Assess the Local Market
Unlike flipping, with buy and hold, you’ll need to fill up your property with high quality tenants. Therefore, you want to identify areas with high population growth and high home appreciation rates. This signals a growing job market which is a green light.
Ideally, you want to look for expanding markets since you can snag good deals in these markets. Make a list of potential markets to analyze since choosing the wrong market means dealing with high vacancy rates which would hurt your cash flow. It could also mean that you have to face negative property appreciation rates at the time of selling.
Generally, you’ll want to pay attention to these things when choosing a market to invest in:
- New Jobs and number of Fortune 500 companies
- Population growth
- Vacancy rates and homeownership rate
- Home affordability rate
- Property tax rate
- School district
- Walkability
- Number of restaurants and malls
You will be managing your rental property in this place for years, so ensure you do careful due diligence.
Check the Building's Condition
Once you’ve done your homework on the area, you should assess the building itself. Some houses are not suitable as rental properties. They might seem like a great deal but you have to put yourself in your tenant’s shoes. How would you love living here?
Instead of seeking bargains as a new investor, you should pay attention to potential cash flow. With limited resale inventory today, investors are searching for deals in turnkey and new construction. Investing in a turnkey property that generates good cash flow is usually less stressful than buying a rehab. If you have to make a lot of upgrades and fixes on the property after purchase, then it’s probably not a suitable candidate for a buy and hold strategy.
As a new investor, you should be willing to pay a slightly higher price to find income-producing properties unless you have some experience handling large scale home repair projects.
Add Value to the Property
Yes you want to find properties in decent condition. But ideally, you shouldn’t be paying market value for your buy and hold. Buy and hold investors typically look for off-market deals and then add value to them by updating floors, kitchen and bathroom hardware, painting and improving the landscaping.
Purchasing a property and adding value to it over time (i.e. increasing rents, renovating the property to improve its condition, decreasing operating expenses, etc.) pays dividends in terms of increased cash flow. You can raise rents by up to 30%. The market value of the property also rises which helps whenever you want to sell or refinance.
With turnkey and new construction, you need to do a thorough home inspection. Ensure that any type of turnkey buy and hold you invest in meets the REAL Income Property™ Standards. You want to squeeze out as much value as you can from the property.
Know How To Find Good Tenants
The success of a buy and hold investment depends on having reliable tenants. So it’s imperative to learn how to market your property, vet tenants, and keep vacancy rates low.
Some of your tenants will leave at any point due to relocation, downsizing, upsizing or homeownership. One or two may need to be evicted. You’ll need measures in place to attract and vet new tenants as fast as possible.
Here are some strategies for marketing your rental property:
- Place a “For rent” sign in the yard
- Advertise on Zillow, Craigslist, Trulia and Realtor.com
- To attract high quality tenants, take professional photos of your listing.
- Conduct a move-out inspection with the outgoing tenant.
- If necessary, hire professional cleaners and contractors.
You should do a good job of screening out problem tenants and anyone who might have problems making payments. Be sure to state your tenant requirements in your rental ad without violating fair housing laws. Basically, you’d want to do a background check. You want to know their credit score, employment history and eviction history. All of these can be stressful, which is why you should simply hire a property management company to take care of marketing and screening tenants.
Work with a Reliable Team
Without the right people on your side, managing rental properties may spell trouble. With one or two properties, you could handle property management on your own. You can save money if you’re handy with repairs.
As your rental portfolio grows, managing your rental properties on your own will lead to overwhelm. While hiring a property management company will cut into your profits, you’ll also be able to sleep well at night not having to worry about clogged toilets.
Aside from handling tenant complaints, you’ll need to find tenants, screen them, collect rents, handle evictions, do periodic property maintenance, among other things. This is why investors recommend building a team especially if you’re in it for the long term. Your team should include a real estate agent, a handyman (or property management company) and a lawyer.
Prepare for Unexpected Expenses
There will be bumps along the way while managing your rental property. A couple of major expenses may suddenly pop up. You might have to deal with vacancies. Without sufficient reserves, you will run out of steam. Tap into personal funds, money earmarked for other projects or high interest credit cards if necessary.
Moreover, you should consider getting landlord insurance since homeowner’s insurance doesn’t cover losses incurred when your property is rented out. Landlord’s insurance covers property damage, lost rental income and protects against liabilities.
USING A BUY AND HOLD REAL ESTATE CALCULATOR
A ROI of 5%-10% is also acceptable.
You’ll need to estimate your costs and forecast potential income from your rental. Some of these costs include maintenance, mortgage, HOA fees, taxes, pest control, landscaping, among others.
When analyzing your property, you can use the 50% rule to estimate operating expenses. That is, 50% of your gross rental income (yearly income from rents) goes towards operating expenses. While the 50% rule is used for quick deal analysis, you might need to do more analysis. Input all operating expenses in this buy and hold real estate calculator to assess your potential ROI.
CONCLUSION
The safest, most stable way to create generational wealth in real estate is the long term buy and hold strategy. But as with any investment, don’t expect the big bucks right away. You need to do your due diligence and work with an experienced team. The Lledon Stokes Group is here for you every step of the way. Allow us to become part of your team, as your preferred real estate advisor. For more information about how The Lledon Stokes Group can help you grow your rental and rehab business send us a message!