What to Look for in Buy and Hold Income Properties
If you are looking for a rental property to buy and hold for several years, there are certain things you will want to look for. Ideally, it should pay for itself (and then some) with the monthly rent you are collecting. Then, you will also be making money over time through property appreciation. The appreciation of the market allows you to keep raising rent or sell the house for a nice profit when the time comes to move on from the investment.
Here are some of the things you will want to look for when purchasing a buy and hold rental income property:
Cost of Ownership
There are many expenses that go into owning an investment property:
• Purchase Price
• Renovation Costs (if necessary)
• Maintenance & Repairs
• Property Management Fees
• Taxes & Insurance
• Vacancy Periods
You will want to calculate the total cost of ownership, averaged out on a monthly basis. Then, compare that with projected rent prices (minus average vacancy periods) to determine if a rental property investment is worthwhile or not. If the numbers don’t add up, it may not be the house for your buy and hold plan.
Condition of the Property
Of course, you will want to have a full understanding of the property’s condition before you commit to purchasing it. As a real estate investor, you are likely buying houses in as-is condition. As the saying goes, “buyer beware!” Any renovation and repair costs should be factored into your overall purchase budget. Also remember that a renovation will take extra time and you won’t be collecting any rent until the house is move-in ready.
The location of the rental property matters a lot. Make sure it is in a desirable neighborhood with low vacancy rates. Look at both the short-term and long-term potential of the house. It may be in a low-rent area right now, but it’s an up-and-coming neighborhood. It could fetch higher rent prices and a great selling price in the future. Or, the opposite trends could be true. Understanding the market will help you make better profitability projections.
Who are the likely renters for the house you are buying? This will be based partly by the location and also local demographics. Can they afford the rent prices you plan to charge? Will they take care of the property? Will there be extended vacancy periods in between tenants? These are all important factors to consider before buying a rental unit.
Who will be handling the property management duties? Will it be you or someone on your team? Will you be hiring (and paying) a professional property management company to handle the day-to-day issues? You have to factor in the time and/or expenses involved with managing your buy and hold property.
Return on Investment (ROI)
Your return on investment is much harder to calculate with a buy and hold investment strategy. It is generally a long-term plan that depends on collecting rent to cover your expenses and make a small profit from month to month. Then, you are also gaining from the long-term appreciation. The capitalization rate (cap rate) is another measurement you can utilize. Determining your target ROI and projected profitability for a rental property is much harder than for a quick house flip. It doesn’t mean one strategy is better than the other. It all depends on the investor and the property.
These are some of the most important things to keep in mind when investing in buy and hold properties. If you want to own a successful rental property, you will have to run proper analytics and develop a sound business plan.
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