Can a buy-and-hold investment be worthwhile? 5 questions you should ask yourself
Finding and keeping the right tenant is essential, so treat tenants like you would customers with exceptional service and quick response times when things go wrong.
Provided that your home remains occupied, you’ll see a return on a monthly basis. But before proceeding, ask yourself some valuable questions to determine whether you see this investment worth it for the long term.
Exactly what is the value of a buy-and-hold investment?
Each investor will give a different response to this since it all depends on what they are seeking to get out of it. If I had a property valued over $175,000, I would fix-and-flip it, but if it was priced under this amount, I would maintain a margin and keep it as a rental.
One important component that investors like about buy-and-holds could be the possibility to appreciate as time passes. The market determines the value of your investment according to its location and the timing, but investors have the option of making improvements to the property or upgrading certain features and amenities to attain forced appreciation.
Investments are built on cap rates, which happens to be your net income of the property divided by the cost of the house. As a buyer, I would like a higher cap rate (7 to 8 percent), with a lower percentage (2 percent) of appreciation later.
For a few investors, they will likely want the opposite, but I we find that this strategy brings a more current return on the capital without depending on the possibility that the property might or may not appreciate in value down the road.
Is the market right for renting?
The market speaks, and it will assist you to determine what the current demand is. The rental market is definitely seeing an upswing, and this could possibly be brought on by the millennial generation.
Students who are either finishing college or have recently graduated are looking at a pathway lined with debt and loans to settle. They can’t necessarily find a way to save for the down payment to purchase a home, so renting is a better option.
After living in dorms or apartments for the past 4 years, some might want to get married, settle down and have kids. They’ll have to have the space and potential a home offers for the immediate future.
And as a bonus, if the rental market ever gets weak, you can always sell the house as a fix-and-flip, so your buy-and-hold investment will still be a profitable asset for your overall portfolio.
Should I remodel or not?
Your decision to rehab a buy-and-hold property might vary from a fix-and-flip. If you fix-and-flip, you approach the remodeling process with the mindset that the buyer is coming with their luggage, ready to move into a turnkey home, without any renovation required.
This, needless to say, is similar to renters. Obviously, they don’t want a house with broken appliances or walls falling in; but as the owner, you need to decide whether certain upgrades like new cabinetry or flooring will be worth the cost.
Question whether these added renovations will increase the value and yield a greater rent as a result. The property is still livable with Formica countertops instead of granite, but you might see lower rents.
It all comes down to the tenants’ needs along with what they are willing to pay for the length of their lease. Should they be comfortable with an additional $30 a month for an alarm system, then go ahead and install one.
Can I manage it on my own?
This all is dependent upon three things: your level of experience, the number of properties you have already,and whether you would like to handle the tenants directly.
If you’re an investor who would like to gain more exposure to single-family rentals, then being a property manager is a great opportunity.
You’ll have to have the time and proper rental software to assist you with basic accounting, leases, rents and listing the house.
However, if you have multiple properties across different locations, you’ll need to find time to visit each property for an inspection, collect rents, listen to tenants’ complaints and hire all the maintenance yourself.
The downsides of using a management company are you lose day-to-day control over the property and have to trust others to deliver the same level of customer service you find acceptable.
But companies likewise have more experience handling management situations, along with their own team of people they call for repairs on all their properties, which can be more affordable in the long run.
While they look after each of the issues with the property and tenants, you’ll be free to pursue other investments.
Am I ready to be a landlord?
This is really the most important question you can ask yourself before deciding on a buy-and-hold. Do you want the long-term responsibility of a rental property?
If you’re able to confidently answer this question as well as the previous ones, then it is time for you to start researching properties in locations that will give you the maximum pool of possible tenants and also the best return on your investment.
Plan your leases accordingly by avoiding vacancies during wintertime months when less people are moving. Get organized with either a management company or the proper software to help you oversee the house.
Keep tenants happy since their rents are your monthly income. Our final suggestion is invest wisely, understand the commitment that a rental property requires and be prepared, so your investments in buy-and-holds don’t ultimately become buy and folds.