How to Buy Your First Investment Property Using the Buy and Hold Strategy
Video transcription and article overview
Karin Carr introduces two common ways to invest in real estate: purchasing a property to renovate and resell, often called flipping, or buying a property to keep as a long-term rental investment.
This article focuses on the second option, the buy-and-hold strategy, and explains how an investor might use rental income, mortgage payments, and refinancing to build a portfolio of properties over time.
What Is the Buy-and-Hold Strategy?
With a buy-and-hold investment, you purchase a property intending to own it for an extended period. Instead of immediately reselling it, you generally rent it to a tenant and collect rental income.
One traditional approach is to save enough money for the down payment, buy a property that is ready for occupancy, and rent it out soon after closing.
The original example uses a 20% down payment for an investment property. Actual lender requirements depend on the financing program, property, and borrower's qualifications.
In some cases, an investor may purchase a rental home with a tenant already in place, allowing rental payments to begin immediately after the purchase.
Understanding Rental Property Cash Flow
Cash flow is the money remaining after subtracting the property's expenses from its rental income.
For example, suppose a property generates $1,200 in monthly rent and has $1,000 in monthly expenses.
Monthly rental income: $1,200
Monthly expenses: $1,000
Estimated monthly cash flow: $200
Expenses may include the mortgage, property taxes, homeowners insurance, management fees, maintenance, and reserves for unexpected repairs. Vacancy and other costs also need to be considered when evaluating a real investment.
In addition to rental income, a long-term investor may build equity as the mortgage principal is paid down. Property values can also change over time, although appreciation is not guaranteed.
The Challenge of Buying Your Next Investment Property
The traditional buy-and-hold method can work well, but expanding a portfolio may take time. After purchasing one property, an investor often needs to save another down payment before purchasing a second.
This is one reason some investors explore a different strategy known as BRRRR.
What Is the BRRRR Method?
BRRRR stands for:
- B — Buy
- R — Rehab
- R — Rent
- R — Refinance
- R — Repeat
The idea is to purchase a property with improvement potential, renovate it, rent it out, and then consider refinancing based on its updated value. If the refinancing terms allow, an investor may recover some of the original capital for another purchase.
1. Buy
The first step is identifying a property offered at a price that leaves room for improvements and potential equity. The original article discusses finding homes below market value rather than paying a premium for properties that are already completely renovated.
2. Rehab
After purchasing the property, the next step is making the necessary repairs. For a beginner, Karin's example emphasizes manageable cosmetic improvements, such as painting, replacing worn carpeting, updating appliances, or improving the front door.
Major structural, electrical, or heating and cooling projects may require a significantly larger budget and more specialized expertise. For more ideas about smaller improvements, see 3 Easy Improvements That Help Sell Homes.
3. Rent
Once the home is ready for occupancy, the investor can find a suitable tenant. This can be handled directly or through a property management company.
A property manager may help with rental pricing, tenant screening, lease administration, maintenance, and other responsibilities. Tenant screening should follow applicable fair housing and privacy laws.
4. Refinance
Refinancing is the step that distinguishes BRRRR from a conventional buy-and-hold purchase.
In the article's simplified example, an investor purchases a home for $100,000 with a $20,000 down payment. After improvements, the property is valued at $120,000.
The investor then explores refinancing the property and withdrawing some equity. The original example assumes the initial $20,000 can be recovered, although the amount actually available depends on the loan balance, appraisal, lender rules, refinancing costs, and loan-to-value limits.
5. Repeat
If refinancing releases usable capital, the investor may apply it toward another investment property and repeat the process.
This approach is intended to make it possible to acquire properties more frequently without having to save an entirely new down payment each time.
Building a Long-Term Rental Portfolio
The original article illustrates the potential scale of this strategy by imagining an investor purchasing four rental properties annually. Over five years, that would amount to 20 properties.
With multiple rentals, income may come from several tenants, while mortgage payments can gradually reduce outstanding loan balances.
However, portfolio growth is not automatic. Financing availability, interest rates, property values, vacancies, repairs, taxes, and management expenses all influence the results. Rental income and property appreciation are never guaranteed.
Investors who prefer not to handle day-to-day management themselves can explore hiring a property management company, although its fees will affect cash flow.
Recommended Book: BRRRR by David Greene
Karin recommends David Greene's book Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental Property Investment Strategy Made Simple for readers interested in understanding this investing method in greater detail.
View Buy, Rehab, Rent, Refinance, Repeat on Amazon
How Can You Find the Down Payment?
Finding enough money for an initial purchase is one of the main obstacles for first-time real estate investors.
Karin's original article offers a downloadable resource called How To Buy Rental Property With No Money Down, covering creative ways to approach the down-payment challenge.
How To Buy Rental Property With No Money Down — Free Cheat Sheet
For more introductory information, you can also read A Beginners Guide To Real Estate Investing.
If you enjoyed the video, visit the original YouTube video to watch it and explore Karin's real estate content.
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