For all of the talk about flipping properties for fun and profit, real estate is frequently about getting rich slowly. Buying a property that you can hold onto for the long term is a more conservative and, in many cases, easier strategy than trying to manage a fast flip. Taking this slower approach to real estate may be different from what you see on TV, but it can help you build a foundation of ongoing income to improve your family's finances.
Planning an Exit Strategy
Buying real estate to hold onto it means different things to different people. One strategy is to buy a property, hold it forever and will it to your kids. For other people, buying and holding means owning the property for seven to 10 years, paying the loan down and then selling it for a bigger property. Your exit strategy will inform how you buy and manage the property, so figure out a plan before you get started. Be sure to incorporate possible tax strategies to minimize the bill when you sell or convey the property.
Selecting a Property
Buying a property that you plan to hold is different from buying a flipper. Instead of focusing on short-term upside, weigh properties that should provide ongoing cash flow and hold their value over time. Many of these properties are located in stable neighborhoods and are in good structural condition. They usually cost more to buy, but should pay you back over time. When looking at a property, make sure that you can rent it out and that you understand any homeowner's association, co-op board or city zoning restrictions.
Financing to Hold
In the world of investment real estate, the key to long-term financing is to find a loan without a big balloon payment. If you can’t get a self-amortizing loan, which is like a traditional mortgage, try for a balloon loan with a long time before the balance is due and a short amortization period. This will increase the amount of the loan you pay down each month and get you closer to holding your rental debt-free. In either case, you'll probably have to pay a higher interest rate and make a bigger down payment that you would to buy your own house. Run the numbers to be sure the property's estimated income will cover your monthly payments. Another possibility is to buy a property as your primary residence and live in it for a time before converting it to a rental. If you consider going this route, be sure that you understand the terms of your mortgage first.
Maintaining to Hold
Holding a property for the long term means that you’re going to have to take care of it. Keeping up with repairs and building maintenance should pay off by reducing the property’s long-term total cost of ownership. Plan to be diligent about maintenance schedules and install better quality components to draw higher rents, attract good tenants and protect your investment.
Owning to Hold
When you own a property and hold it, it can be a lot of work. It's smart to track your income and expenses on both a yearly and monthly basis. To do this, record your monthly rents and subtract all of your monthly expenses for the property. Monthly expenses include everything from loan payments to ongoing maintenance to your property insurance. Property taxes may be higher than you expect if you live in a state with a homestead deduction, which doesn't apply to investment properties. Estimate the income and expenses for a handful of properties before making a final selection. Keep in mind that real estate investing is risky, and it only takes a few unexpected repairs to wipe out months or even years of profit.
Managing to Hold
Given the amount of work involved in owning rental property, some landlords choose to have a manager handle their properties. The manager finds and screens tenants, coordinates maintenance and repairs, and pays the bills. She can also ensure that you're following your community's housing code and tenant protection laws. In exchange for the help, expect to pay around 10 percent of your monthly rent.
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