How To Buy And Hold Real Estate Investments
If you’re considering a buy and hold real estate investment, it can be helpful to know exactly what you can expect from the process. Here’s how it all works.
1. Browse And Compare Investment Properties
If you want to get into buy and hold real estate investing, you’ll first need to browse and compare investment properties. Knowing how to find investment properties for sale will be crucial in this step, so you may want to have a real estate agent help you through online auctions or the multiple listing service (MLS). You can also drive around, get word-of-mouth recommendations from friends and family, visit "for sale by owner" properties or check out pre-foreclosure, foreclosure or short sale options.
What To Consider When Looking At Properties
Consider the location of the investment property, the potential future housing market conditions in the area and the property's appreciation when finding an investment property.
You’ll also want to consider the return on your investment (ROI) by estimating your annual rental income and annual expenses. Subtract your annual net rental income from your annual expenses to determine your net operating income (NOI). Figure out your total cash investment, including down payment, repairs, property taxes and closing costs. Divide your NOI by this figure to learn your ROI.
Have Your Mortgage Preapproval Ready
Note that prior to browsing and comparing investment properties, it's a good idea to get preapproved for a mortgage (unless you plan to buy the property in cash). An approval letter can help you keep the right budget in mind for your property search and help sellers see you as a legitimate buyer.
2. Purchase Or Finance The Property
The process of financing buy and hold real estate is similar to financing a primary residence. Here’s how it works:
- Go through underwriting: Once you land on a property to purchase and have an offer accepted, an underwriter will look at your assets through underwriting. Your lender will want proof of income (tax returns and pay stubs), credit documentation, proof of assets and liabilities (retirement and banking account statements, titles of transfer and gift funds).
- Get a home inspection: While you’re going through underwriting, it’s also a good idea to get a home inspection. This will ensure you’re fully aware of the property’s condition before you purchase it.
- Get an appraisal: Your lender will order an appraisal, which identifies the property's fair market value to ensure they’re not lending you more than the property is worth.
- Review your closing disclosure: After that process, you'll get a Closing Disclosure, which summarizes what you should pay at closing. Make sure it looks similar to your Loan Estimate, which you should’ve received from your lender after you submitted your loan application.
- Close on the property: Finally, you’ll need to do a final walkthrough and attend your property’s closing. Bring your ID, funds for closing and a copy of the Closing Disclosure.
3. Rent Out And Manage The Property
After you’ve closed on your rental property, you’ll need to decide if you’re going to manage and maintain it yourself or if you’d prefer to enlist the help of a property management company. Here are some of the steps you’ll need to take in order to get a tenant into your property:
- Market your property
- Screen potential tenants, including running background checks and making sure they can afford rent
- Formulate a lease agreement
- Keep track of all state and local laws
- Get landlord insurance
Maintaining The Property
You'll also need to maintain the property, which means doing the same type of things that you would do with your own property, such as:
- Updating smoke and carbon monoxide detectors
- Putting in new air filters
- Maintaining the HVAC and other major systems
- Managing structural issues such as foundation problems
- Getting ahead of any issues before they become a problem and throughout the time you rent out your property to tenants can make it a positive experience for them and you.
Managing Finances
Buy and hold real estate investing also includes managing the financial aspects of the business, including:
- Collecting rent and security deposits
- Keeping track of mortgage, taxes, insurance and utilities
Making sure you're timely on the finances can help you keep your business in tip-top shape. Your tenants will also thank you for keeping things streamlined.
4. Monitor Housing Market Trends
When you’re thinking of selling your buy and hold property, knowing the current and potential future housing market trends can help you figure out the best time to sell. Keep tabs on the broader and local housing markets to decide how you might make your next move, which could mean capitalizing on a seller's market.
Note that housing market trends might not be the same across the country. Pay attention to how long homes are sitting on the market, what they’re selling for and if it’s above or below asking price.
5. Know When To Sell The Property
The final step in buying and holding a real estate investment property involves knowing when it's a good time to sell the property. That could be when comparable properties in the area are starting to depreciate, though a large part of the buy and hold strategy involves weathering fluctuations in the housing market. Ultimately, you may want to consider selling if the property no longer meets your investment and financial goals. Continually evaluate whether your buy and hold investment still fits your abilities, financial goals and willingness to handle being a landlord.
Consider Tax Implications
Remember to consider taxes before you sell. When you sell a property, you'll pay capital gains, and the time you own the property determines the type of capital gains you pay. You'll pay short-term capital gains (the ordinary tax rate) if you own the property for less than one year, though this typically won’t apply in a buy and hold scenario. You’ll get preferential tax rates on long-term capital gains, which can be a big benefit for buy and hold real estate investors.
