In 2018 and 2019, we saw an increased number of transactions where our hard money loans were used to rehab and keep a home as a rental – as opposed to selling it right after the renovation is completed. Yes, we are talking about good ol’ buy-and-hold versus fix-and-flip. In 2020, I expect this trend to continue. If you’ve been previously focusing solely on flipping properties, now it’s time to consider the benefit of long-term investing.
As the DC-area inventory continued to tighten, so are the profit margins. The market is shifting and so should be your mentality as a real estate investor. A purchase price might not be discounted enough to justify flipping, but – under the right circumstances – might be low enough to get you a head start in building equity for years to come.
In previous blogs, we’ve talked at length what makes a good rental opportunity. To recap, there are two major factors to consider. One is the location and its long-term appreciation potential. Obviously, as a long-term real estate investor, you should be looking for a steady and consistent increase in value. The good news here that regardless of whether you are investing in Frederick, Laurel, Silver Spring or Manassas, the entire DMV area has the most consistent real estate appreciation in the nation.
The second factor is positive cash flow. At the very minimum, you want to make sure that your rental income is high enough to cover the expenses associated with owning a rental property. The experts rely on the measurement called the debt coverage ratio to ensure that the property can financially support itself. Interestingly, this is where the high prices in the DC area might work against you. Even with escalating rent prices, many homes might be just too expensive to generate that positive cash flow. Typically, those properties have a debt coverage ration of less than 1.25% and you want to stay away from them.
What’s equally important to understand is whether long-term real estate investing is the right strategy for you personally. Here are four factors to consider:
- Make sure you have a solid refinance strategy. Once you’ve completed your rehab using our private money loan, you would need to pay it off by refinancing with a conventional lender. Conventional lenders are way more focused on your credit scores and your personal income than private lenders and not everyone qualifies. Talk to us before you decide to go the buy-and-hold route to make sure that strategy is right for you.
- Buy-and-hold is an effective hedge against inflation and comes with substantial tax advantages. Unlike flipping, however, it’s unlikely to generate immediate income.
- Unless you are getting an incredible deal, some of your initial investment will be locked in the rental property for years to come. If you’re planning to remain active in real estate investing, make sure you have a decent amount of money left to pursue other real estate investment opportunities. You don’t want to sit on the sidelines being cash-poor.
- Being a landlord comes with responsibilities. Make sure you are ready (and have time) to deal with tenants and maintenance. One simple piece of advice: don’t buy a rental property that is too far away from your home. You don’t want to have a 45-minute drive just to check on a leaky toilet.
Truth be told, to be a successful real estate investor you have to pursue both long-term and short-term investing strategy. If you have a couple of flips under your belt, you might be to set your sights on accelerating your retirement. If you’re looking for a worthy New Year resolution, it might be a winner that would benefit you for years to come.
New Funding Resources is a private lender in the DMV area that helps real estate investors to finance the purchase and rehab of distressed homes. Ready to try the buy-and-hold strategy? Call us today at 240-436-2340.