What I look for in a buy and hold property.

The term “buy and hold” as it relates to real estate investing is pretty much self explanatory. An investor purchases and holds onto a property with the goal of creating strong positive cash flow through rental income. Although this seems like an easy enough strategy, not all properties are created equal as it relates to it’s buy and hold potential. There are 5 things I look for when purchasing a buy and hold investment property to ensure it will be a successful investment.

  1. What are the rental rates in the market? This is a pretty obvious item to be aware of as the revenue you generate from rents needs to be substantial enough to cover all fixed expenses and produce positive cash flow. It’s extremely important that the rental rate you expect to get out of a property is realistic and is compared to properties of similar caliber. Just comparing a 2 bed, 2 bath with others in a market is not enough. Here are some questions you need to ask yourself to make sure your comps are accurate.
    1. Am I comparing apples to apples? Comparing a 2 bed 2 bath condo with a 2 bed 2 bath house on 1/4 acre of land is not apples to apples.
    2. What is the condition of the property? If my property is outdated and I expect to get the same rental rate as other 2 bed/2 bath properties that are updated, I making a big mistake.
    3. Proximity to desirable locations. In a beach community such as Carolina Beach, proximity to the beach is a huge factor in determining rental potential for similar properties. Every market has there desirable areas and people pay a premium to live there.
    4. What’s the worst case? Although I want to secure top of market rents, what happens if the market tanks and rental rates drop by 20%? Am I still in a good situation relative to the properties expenses?
  2. Can I add value to the property to get top of market rents? If a property needs work, I wouldn’t shy away from it. When home buyers or investors purchase a turnkey home or investment property, they are typically paying a premium for it. A property that needs some work gives an investor more negotiating power with a seller and it provides opportunity to “force appreciate” the property once it is acquired. The goal here is to acquire a property for the least amount of money possible, update the property and then secure top of market rents due to the updates. Depending on the extent of the rehab and the increase in rental income, an investor could choose to refinance the property to take some of their cash out and put towards other projects, sell the property to other investors looking for turn key, or just hold it. Either way, you have options.
  3. Are there any major investments needed to the property immediately or in near future? HVAC replacement, Roof replacement and crawl space mold remediation are examples of costly items that can drastically impact your ability to create positive cash flow. These items should be budgeted for through positive cash flow as the HVAC and roof will need to be replaced at sometime. However, if the property needs it right away, it should be used as a negotiating tool for a lower sale price.
  4. What is the cash on cash return? Lets say your purchase price of a rental property is $300,000 and you put $75,000 (25%) down with closing costs to secure the loan and put another $10,000 towards repairs. Your total cash invested is $85,000. Cash on Cash return is the amount of Net Operating Income (Gross rents – operating expenditures)/total cash invested. Assume the property has a a NOI of $12,000 annually, the cash on cash return (12,000/85,000 x 100) would be 14%. The higher that number the quicker you are getting back your cash investment and the sooner you can take on another property.
  5. What is the trajectory of the market? When purchasing any property it is always good to understand where the market is, where it has been and where it appears to be going. While no one can predict the future, there are clues that will tell you if the rental market will continue to grow. Things I look for are:
    1. Jobs: Are there good paying jobs in the market and are the major companies that provide those jobs expanding? Wherever Amazon selects as their new headquarters is where I want to own rental property.
    2. Vacation Rental Potential: I love Carolina Beach as a rental market because it gives me two options. I can choose to rent annually because Wilmington and it’s jobs are so close and also rent weekly to vacationers. Not every market provides this flexibility.
    3. Migration Patterns: Wilmington has had a net inward migration of 6.8% in the last 5 years and ranks #19 in cities with the highest in-migration according to the US Census Bureau. People are discovering Wilmington and all its beauty and although they may not be buying homes they still need a place to live.

 

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