In our last article, we discussed several important factors that real estate investors need to consider before purchasing a buy and hold property. If you happened to have stumbled upon this article first and haven’t had the opportunity to read “Part One” of this two-part series, you can read it here:
(Part One) The Truth about Buy and Hold Properties: What To Consider BEFORE Buying One
Now that you’ve considered if a buy and hold property is right for you, it’s time to start thinking about how to maximize your return on investment. In this second part of our two-part series, we’ll also discuss how you can maximize your return on investment (ROI) with this REI strategy!
You can boost your ROI on a buy and hold property in several different ways. Here are just a few ROI-boosting strategies that can help you get the most bang for your buck.
One way is to make sure you’re charging enough in rent. You want to ensure you’re charging enough to cover your monthly expenses and generate positive cash flow, but you also don’t want to price yourself out of the market. The best way to determine an appropriate rent amount is to compare your property to similar properties in the area.
As a property owner, you’ll also want to regularly adjust your rental rates according to the market when your tenants’ leases expire. This will ensure you’re getting the best possible going rate that you can achieve in your current market conditions so you can maximize your ROI.
Another way to boost your ROI is to make sure you’re keeping your expenses low. You can do this by shopping around for the best mortgage rates, insurance rates, and property management fees. In addition, you’ll want to build solid relationships with vendors and contractors in your area to ensure you’re getting the best pricing when making repairs and improvements to your investment property.
Upgrading the property can also help you boost your ROI dramatically. Making improvements to the property, such as adding new appliances or renovating the bathroom, can help you attract higher-quality tenants who are willing to pay more in rent. It will also help you get a higher price when selling the property.
Keep in mind that it will take some time, money, and effort to renovate a buy and hold property, and this might mean you’ll be dealing with slightly longer vacancy times. But, if you do your homework and make sure that the improvements you’re making hold up to what the market is looking for, your ROI should end up being well worth it in the end.
Another thing you might want to consider is making energy-efficient upgrades to the property, such as adding energy-efficient appliances and windows, LED lighting, and perhaps even solar panels if it makes sense to do so. These upgrades will not only help you save money on your monthly expenses, but they may also make your property more attractive to potential tenants. Of course, you’ll want to do a full cost analysis when making any type of improvements to ensure you’ll net a profit on your value-add investments.
Another way to boost your ROI is to make sure you diversify your portfolio. This means investing in different types of properties in other locations. This will help you mitigate your risk and ensure that you can generate positive cash flow even if one of your properties isn’t performing as well as you’d like.
And last but not least, you can boost your ROI by selling the property at the right time. If your market is hot, you won’t want to wait too long to sell, or you may miss out on appreciation in the market. On the other hand, if you sell too soon, you won’t have enough time to fully benefit from the tax breaks associated with owning a rental property.
Now that we’ve discussed ways to boost your ROI on buy and hold properties let’s talk about some complications that might affect your profits.
As with any investment, there are potential complications that could eat into your profits on a buy and hold property. Let’s discuss a few of them.
One complication is vacancies. If your property is vacant, you’re not generating any rental income. Since you’ll still need to make your mortgage payments and pay for other expenses associated with owning the property, this can quickly eat into your profits. Coming up with a solid marketing strategy to reduce vacancy loss is key to overcoming this potential complication.
Another complication is tenant turnover. If you have a high turnover rate, your expenses can quickly add up. High turnover means you’ll need to spend time and money on turning the home and preparing it for the next resident. It will also contribute to vacancy loss, which increases overall costs. In addition, you’ll need to invest in advertising to new residents, and set aside the time to answer prospective renter’s questions and show them the property.
One of the best ways to mitigate high tenant turnover is to implement a resident retention process where you’re regularly checking in with them to ensure they’re happy and feel taken care of. With that said, turnover is sometimes a necessary factor, especially during times when rents in your market are increasing at dramatic rates. As a property owner, you’ll want to do a full analysis when determining your rental increases to factor in the amount you’ll earn over the life of the lease on that rental increase, minus the expenses associated with turnover, to ensure you’re making the best decision for your buy and hold property investment.
Dealing with problem renters is another potential complication. If you’re renting the property, you need to consider the fact that you may run across a problem renter or two, depending on how large your portfolio is. For example, you might have a renter who doesn’t pay their rent on time. In this case, you may need to take legal action against them, including potentially filing an eviction and going to court. This will cost you money and time. In addition, if you have a tenant who damages your property, you may need to follow the appropriate legal channels to collect the money owed to you.
One of the best ways to protect yourself against problem renters is to have all new renters fill out an application and do a thorough credit, criminal, and rental reference check on them before approving them to move in. You’ll also want to make sure you have a solid lease contract in place that protects you against problem renters and outlines the steps you’ll take to mitigate any issues that might arise. In addition, you’ll want to collect a security deposit to cover potential damages and increase that security deposit if they have a pet.
As a reminder, if you’re a new landlord, you’ll want to do your homework and get legal advice to ensure you’re following all local, state, and federal landlord-tenant laws.
Last but not least, maintenance and repairs can quickly eat into your profits. This is why it’s important that you’re prepared to pay for repairs and maintenance on your property. No matter how well you maintain the property, there will eventually be something that needs to be fixed or replaced.
Having a savings fund set aside for costly maintenance and repairs will be a necessity, especially if you’re renting the home since you’ll need to make all repairs in a timely manner to avoid defaulting on your part of the lease contract. Consider holding your repair funds in a separate savings account to make sure it’s there for when you need them.
Now that we’ve discussed some potential complications that could eat into your profits, let’s talk about when to sell a buy and hold property to maximize your return.
You’ll need to consider a few different factors when deciding when to sell a buy and hold property.
One factor is how long you’ve owned the property. Typically, the best time to sell a buy and hold property is after you’ve owned it for five years or more. This is because if you sell before five years, you may have to pay capital gains tax on your profits.
Another factor to consider is the current state of the real estate market. If prices are rising, then it may be an excellent time to sell to maximize your profits. But if prices are falling, then you may want to wait until they start to rebound before selling.
And last but not least, you’ll need to consider your financial situation. If you need the money from the sale of the property for other purposes, you may need to sell even if it’s not the ideal time in terms of market conditions or capital gains taxes.
As you can see, there are a lot of factors to consider when trying to maximize your ROI on a buy and hold property. But if you do your homework and put in the effort, you can achieve great things. What other tips would you add to this list? Leave a comment below and let us know.
Also, if you missed part one of this two-part training series, be sure to check it out here.