Are you considering real estate investment with buy-and-hold loan? Different real estate options are available when starting your real estate journey. You could become a wholesaler, decide to flip houses, or focus on rental properties. Despite the options available, one thing is common among them: funding.
Building a real estate portfolio requires financial backing, and unless you are wealthy, chances are you’ll require a loan to get started. Instead of opting for a loan, you start with rental properties. This option allows you to hold onto the property until it is valued higher on the market and sold.
This is called the buy-and-hold strategy, and because it’s a prevalent option, there are tailor-made loans for it. In this article, we’ll look at what a buy-and-hold loan is, who it is designed for, how to use one, and its benefits.
What Is a Buy-and-Hold Loan?
Real estate investors often use the “buy and hold” loan to purchase, rehab, and refinance their property. These loans are ideal for refinancing properties that are in a condition that the bank can’t approve.
A “buy and hold” loan funds a straightforward real estate strategy focusing on long-term growth instead of quick returns. It involves picking up an undervalued or foreclosed property with the aim of selling it once the value has appreciated. In the meantime, you may lease it out to generate a reliable stream of rental income. As you collect rent, you can use the income to pay off your mortgage and build up your equity in the property.
The Gap Between Short and Long-Term Loans
A Short-term hard money loan is ideal for properties you intend to flip instantly. It can also be used when you need instant funding and know you can pay it back quickly.
However, you will need a long-term loan if you plan to keep the property for a long time, either as a rental or for its value to appreciate before you sell it.
This long-term hard money lending, usually a buy-and-hold loan, will give you enough time to get the cash you need. You also won’t feel under pressure to pay it off instantly.
Advantages of a Buy-and-Hold Loan
There are many reasons investors might opt for a buy-and-hold loan. Below are just a few:
Steady Income Stream
Renting out your property provides a stable income stream that can help cover maintenance costs, mortgage payments, and other property-related expenses. This means you don’t have to wait a for a long period to see the financial benefits of your investment or generate revenue. This consistent cash flow can be a primary source of income for some investors or an excellent supplement to other income.
Property Appreciation
Real estate usually appreciates over time, and buy-and-hold loans allow investors to reap the benefits of this appreciation. By holding on to the property for a long period of time, investors give their property time to increase in value, which could potentially lead to exponential profits when it’s time to sell. This prospect of significant returns can be a source of excitement and motivation for potential investors.
Amassing Equity
As you use the rental income to repay your mortgage, you are also building equity in your property. This means you own a large proportion of the property outright. This can increase your net worth and offer more profitable streams, such as leveraging this equity for other real estate investments.
Tax Deductions
There are a lot of major tax benefits you can take advantage of if you own real estate. Some of them include mortgage interest deductions, property taxes, repair costs, and other operational expenses.
Long-Term Financial Security
The buy-and-hold loan finances a long-term strategy that can lead to long-term financial security. With each mortgage payment and property appreciation, your wealth steadily grows. This long-term investment can provide a stable source of income, comfortably fund a child’s education, provide a retirement scheme, or help achieve other financial goals, giving you a sense of security and confidence in your investment.
Long-Term Repayment Option
Unlike short-term hard money lending with repayment options ranging from 9 months to 18 months, a buy-and-hold loan allows you more time to pay back a loan, often up to three years. You might sometimes get a fully amortized loan with payback terms ranging from 15 to 20 years.
If the market changes and you can sell off your property early, you can repay your loan early and keep the rest. Generating monthly income can also cover a part of your prepayment.
Drawbacks of a Buy and Hold Loan
Below are some of the disadvantages of a buy-and-hold loan:
Management Responsibilities
From tenant screening to maintenance to landlord-tenant law compliance, property management can be a massive responsibility,
Market Risks
Although real estate tends to appreciate over time, it’s not immune to market fluctuations. Localized issues or economic downturns can impact property values and rental demands.
Unexpected Costs
Investment properties may encounter unforeseen circumstances, such as extended vacancies or major repairs, which can require a huge amount of money. It is essential to have a financial cushion that can handle these costs.
Liquidity
Compared to other kinds of investment, real estate is relatively illiquid. Selling a property can take a while, which can be a disadvantage, especially if you need instant cash.
Not for Residential Purposes
It’s important to note that buy-and-hold loans aren’t used to fund a property you intend to occupy. They are intended only for residential purposes. If you can’t get a traditional loan for your primary residence, a buy-and-hold loan might not be for you.
Higher Interest
Buy-and-hold loans have higher interest rates than traditional loans, so it’s essential to have a long-term exit strategy. This strategy might be simply paying off the loan after the property generates enough profit. It can also include refinancing when you eventually qualify for traditional refinancing.
Steps to Getting Started with Buy-and-hold Loans
Starting out with buy-and-hold loans can feel daunting, but with the proper guidance, anyone can succeed. Here’s a detailed guide on how to get started.
Financial Preparation
Begin by thoroughly understanding your financial situation. This might include evaluating your savings, debt-to-income ratio, and credit score. Remember that real estate requires an upfront investment for down payment and other operational costs.
You’ll also need financial reserves for potential vacancies, maintenance, and property management. This comprehensive financial preparation will ensure that you are well-informed and prepared for the buy-and-hold loan process.
Market Research
Research rental markets with high potential. Look for areas with strong rental demand, such as places near industries and universities. Consider factors such as local rent regulations, property taxes, and values.
Property Selection
Are you looking for a single-family home, a duplex, or a larger family unit? Choose a property that is in alignment with your investment goals. Consider things like the age of the property, potential rental income, and the necessary repairs.
Purchase and Rehabilitation
Once you’ve secured your buy-and-hold financing, purchase the property and make the necessary renovations and repairs. Hire the professionals you might need and ensure they are all within budget.
Property Management
When you purchase your property, you must decide who will manage it. You can do it yourself or hire a company to do it for you. You also need to consider how far away the property is, how much time you have to manage it, and what tasks are involved, like collecting rent and fixing problems.
Tenant Acquisition
To rent your property, advertise it to attract potential tenants. Next, interview the interested parties to find the best fit. Once you’ve selected a tenant, sign an agreement outlining the rental terms.
Remember to follow all housing laws and rules during this process. Be honest and open about the property’s condition, rent, and utilities. A transparent and fair agreement will help avoid problems and ensure a smooth rental experience.
Long-Term Management
As a landlord, your work is far from over once you’ve found a tenant. In fact, it’s only just beginning. To succeed, you must stay on top of things and keep a close eye on your property. This means building a good relationship with your tenants, fixing any problems that might arise, and keeping the property in good condition. It also means staying informed about what’s going on in the real estate market so you can make intelligent decisions about your investment.
Secure a Buy and Hold Loan with Capital Max
Getting started with a buy-and-hold loan involves many steps, from preparation to long-term management. However, you can accrue wealth through this strategy with patience and commitment.
Reach out to us today at Capital Max to secure your buy-and-hold loan. With a fast closing rate and a wide range of hard money lending options to match your needs, Capital Max is here to finance your real estate loans.
Don’t hesitate to contact our team and get more information today.