding tenants.
- Management-Intensive: Requires effective property management skills.
- Illiquidity: Not suitable for investors seeking immediate cash.
- Risks of Loss: Potential income loss due to vacancies or tenant defaults.
- Maintenance Costs: Ongoing expenses for property upkeep.
- Commitment-Dependent: Takes time to achieve investment goals.
- Disappointing Return on Investment: Property value may not appreciate as expected.
5. Types of Buy and Hold Properties:
- Single-Family Homes: Ideal for new investors due to affordability and immediate returns.
- Multi-Family Homes: Easier to finance, quicker portfolio growth, and viable property management services.
6. When to Sell a Buy and Hold Property:
- Factors to Consider: Loan term, real estate market conditions, frozen rental income, increasing property taxes, and better investment opportunities.
7. Top 5 Places to Purchase a Property for the Buy and Hold Strategy:
- Austin, Texas; Birmingham, Alabama; Detroit, Michigan; Boise, Idaho; Chicago, Illinois.
- Factors considered: Median property price, price per square foot, cash-on-cash return, rental income, and real estate forecast.
8. Making the Buy and Hold Strategy Work: Helpful Guides:
- Choose Property Location Wisely: Consider ongoing infrastructure and economic development.
- Consider Distressed Properties: Explore foreclosed properties for cost savings.
- Explore Payment Options: Beyond housing loans, explore alternatives like self-directed IRAs.
- Conduct Market Analysis: In-depth analysis for informed purchasing decisions.
- Rent Out Your Property: Generate monthly rental income while waiting for property appreciation.
This breakdown showcases a comprehensive understanding of the buy and hold strategy, providing valuable insights for both beginners and experienced real estate investors.
