Digging a little deeper in Buy and Hold strategies
In Real Estate Investing 101, Part II, we covered buying and holding property for long term appreciation and wealth building. This is by no means a get rich quick scheme, but is one of the most proven ways to build wealth over time.
Finding an appropriate property
Just like with flipping, property is a required ingredient. In fact, the same sources will work for buy and hold strategies as for flipping. The primary difference is that buy and hold strategies are generally a little less stringent on cost control, as well as condition. One can be in the property for a little more money because there isn’t a short term margin to mind. REOs (bank owned property), pre-foreclosure, short sales, older homes needing updating and strong but ugly properties are still the best options.
Rental homes are more price sensitive for marketing. While a flip may be done at any price level, rentals are a bit more picky. While it certainly requires knowing the market, generally in the Atlanta area, the best options are in the $125k to $250k area. There are opportunities below that, as well as above, but the meat of the Single Family Residential (SFR) market will be around this range.
Under $125k- Pro- Just as with a flip, these properties are easier to carry when they aren’t producing. Con- Even with a generous appreciation, the actual cash value will not go up as much as with more expensive properties.
$125k to $250k- Pro- This is the most active area of the market. There are more renters available, so it may be easier to keep the property occupied. Con- This is the most active area of the market. There are more properties to compete against for the renters.
$350k to $500k- Pro– These are executive rentals, and usually the renters will be more mindful of the property. There are property owners that concentrate on this market because it is quite profitable and low hassle. Con- There are higher costs to carry the property when it isn’t rented, and it may require more 홀덤 expenditure between renters to update the property. The renters will be pickier about amenities, fixtures and finishes.
Over $1m- Pro- The rental rate to cost is usually higher because of the rarity for SFRs. Most of these properties will be commercial, which usually have longer leases and often don’t require the landlord to make the improvements of maintain the property. Con- For the SFR market, this is a rare rental. There certainly are some out there doing well, but they will be shorter term (usually) and require more and more expensive marketing to fill. For commercial properties here in Atlanta, one needs to be very careful because there is a LOT of available commercial space.
Putting together the numbers
As with the flipping article, I have an Excel spreadsheet to examine the deal more closely. It isn’t fancy, but it does help keep all of the important points front and center so that the details don’t get in the way of the big picture.
When filling out the spreadsheet, the light gray areas are for users to input information. The light green areas have calculated values. Remember, the more accurate the input information, the more accurate your profit analysis will be.
As with flipping, it is very important to know what the upfront costs will be, both for acquisition, but also for any required renovation. However, unlike flipping, if the investor wants to reduce costs, and has the needed skills, doing more work themselves, instead of hiring contractors can be more manageable. Most investors aren’t going to have a bunch of projects running at once. If one DOES plan to have a lot of project going at one time, or if one is not appropriately skilled, hiring contractors is a better plan.
On the linked worksheet, we can see that the fictional investor purchased a property for $200k. It needed a further $25k in renovations. After renovation, the unit has an expected rental of $2250/mo. and requires about $1800/mo. to carry. I factored vacant periods in, as well as needed maintenance through the use of set-asides and reserve funds. These are included in the monthly carrying costs. I specifically expect a 90% occupancy rate. That may be a bit high, but I also tried to balance that by under shooting the expected annual increase in value.