By Noah Brocious – President/RI/Mortgage Loan Originator – If you’re just starting your career as a property investor in Arizona, the sheer number of possibilities can be overwhelming. Will you fix and flip houses? Will you upgrade the commercial property for rent? What if you could do both?
Buy and hold real estate gives you the ultimate flexibility in several ways to turn a profit. If you play your cards right, you can even use that property to secure financing in the future.
What Is Buy and Hold Real Estate?
First, let’s talk about what “buy and hold” means in terms of property. This is real estate that you plan on owning for a while — at least a few years, though you can reap the rewards for well over a decade. This is in contrast to the fix and flip approach, which focuses on selling property as quickly as possible after rehabbing it.
Why Invest in Buy and Hold Real Estate?
Why is this type of property best for beginners? For one, it doesn’t involve as much risk as fix and flip, as you don’t have to worry about selling the property in time to pay off the loan. For another, it’s an excellent foundation for your investing career, as it provides income and tax opportunities. Additionally, there’s a lot to be said for holding onto property rather than immediately looking for a buyer.
Improved Markets
If the property is quite valuable, but it’s a buyer’s market, you may benefit from keeping your real estate for a while. Instead, watch the markets and wait for the opportune moment to list. It may take months or years, but this patient, cautious approach can net you tens of thousands of dollars above what you originally paid.
Steady, Long-Term Income
In the meantime, you can take advantage of a steady income from renting. This has two benefits: First, you have a new income source to use for other investment projects, and second, lenders will see this income when you apply for financing. This allows you to get loans with favorable terms.
Great Tax Benefits
As a landlord, you get tax benefits and write-offs for the property you rent. For example, you get to claim depreciation every year. Additionally, when you finally sell the property, it will count as a large taxable event, which you can take advantage of if you use the funds to purchase similar real estate. Once you own, buy and hold real estate, a professional accountant can help you work these factors to your advantage.
Compounding Appreciation and Increasing Net Worth
Finally, owning property for the long-term gives you an asset, which is incredibly useful when seeking funding. Beyond the rental income, you collect the real estate itself has value. If you put in the effort to upgrade the property, that raises its value, increasing your net worth. This is appealing to lenders who may be more interested in your assets than your credit score.
Why Choose a Buy and Hold Loan?
Knowing how useful buy-and-hold real estate can be, plenty of lenders offer loans specifically designed for it. So what makes them different from mortgages? To find out, let’s look at two of the most significant benefits of buy and hold loans: short-term lending and fast funding.
Short-Term Lending
Buy and hold loans are structured like hard money loans; they’re typically very short, lasting two years or less than the typical 30-year mortgage. However, most hard money loans are provided with the expectation that they’ll be paid off once you sell the property. Our longer-term loans do have more extensive pre-requisites before closing as they’re more of a “soft” hard money loan, but do have lower rates that change similar to the feds rates.
On the other hand, buy and hold financing is a foundation for you to seek refinancing in the future. This makes them ideal loans for beginners in the property investment industry.
Fast Funding
One thing both financing options have in common is fast funding. Private money lenders are known for their quick application approval, which makes them an excellent opportunity for investors — the faster you have cash in hand, the sooner you can do business. This is one thing that sets buy and hold loans apart from mortgages — with buy and hold financing, you can get funds in as little as 24 hours, while mortgages can take over 30 days for an answer.
At Capital Fund 1, we have multiple options for short-term (6-24 months), medium-term (3-5 years), and long-term (15-30 years) options available for buy and hold real estate.
How Can You Use a Buy and Hold Loan?
Once you have your financing, how can you use the funds? The good news is, buy and hold loans are quite flexible, which means you choose how to use them. The most common choices, however, are purchasing and renovating.
Purchasing Property
Investing in property starts with buying real estate you think is or can be valuable. This comes with immense risk, as you’re tying up equity in assets and going into debt. That’s why careful research is essential to getting the most out of your buy and hold real estate.
Make sure you understand the markets, especially as they relate to the property type you’re buying. Every area has its factors that influence property value:
- Job opportunities
- Migration and immigration
- School quality
Just crossing city lines can make a big difference; for example, Tempe and Mesa (both cities in Arizona) share a city border but have very different demographics.
Renovating Real Estate
Renovating your property isn’t necessary, but it’s recommended to increase its value. Of course, this requires you to set aside part of the loan specifically for rehab expenses, which usually end up costing more than you expect. However, it can pay off in the long run, especially if you routinely upgrade the property over the years.
What Is the Best Strategy for Buy and Hold Real Estate?
Once you’ve purchased and renovated your property, you can rent for years until you have the opportunity to either sell or refinance. Which you choose depends on your situation; selling is a good option if you want a large amount to invest in a new property while refinancing allows you to hold on to your real estate while accessing its equity for other business opportunities. Most owners of buy and hold real estate choose to refinance, as it allows them to access working capital without going back to square one.
Why Choose Capital Fund 1?
Capital Fund 1 offers commercial real estate loans in Arizona, Oregon, Texas, and Colorado. We pride ourselves on high-quality customer service and reliable funding. If you’re interested in jumpstarting your property investment career, we can help. For more information or to start your application, you can visit us online or call us at (480) 889-6100.
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