A smart investor can turn a buy-and-hold property into a consistent means of earning a monthly income and a good risk-adjusted return on your investment.
Finding and keeping the right tenant is important, so treat tenants like you would customers with exceptional service and quick response times when things go wrong.
As long as your home remains occupied, you’ll see a return each month. But before proceeding, ask yourself some valuable questions to determine whether you find this investment worth it for the long haul.
What is the value of a buy-and-hold investment?
Each investor will give a different answer to this because it all depends on what they are looking 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 factor that investors like about buy-and-holds is their potential to appreciate over time. The market will determine the value of your investment based on its location and the timing, but investors have the option of making improvements to the property or upgrading certain features and amenities to achieve forced appreciation.
Investments are made on cap rates, which is your net income of the property divided by the cost of the property. As a buyer, I want a higher cap rate (7 to 8 percent), with a lower percentage (2 percent) of appreciation later.
For some investors, they will want the opposite, but I find that this strategy brings a more current return on my capital without relying on the possibility that my property might or might not appreciate in value down the road.
Is the market right for renting?
The market speaks, and it will help you to understand what the current demand is. The rental market is definitely seeing an upswing, and this could be caused 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 pay off. They can’t necessarily afford 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 four years, some might want to get married, settle down and have kids. They’ll need the space and potential a house can provide for the immediate future.
And as a bonus, if the rental market ever gets weak, you can always sell the property as a fix-and-flip, so your buy-and-hold investment will continue to be a profitable asset for your overall portfolio.
Should I remodel or not?
Your decision to rehab a buy-and-hold property might differ from a fix-and-flip. When 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, with no renovation required.
This, of course, is similar to renters. Obviously, they don’t want a house with broken appliances or walls falling in; but as the owner, you have to decide whether certain upgrades like new cabinetry or flooring will be worth the expense.
Question whether these added renovations will increase the value and yield a higher rent as a result. The home is still livable with Formica countertops instead of granite, but you might see lower rents.
It all comes down to the tenants’ needs and what they are willing to pay for the duration of their lease. If they are comfortable with an extra $30 a month for an alarm system, then go ahead and install one.
Can I manage it on my own?
This all depends on three things: your level of experience, how many properties you currently have,and whether you want to deal with the tenants directly.
If you are an investor who wants to gain more exposure to single-family rentals, then becoming a property manager is a great opportunity.
You’ll need the time and proper rental software to help you with basic accounting, leases, rents and listing the property.
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 also have more experience handling management situations, along with their own team of people they call for repairs on all their properties, which might be more cost effective in the long run.
While they take care of all the issues with the property and tenants, you’ll be free to pursue other investments.
Am I ready to become 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 can confidently answer this question and all the previous ones, then it is time to start researching properties in locations that will give you the greatest pool of possible tenants and the best return on your investment.
Plan your leases accordingly by avoiding vacancies during winter months when less people are moving. Get organized with either a management company or the proper software to help you oversee the property.
Keep tenants happy because their rents are your monthly income. My final word of advice is invest wisely, understand the commitment that a rental property requires and be prepared, so your investments in buy-and-holds don’t ultimately turn into buy and folds.
Bill Green is the Founder and Chief Executive Officer of LendingOne and the Crestar Group of Companies. Crestar is comprised of private equity, specialty finance, and real estate businesses.