Buy And Hold Real Estate
Some buy-and-hold real estate investors rarely sell. For example, buy-and-hold real estate can also be used as part of the BRRRR method of investing. Instead of selling a property, an investor does a cash-out refinance to pull equity out of one home to buy another. After patiently waiting for both properties to increase in market value, an investor performs a cash-out refinance on both to raise capital for a third cash-flowing investment property.
buy and hold real estate
Buy-and-hold real estate offers the opportunity for a consistent stream of rental income month after month. Through November 2021, single-family rent prices increased by 11.5% year over year, according to a recent report from CoreLogic, a leading property information and analytics provider. In fact, some markets like Miami, Phoenix, and Las Vegas posted annual rent increases of between 16.7% and 33%.
Buying and holding real estate also can help you build wealth over the long term. As the Federal Reserve reports, the median sales price of houses has increased by more than 238% over the past 20 years (Q4 2001 versus Q4 2021). That means a home purchased for $150,000 20 years ago would be worth about $357,000 today, appreciating $207,000, provided that the property was properly maintained.
Real estate also historically acts as a hedge against inflation when bought and held for the long term. Annual increases in inflation, as measured by the consumer price index (CPI), generally can be passed to a tenant in the form of rent price increases, while housing prices historically go up faster than the rate of inflation. Between 2001 and 2020, the U.S. inflation rate totaled 41.26%, while median home sales prices rose by 238%.
Buy-and-hold real estate historically offers a much higher ROI. To illustrate, assume an investor purchased a rental property for $150,000 in cash in 2001. Over the holding period, the property generated a net operating income (NOI) of $9,000 per year, for a total of $180,000. If the property sold today for $357,000, the ROI over the 20-year holding period would be 358%:
Unlike other investment assets like stocks and treasury bills that can quickly and easily be sold, real estate can easily take 30 days or more to sell, even when an owner is distressed and willing to sell for less than what the property is worth.
A buy-and-hold investor who wants to sell may discover that the market is trending downward, which could reduce or even eliminate potential profits. To avoid selling into a down market, investors can plan ahead and monitor market cycles to help them retain or increase gains.
Of course, the opposite is true as well. Large urban gateway markets used to be the only real estate markets that some investors would consider. Today, small secondary and tertiary markets like Kansas City and Waco are on the radar of remote real estate investors.
All investments come with a certain amount of risk in exchange for potential reward. While investors who are extremely risk-averse may opt for a treasury bill that pays an interest rate below the rate of inflation, others choose buy-and-hold real estate investing for a balanced blend of risk and reward.
Buy-and-hold real estate can be a good investment strategy for people seeking to build wealth and generate recurring income year after year. Sometimes the best buy-and-hold real estate investments are found in a different city from where an investor lives. Buying rental property in markets where prices are still relatively affordable may generate healthier overall returns than purchasing property in a city where prices are already sky-high.
Jeff has over 25 years of experience in all segments of the real estate industry including investing, brokerage, residential, commercial, and property management. While his real estate business runs on autopilot, he writes articles to help other investors grow and manage their real estate portfolios.
Rather than taking out a loan to purchase a rental property, you could tap your retirement assets through a self-directed IRA. This type of IRA allows you to direct your investment choices beyond stocks and bonds to real estate and other alternative investments.
These kinds of activities fall under the umbrella of self-dealing, which is an "IRS no-no." But assuming you follow the rules, using your IRA to invest in buy-and-hold real estate could allow you to reap cash flow and appreciation benefits, alongside tax benefits.
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. 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.
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.
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 influence future market growth and impact your ability to make an initial investment. Currently, the national average home price is around $316,000 while the average monthly rent is roughly $1,879.
Based on the above factors, investors have their work cut out for them in the year ahead. A recent study from RealWealth revealed a number of potential real estate markets for 2022. The following list outlines some of the best places to buy rental properties this year:
Atlanta, GA: As the third-largest metro area in the Southeast, Atlanta has been a prime market for real estate investors in recent years. All signs point to continued growth for the city, as the population and local economy continues to grow. Research shoes that the population has grown almost 14 percent in the last decade. Currently, the average home price is around $330,218 and the average monthly rent is $1,875. Investors who are able to break into this market are expected to enjoy high rates of appreciation in the years to come.
Baltimore, MD: The average home price in Baltimore currently sits around $351,500, with an average rental price of $1,740. Both population and job growth rates are increasing, and housing is considered more affordable than many markets in surrounding areas. The federal government and military are two main employers in the Baltimore area, though there are significant health care, finance and insurance industries as well. Baltimore also features a number of higher education institutions. As a whole, the city has a number of factors that signal a healthy (and growing) real estate market.
Chicago, IL: For the second year in a row, Chicago represents one of the best markets for real estate investors. The current average home price is around $287,131 and the average monthly rent is $1,730. These are already pretty significant changes compared to last year. While job and population growth rates are not as high compared to other markets on the list, Chicago consistently boasts a strong price-to-rent ratio. Further, the city has experienced consistent rental demand.
Pittsburgh, PA: Pittsburgh has been 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 in 2021 was 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.
Houston, TX: Houston is yet another city that made waves in 2021 as a result of job growth and affordability. The median house price was 21 percent below the national average, at around $175,000, and the average monthly rental price was about $1,500. This signaled a highly profitable market for buy and hold investors. Adding in the 2.59 percent projected job growth, and Houston will continue to remain a desirable market in the years ahead.
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 in 2021 was around $165,000. Buy and hold investors may still find that these properties have high chances of appreciation as the metro area continues to grow.
Chicago, IL: The median home price in the Windy City was at $210,000 in 2021, whereas average rents were 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 were able to act last year in Chicago may have scored properties for as low as $130,000. The right investment could enable buy and hold investors to continue to turn over large profits in this market area.
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: 041b061a72