In this five-part series, we will discuss the basic ins-and-outs of the buy and hold exit strategy. Part I will define what the buy and hold strategy is, and how to choose the right market. Part II will discuss how to work with a good turnkey provider. Part III describes how to choose a profitable property location and city certified renovations. In Part IV, we delve into placing a qualified tenant and Part V demystifies property management.
While there may be a multitude of shows depicting the process of real estate flipping—touting how this method is the only real way to make money in real estate—the buy and hold strategy has been regaining its foothold in the investment industry as of the last decade. Today, buy and hold is generally the more favored method of real estate investing.
What is Buy and Hold?
Buy and hold refers to the process of purchasing a property for long-term gains rather than for short-term profit. In buy and hold, the profits are made down the road, through cash flow and appreciation on the investment rather than buying low and immediately selling high.
The biggest variation between a buy and hold property and other forms of real estate investments is that a buy and hold is a continual producer of income, whereas a flip–for example—is merely a one-time income generator. In addition to producing a continual, monthly income, a buy and hold property allows for tax deductions, such as depreciation, which are unavailable with a short-term investment. You are able to deduct depreciation costs for the home across a 27-year period.
While buying and holding property appears to be the preferred, and often the more beneficial form of real estate investing, it isn’t a cake walk, either. There are specific factors which have to fall in line and certain traits you need to be on the lookout for when scouring the market for buy and hold properties. Not just any single-family home will do.
Choosing the Right Market
One of the most important factors in buying and holding is selecting the right market for your investment. Not every market works and not every property within a market will work, either. Be sure to do your due diligence in researching markets and narrow down one that meets your investment criteria prior to beginning your housing search.
When researching markets, there are a few things to be on the lookout for:
Look at the long-term population trend. Does it appear to be rising?
A steady growth trend in population will help increase the rental demand. If the trend seems to be plateaued or even decreasing, it won’t equate to a good rental demand rate making it a bad market to own property in.
Is there a steady job market?
If the area’s entire community is based around one company or industry, you might want to be wary of purchasing property in the area. Industries change as demands change. If the majority of the community’s income is based on just one industry, it’s ripe for financial disaster if the industry shifts away from the community.
The buy and hold strategy can create a long-term income stream through cash flow and appreciation when researched and enacted properly. Yes, we all have bumps in the road or mountains, however you depict your challenges. Choosing the right market by looking at key indicators such as job markets and population trends provide insight into your investments and in-turn, your profits. Use this provided information to make logical and profitable investment decisions.
Michael Jordan is the founder and president of Strategy Properties, a diversified private investment company specializing in purchasing and renovating single family homes in Detroit and Southeast Michigan.