It’s been said that more millionaires are made every year through real estate investing than through any other method.
There’s a reason for that: the stock market might rise and fall, inflation might cripple the value of a dollar, and taxes might demand more than is reasonable… but people will always need a place to live.
No matter how you slice it, real estate — specifically, buy-and-hold investing — is one of the best ways to build wealth.
Well, as Robert Kiyosaki famously wrote, “It’s not about how much money you make, but how much money you keep.” For our purposes, we can adjust that to, “It’s not about how many deals you do, but about how many properties you keep.”
What is Buy-and-Hold Real Estate Investing?
Buy-and-hold real estate investing is when you purchase property and hold onto it for an extended period of time to create cash flow, increase equity, and build long-term wealth.
This is fundamentally different from other investing methods.
That’s not the same game as buy-and-hold real estate investing.
You don’t get paid immediately when you buy and hold real estate, but in growing dividends over years or decades.
P.S. If you want to make the most of every opportunity that comes your way, then we recommend using every investing method — BRRRR, wholetailing, wholesaling, creative financing, and buy-and-hold. As Ryan Dossey says, “Keep the best and wholesale the rest.”
Success Is In The Numbers…
If there’s one thing you take away from this article, make it this.
Good buy-and-hold investing is all about cash flow.
At a bare minimum, every property you purchase should pay for itself, including its loan, upkeep, and maintenance. That means you’ll need to have at least a few hundred dollars left over after your monthly mortgage on the property to keep up with maintenance demands. But here’s the good news: breaking even as a buy-and-hold investor is winning…
…because someone else is paying your mortgage and building your equity on the property (i.e. the tenants).
So if you are breaking even every month on a buy-and-hold investment, you’re still building wealth.
Of course, a buy-and-hold investment is only as good as your math.
You need to determine the purchase price, down payment, loan interest rate, closing costs, repair costs, property management costs, and everything else that goes with buying an investment property. Then you need to run the numbers to see if the property you’ve found will indeed be able to break even.
Here’s a free rental property calculator to help you crunch those numbers.
What is the BRRRR Method?
The BRRRR method is a version of buy-and-hold real estate investing. The acronym stands for buy, rehab, rent, refinance, repeat.
The idea is that you buy distressed properties for less than their market value, rehab them, rent them out to tenants, do a cash-out refinance to recoup your initial investment, and then repeat the process with the same funds. This is a great way to do buy-and-hold deals not just once… but over and over again.
Check out the video below to learn more.
The Beauty of Debt for Building Wealth
You’ve probably heard Dave Ramsey (or some other “wealth-building” guru) say that debt is the enemy.
But every buy-and-hold real estate investor who’s worth their salt knows that’s not true — in fact, it’s a tool you can use to build great wealth.
Unless you’ve got a lot of gold buried in your backyard, it would be extremely difficult to make significant progress on your buy-and-hold portfolio without borrowing money. I don’t know a single successful real estate investor who doesn’t borrow money.
The key is to ensure that your monthly revenue is greater than your monthly expenses.
Ryan Dossey once joked with me, “Whoever has the most cash-flowing debt when they die wins.”
In other words, get comfortable with borrowing money not just from banks, but from friends, family, and other investors. If you want to make significant progress as a buy-and-hold investor, then that’s just part of the game.
The Pros & Cons of Buy-and-Hold Real Estate Investing
Every real estate investing method has benefits… and risks.
And while we believe the pros far outweigh the cons of buy-and-hold real estate investing, there is still some stuff you should be aware of. Let’s start with the bright side.
Pros of Buy-and-Hold Real Estate Investing
Monthly Cash Flow — If you do it right, buy-and-hold investing creates cash flow in a way that no other real estate investing method does. Every property you add to your portfolio increases your monthly cash flow, profit, and ability to purchase more properties.
Appreciation — Over the next year or two, no single property is guaranteed to appreciate. But over the next decade? Or the next couple of decades? The farther out you look, the higher the probability that a property is going to appreciate. In fact, it’s damn near certain if you look far enough out. This is a huge benefit for buy-and-hold investors interested in building generational wealth.
Tax Benefits — Tax benefits for buy-and-hold real estate investors are significant. Deductible operating expenses, mortgage interest deduction, and deferred capital gains are just a few ways that wealthy real estate investors avoid paying big tax bills.
Hedge Against Inflation — Real estate investing is well-known to act as a hedge against inflation. For example, from 2001 to 2020, the U.S. inflation rate totaled 41.26%, while median home sales prices rose by 238%. Real estate increases typically outpace inflation at a comfortable rate.
Better ROI — You could wait for a measly 10% return on your stock market investment accounts (at the high end)… or you could buy and hold real estate to get a much higher ROI. Appreciation, tax benefits, equity, and monthly cash-flow all work to give buy-and-hold one of the most lucrative ROIs known to investors.
Cons of Buy-and-Hold Real Estate Investing
Property Management — You might have tenants in your properties, but you’re still the owner. You need to make sure someone (it doesn’t have to be you) is available to attend to emergencies, collect rent, make necessary repairs, and handle anything else that comes up. The more properties you own, the more necessary good property management systems are.
Changing Markets — Buy-and-hold real estate investing is not for the faint of heart. You’ve got to have some grit and resilience to stick through fluctuating market conditions.
