The Must-Know Details for Buying and Holding Real Estate
Real estate investment can be a tricky business. Deciding how you invest in real estate can range from quick one-time profits to building long-term equity and even residual income. Your favorite home improvement television show probably focuses on flipping houses after quick home improvements. Sure, it's flashy and fun and may lead to quick profits, but buying and holding real estate can lead to long-term gains, like multiple income streams and equity, all while helping with future finances. Continue reading for more information on buy and hold real estate strategy.
What is Buy and Hold Strategy in Real Estate?
Buy and hold strategy in real estate refers to a long-term passive investment strategy where an investor purchases and holds on to a property for a set period of time. Buy and hold strategy offers multiple benefits such as long-term gains and potential short-term rental cash flow.
When Should You Buy and Hold Real Estate?
The real estate market in the United States has been on a steady incline for years. Last year saw a 5.61% average gain in home prices. While the market can be volatile in the short-term, housing prices are expected to continue to rise in the future. With this in mind, you may be tempted to say that right now is the best time to buy if you're planning to hold onto the property and, if you're planning to make a real estate purchase as an investment, time is probably on your side. Real estate market trends tend to move in cycles and without time as a pressure, you'll have the luxury of waiting to find that perfect deal for your buy and hold strategy.
How Do You Pick a Property Location?
When you buy real estate with the intention of holding onto the property, you'll need to use a combination of intuition and detective work. Buying a home in an established neighborhood can be a more predictable investment that can produce a more reliable income immediately, if you plan on renting it out. Be prepared, however, to pay a premium for a home in a hot neighborhood. If your goal is to build equity in the home rather than getting a higher rental margin, consider an up and coming neighborhood in your city or town.
With a little sleuthing, you might also discover a neighborhood that is likely to be the next hot, new spot to buy. Early indicators for an up and coming neighborhood include large amounts of construction for both residential and commercial projects. Businesses are likely beginning to move into the neighborhood. In addition to the new Starbucks, look out for service industry businesses as well. Restaurants and grocery stores, for instance, could be a good indicator that home values will begin to rise in the near future.
How Can You Finance a Property to Hold?
Qualifying for a mortgage for a second home is largely the same as the first. But if it's considered an investment property, your interest rate and required down payment will likely be higher. The good thing, though, is that you can usually use the equity in your first home to help finance the second. Determining how much you can borrow and what your monthly payment and APR[CP1] will be can help determine what kind of investment you should make. Once your investment begins to pay off, either from the income received while renting or by accruing equity in the home, you can use that income to help finance future investments. In this way, real estate investing could potentially be less volatile than other types of investments, like the stock market.
How Do You Make Money Buying and Holding Real Estate?
There are typically two means by which you can make money when buying and holding real estate. The first is immediate – in the form of rent received on the property. The money made can be used to help pay the mortgage, cover repairs, and give you added income. The second form is in the equity that you build in the home or investment property. Housing prices these days almost always outpace inflation and while there are always ups and downs in the market, there is a good chance that a property purchased today can be sold for a profit in the years to come. This is the backbone of real estate buy and hold strategy.