What Is Buy And Hold Real Estate Investing?

You may recognize the term "buy and hold" as a stock market investing term. It refers to when you buy a stock or another asset and keep it in your portfolio through market highs and lows. Buy and hold real estate involves the same basic concept.

Learning more about the buy and hold strategy can help you better assess whether this real estate investing technique is right for you.

What Is The Buy And Hold Strategy In Real Estate?

The term "buy and hold real estate" refers to a specific investment strategy where investors purchase property and retain it for a long period of time, often several years or decades. The investor rents out the property and collects rental income. Over time, the property’s value may increase, allowing the investor to eventually sell it for more than they paid for it.

Ultimately, the buy and hold strategy is a long-term approach to investing, unlike purchasing real estate only to sell it again soon afterwards. In a buy and hold real estate situation, you might even hold onto a property for your kids or grandkids someday to bring them rental income or even the proceeds if they decide to sell the property.

Buy And Hold Real Estate Vs. BRRRR

Besides buy and hold investing, you may also want to consider the BRRRR investment strategy (Buy, Rehab, Rent, Refinance, Repeat). This type of real estate investing involves flipping a distressed property, renting it out and getting a cash-out refinance for more rental property investments. A cash-out refinance allows you to pay off the original mortgage with money from your new, larger loan, then take the difference between the two mortgages in cash. From there, you can use the cash to buy a new distressed property and start the process over again.

How They Differ

The biggest differences between the buy and hold versus the BRRRR process is that in the buy and hold process, you hold onto the property, whereas in the BRRRR process, you don't. Furthermore, with the BRRRR, you continue to purchase new investment properties after the work on the current one is complete.

However, in both strategies, you evaluate to make sure you're buying the right investment, monitor housing trends and in both cases, may eventually sell your real estate investment.

How Does The Buy And Hold Real Estate Strategy Work?

The buy and hold strategy involves browsing and comparing investment properties, buying a property, renting out or managing the property, monitoring market trends and determining when to sell it.

When done effectively, buy and hold real estate has the potential to give you a continuous source of income, possibly even through retirement. In contrast to fix-and-flip properties, they may offer a steady, consistent return over many years.

What Type Of Properties Work For Buy And Hold Real Estate?

Any type of property can work well for the buy and hold strategy, but it’s often wise to find a property that is expected to increase in value over time. For example, you might consider buying a property in a developing area.

Pros And Cons Of Buy And Hold Real Estate Investing

Whether the buy and hold strategy fits your goals will depend on whether the pros outweigh the cons, so consider both.

Pros 

Let’s explore some of the benefits of buy and hold real estate investing.

Regular Income

Buy and hold real estate has the potential to provide you with regular income for years. As long as you continue to have a renter, you can expect to collect regular income from your investment. That said, keep in mind that you’ll need to factor in the expenses of maintaining the property.

Potential For High Returns

When you decide the time comes to sell your investment property, there’s the potential for a high return on your investment. Of course, it’s all about timing. To maximize your profit, you’ll want to carefully monitor the real estate market and determine when the best time is to sell.

Passive Investing

Buy and hold real estate investing offers a great passive investment strategy because as long as the property is occupied, you’ll be able to collect income with minimal effort on your part. However, note that it's not a completely hands-off investment strategy all the time. You’ll still need to find tenants, maintain the property and deal with any other issues as they arise. If you prefer, you can enlist the help of a property management company to handle the day-to-day tasks of being a landlord.

Cons

Here are some of the disadvantages of the buy and hold real estate investment strategy.

Requires Thorough Research

Determining whether a particular property fits your needs requires some investigation. It requires you to know a lot about the area and how much rental income you can expect. Getting the right real estate agent on your side can help immensely.

Presents Risks

Real estate, like all forms of investment, presents risk. If you have trouble keeping the property occupied over the years, you could have gaps in your rental income. This may be difficult if you rely on the rental income to sustain you.

More Stringent Requirements

Because they’re riskier for lenders, investment properties have more stringent qualifications. Most fixed-rate mortgages require a 15% down payment and a 680 qualifying credit score for a one-unit investment property, while a 25% down payment and 620 credit score is typically required for two- to four-unit investment properties. Your interest rate may also be higher on investment properties than on your primary residence.

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.

The Bottom Line

Buy and hold real estate is a long-term investment strategy. The process involves looking at investment properties, buying a property, renting it out, managing it, monitoring market trends and deciding when to sell it. There are pros and cons to buy-and-hold investing, so consider both sides of the coin before you choose this real estate investment strategy.

Are you ready to get started with buy and hold real estate investing? If so, start a mortgage application with Rocket Mortgage^® today.