Low Liquidity — Buy-and-hold real estate investing isn’t entirely illiquid. You could always sell a property to get cash, but that takes time. It’s not immediate. And you might need to notify tenants depending on your contractual agreements.
Long-Term — You’re not going to make money overnight with buy-and-hold investing… but over years. You’ve got to keep the long-term game in sight if you’re going to succeed with this real estate investing method.
Step 1. Choose a Market
The first step to buy-and-hold investing is to figure out where you want to invest.
For most of you, the answer is simple: you can just start by investing in the city where you live. However, if you’re located in a pretty rural area with little opportunity and low housing demand, then you might consider building your portfolio in a larger city nearby.
Whatever market you consider investing in, here are some things you’ll want to consider…
- Population growth — Is the city growing? If so, that means more people will be moving there, which leads to increased housing demand and rising prices. Which is good for buy-and-hold investors.
- Job growth — Is the city creating new jobs? Again, more people moving to the city leads to increased housing demand.
- Diversity — Is the city’s economy reliant on just one industry? If so, that could make it susceptible to downturns if that industry takes a hit. A diverse economy is usually a good sign for real estate investors.
- Rent prices — How much are people paying in rent? If rents are high, that could mean there’s strong housing demand. Which is good news for you as a buy-and-hold investor.
- Vacancy rates — Are there a lot of vacant properties in the city? If so, that could be a sign that there’s not as much demand for housing. And you could have trouble finding tenants.
How do you get this information?
A quick Google search will tell you a lot. Or you could always call a few real estate agents in the area to ask about market conditions.
Step 2. Find Off-Market Properties
Now that you’ve chosen a market, it’s time to start looking for properties.
And you could look for properties on the MLS or that real estate agents have listed, but then you’ll have to pay full price.
Instead, look for off-market properties. These are properties that aren’t being marketed by real estate agents or listed on the MLS. Owners of distressed properties are often willing to sell for less than market value to get the property off their shoulders.
To find off-market properties, you can…
Drive For Dollars — This is when you physically drive around a neighborhood and look for properties that look like they might be in disrepair. Write down the address and research it using software like Propstream to find the owner.
Direct Mail — You can direct mail potential sellers in a neighborhood you’re interested in. This is where you send a piece of physical mail to the owner of a property asking if they’re interested in selling. Learn more about direct mail marketing here.
Wholesalers — You can also find properties through wholesalers. Wholesalers are people who find deeply discounted properties and sell them to investors for a small profit. To find wholesalers in your area, search online or attend local real estate meetups.
Step 3. Choose a Property Management Company
It’s not absolutely necessary for you to work with a property management company (it’ll certainly cut into your profits a bit)… but the more your portfolio grows, the harder it’ll be to manage everything.
That’s why we recommend finding a property management company to work with. They’re typically well worth the cost of their services because they turn your buy-and-hold investments into far more passive income.
Typically, a property management company will …
- Market your rental units to find tenants
- Screen potential tenants (run background and credit checks)
- Sign leases with tenants on your behalf
- Collect rent each month
- Handle maintenance and repair requests from tenants
To find a good property management company, ask around at local real estate meetups or search online. Make sure you vet them pretty thoroughly before moving forward.
Step 4. Secure Financing
Now it’s time to secure financing for your investment property. You could pay cash if you have the funds available, but most investors use leverage (borrowing money) to increase their returns.
There are a few different types of loans you could get…
Conventional Loan — A conventional loan is a traditional mortgage from a bank or credit union. They’re typically the hardest to qualify for but offer the best terms.
Hard Money Loan — A hard money loan is a short-term loan from a private lender. Hard money loans are easier to qualify for than conventional loans but come with higher interest rates and fees.
Private Money Loan — A private money loan is a loan from an individual rather than a bank. Private money loans have shorter terms and higher interest rates than conventional loans but can be easier to qualify for.
Creative Financing — Creative financing is any type of financing that’s outside the box. This could be something like a lease option or subject-to deal.
You’ll need to put some thought into which type of loan makes the most sense for you.
Step 5. Make Repairs & Clean (As Needed)
Once you’ve secured financing and closed on the property, it’s time to get to work. If the property is in decent shape, you may not need to do much. But if it needs some work, you’ll have to roll up your sleeves and get to it (or hire someone to do it for you).
The goal is to make repairs that will increase the value of the property and make it more attractive to potential tenants. But you don’t want to go overboard — remember, you’re trying to earn a profit, not build your dream home.
Some common repairs/improvements that buy-and-hold investors make include…
- Minor repairs (fixing leaks, etc.)
- Updating fixtures
Step 6. Find Tenants
Once the property is in good shape, it’s time to find some tenants. You could do this yourself or hire a property management company to do it for you (which we recommend).
Either way, the goal is to find tenants who will pay rent on time and take good care of the property. To do this, you’ll need to screen potential tenants pretty carefully.
Most landlords require that potential tenants have a steady income, good credit, and no criminal history. You may also want to require that they have renter’s insurance.
Once you’ve found some qualified tenants, it’s time to sign a lease. We recommend using a standard residential lease agreement that’s been prepared by an attorney.
This will protect both you and your tenant and help avoid any legal issues down the road.
Final Thoughts on Buy-and-Hold Investing
Buy-and-hold real estate investing is a great way to build wealth over time. It’s a relatively simple strategy that can be quite passive if you hire a good property management company.
If you’re thinking about getting started in buy-and-hold real estate investing, follow the steps outlined in this article.