Affordable Housing: A Beginner's Guide for Investors
Purchasing and holding real estate can be a lucrative investment strategy over a long period of time, especially in markets where property values are expected to rise over time. In Memphis, TN, where affordable price points make it possible to acquire properties at relatively low cost, it can be especially attractive to buy and hold real estate as a long-term investment.
One approach that investors in Memphis might consider is looking for properties that need some repairs, but not so much that they would be considered "distressed." By targeting properties that are in good condition but just need a few minor repairs, investors can potentially acquire a property at a lower price point, while still being able to make improvements that increase its value. For example, an investor might look for a property in the $40,000-$60,000 range that needs $20,000 worth of repairs, and the house would be worth in the $75,000ish.
To finance the purchase of such a property, the investor might consider offering seller financing terms to the seller. This could involve making a down payment of 10% of the purchase price, which would cover the cost of real estate agent fees (if included) and closing costs. The investor could then agree to pay off the balance of the purchase price over time, at an interest rate of less than 5%. By amortizing the loan over a longer period of time, the investor could potentially make smaller monthly payments, while still building equity in the property.
To help pay off the loan, the investor might consider renting out the property to a tenant. As the tenant pays rent, the investor can use that income to make the monthly payments on the loan. This can be a particularly effective strategy if the rent collected from the tenant is higher than the monthly loan payment.
As the investor makes payments on the loan and the tenant pays rent, the value of the property is likely to appreciate, as the investor completes the necessary repairs and makes other improvements. For example, let's say an investor purchases a property for $50,000, with a 10% down payment of $5,000 and $20,000 in repair costs, bringing the total investment to $70,000 and a seller financing $45,000. If the investor makes monthly payments of $500 on the loan and collects $750 in rent from the tenant each month, and the value of the property appreciates by 5% per year, after 10 years the property would increase $37,500 making the property worth approximately $110,000. This would result in the investor owning the property outright, with an initial $25,000 investment. Disclosure: Remember you are taking on risk and not all things projected work out, and the journey over the years can also be a very tough road, and at the end you can lose all your money and time invested. This is a scenario to think about in an approach to investing.
In addition to building equity, renting out the property can also provide the investor with a steady stream of income. As long as the investor is able to find reliable tenants and maintain the property, the investor can continue to collect rent and potentially generate a positive cash flow.
Overall, buying and holding real estate in Memphis, TN, can be a smart investment strategy for investors who are willing to put in the work to find and repair properties that have good potential for appreciation. By using creative financing techniques, such as seller financing, and by renting out the property to a tenant, investors can potentially acquire properties at a lower cost, build equity over time, and generate a steady stream of income.
I write more about creative financing in another blog if interested in reading that as well Click Here