A Beginner’s Guide To Buy & Hold Real Estate

Key Takeaways:


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 of time. 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 an investor to profit when they are ready to sell the property down the line.

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.

buy and hold

Best Buy And Hold Real Estate Markets [Updated 2021]

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 will help 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 not only influence future market growth but also impact your ability to make an initial investment. Together, these factors can signal a healthy real estate market.

According to a study published by RealWealth Network, there are several markets that present the above qualities. Here are some cities expected to offer promising opportunities for buy and hold investors:

  1. Orlando, FL: Located in the “sun belt” of Florida, Orlando has numerous perks that have caused the population to grow in recent years. Even more importantly: these new residents are looking to rent and not buy. A recent study showed that the rental rate has risen over six percent in the last year, a climb that is projected to continue. The median sale price of a property is currently around $230,000, with an average monthly rent of about $1480.

  2. 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 is Tampa currently attracting new job seekers, but it also remains to be a popular tourist destination. Investors should know the median sale price is around $225,000, with some ideal investment properties coming in right around $150,000.

  3. 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 is yet another destination for job seekers, tourists, and retirees—making this a desirable option for buy and hold investors. The average home price is currently 15 percent below the national average, at around $189,000. The average monthly rent is between $1,200 and $1480, signaling potentially high profit margins for those who choose the right property.

  4. Pittsburgh, PA: Pittsburgh is currently 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 is 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 of time.

  5. 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 both renters and investors. The Huntsville economy is most known for its space, defense, and tech industries, contributing to a growing population.

  6. Houston, TX: Houston is yet another city on this list as a result of job growth and affordability. The median house price is 21 percent below the national average, at around $175,000, and the average monthly rental price is about $1,500. This signals a highly profitable market for buy and hold investors. Add in the 2.59 percent projected job growth, and Houston will likely remain a desirable market for the near future.

  7. 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 is currently around $138,000, and the average monthly rent is around $1,143.

  8. 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 is currently around $165,000. Buy and hold investors will find that these properties have high chances of appreciation as the metro area continues to grow.

  9. Chicago, IL: The median home price in the Windy City is currently at $210,000, whereas average rents hover 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 can do so in Chicago may find properties for sale as low as $130,000. Securing the right property could enable buy and hold investors to turn over large profits in this market area.

  10. 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. Investors will find the median price for a property is around $165,000 and the average rent hovers at .71 percent of the purchase price.

  11. Kansas City, MO: Kansas City is a strong pillar in the healthcare, manufacturing and automotive industries—with a job growth rate of around 1.67 percent. The city has seen an increase in rental demand as new talent moves to the area. The median home price is currently $162,000, with an average monthly rent of about $1,200.

buy and hold real estate

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:

Find The Right Property

Whether you are looking 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 a tough time 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.

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:

  • Traditional Lender Financing

  • FHA Purchase Loans

  • Hard Money

  • Private Money

  • Seller Financing

  • 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 in order 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 are allowed to 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.

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.

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.

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 out of the blue, get hit with two or three major expenses. 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.

buy and hold real estate strategy

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.

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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Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies