There are many ways to get involved in the real estate business. Rehabbing and flipping properties are currently the hottest trend, but they are far from the only option. One tried and true method of generating wealth has always been through rental properties. A solid rental property that you buy for the long term can bring you strong returns year in and year out, regardless of what the market is doing. To achieve those results, there are a few actions you need to take. While these steps may appear simple, they are often not done enough. Here are a few keys to buy and hold rental property successfully.
1. Buy at the right price. This is the starting point for everything else that goes on with the property. Even though you plan on holding the property for years, you still need to aggressively negotiate the best possible price. The purchase price has a direct impact on your cash flow which impacts your bottom line. There is often a tendency to settle on whatever price your wholesaler presents to you. Even though you may be getting a good deal, you still need to try to get the best deal. The same is the case if your real estate agent finds a property for you. There is a fine line between “nickel and diming” your lead sources and trying to get the best deal possible. If you squabble over a few hundred dollars, you look petty and nobody will want to work with you again. However, if there are thousands of dollars on the line, you are simply being a savvy investor trying to negotiate. Your contacts will understand and years from now you will be glad you did. Everything starts with buying at the right price.
2. Put the right work in. There are many similarities between buying a home to rehab and buying a home to rent. With both properties, you want to make your home as appealing as possible for an end user. To do this, you need to make improvements that work for the property and the market it is in. The biggest difference with rental property upgrades is that they often don’t produce as large of a return as you may think. With a rehab, buyers look at every square inch of the property. Some tenants may do the same but probably not with as much scrutiny as if they were going to buy. You don’t need to give your rental property a complete facelift, but you do need to put in the right amount of work. You should do your homework and look at as many different rental properties as possible. Get a feel for what is being offered and how your property stacks up. After looking at a handful of other properties, you should have a good idea of what improvements you need to make. Granite countertops and stainless steel appliances may help attract a buyer but may not do much to help find a renter. There will always be improvements needed for buy and hold properties but it is important to work smarter not harder.
3. Don’t rely on appreciation. The real estate market works in cycles. There is plenty of historical data to give you an idea of where the market may be going, but nothing is a guarantee. You may think that with all of the improvements you make your property value will skyrocket. Sometimes this is the case but sometimes your projections are way off. With any buy and hold property, you need to dismiss the thought of appreciation. Appreciation should be viewed as a bonus if it happens. As much as it is nice to think that your asset has increased in value, it doesn’t do you much good until you are ready to sell. For a buy and hold property that you plan on keeping in your portfolio for year’s, appreciation should not even be a consideration. If you are thinking about selling within five years, then a rental property may not be the best way to go getting started. It is a dangerous proposition to need appreciation to make the deal be successful. Most markets have bottomed out and are on the way up. This doesn’t mean there won’t be some occasional bumps along the way. Appreciation is nice to have in your back pocket for a rainy day, but nothing is ever guaranteed.
4. Good management. Rental properties don’t run themselves. Even if you haven’t heard from a tenant in months, it doesn’t mean that something bad isn’t right around the corner. The best buy and hold properties are often those that are run the best. Whether you use a property manager or not depends on several different factors. The bottom line is that you need to stay on top of all managerial aspects of the property. There is more to property management than simply collecting rent checks every month. You need to stay on top of any issues with the property, maintenance, tenant retention, lease problems, and more. As the owner, the buck ultimately stops with you. You are the one that needs to be ready to act in a moment’s notice. If you treat each rental property like a business, you will be much more successful.
In a perfect world, a good rental property will provide you with monthly cash flow all the while setting you up for the future. Ten and even twenty years comes much quicker than we would like. A buy and hold rental property can be a strong addition to your portfolio if you remember to do the little things.