Real Estate Investing 101 - 2
Real Estate Investing 101 is a series of articles aimed at new real estate investors wanting to learn the basics. There are so many ways in which you can invest in real estate. You can take your pick based on your interests and experience, how active or passive you want your investments to be, and how much risk you are willing to take on.
Real Estate Investing 101: Buy-and-Hold Investing
What is it? Buy-and-hold investing involves purchasing properties to own for the long term and renting them out while you own them. Rental income represents the return on your investment. If you purchase a property for $100,000 and rent it out for $500 per month, this represents a 6% return on your investment. However, as with any real estate investment, you need to factor in the investment costs.
If you purchase the property with a mortgage, the rental income will need to cover the payments. In addition, you need to cover property taxes, utilities, garden maintenance, etc. Depending on your state, these costs might be included in the rent or paid directly by the tenant. You also need to factor in the costs of maintaining the property, vacancy costs, and property management. As a landlord, you are responsible for providing a livable, well-maintained property for your tenants. This includes ongoing maintenance like fixing leaky taps or a broken window and big-ticket items such as replacing the heating system or the roof when needed. You’ll need to be able to pay all of these expenses, even when the property is vacant between tenants. Finally, you need to decide if you’ll manage your properties yourself or outsource all or some of the work to a property management company. This also represents a cost that you need to factor in.
Your objective with buy-and-hold investing is to maintain a positive cash flow from your properties considering all the running costs of the property. Remember that even if the big-ticket repairs on the property and maintenance aren't monthly bills that you pay, you should actively set aside a percentage of your rental income each month to build up a cash reserve to cover them.
What do you need to know?
Rental laws and regulations. Landlords often get a bad rap. This will hopefully be undeserved in your case, but there are laws and regulations in place to ensure that landlords treat their tenants properly. These can cover everything from preventing discrimination against tenants, ensuring that eviction processes are fair, and sometimes even rent controls that impact how much rent you can charge. Regardless of whether you think these laws and regulations are good, fair, or justified, you need to know them and apply them.
General maintenance and people skills. Your property is your asset, and it enables you to earn a return. If it falls into disrepair or is damaged in any way, you will be out of pocket. If your tenants are unhappy, they will leave or misbehave in other ways. By keeping your property well-maintained, and your tenants happy, you will be able to preserve your ongoing income and the value of your property, and you will also generally attract better tenants.
Is buy-and-hold investing right for you?
With buy-and-hold investing, the return on your investment will come in monthly increments, there aren’t any big payouts like with fix-and-flip investing. This has pluses and minuses. On the plus side, you create a regular, passive income for yourself that will keep coming as long as you own the property. On the minus side, your investment is not liquid. To get your original investment out, you will need to sell the property or refinance it to take out any equity in the property.
We hope you found this article interesting and informative. Please keep reading our other articles in the Real Estate Investing 101 series to learn about more ways in which you can invest in real estate.
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