The buy-and-hold market has long been a fruitful investment option for rental owners. This investment framework thrives off of a combination of appreciation (net worth growth) and monthly rental rates from tenants (for cash flow). If you have a rising property value and qualified tenants that are willing to pay a rental rate that covers your initial investment expense, then you are set!
Along those lines, let’s take a look at the 2021 housing market trends and see what 2022 has in store for buy-and-hold owners.
Where Buy-and-Hold Works in 2021 (and Where It Doesn’t)
Buy-and-hold works best in markets where:
- The population is growing so you have an increasing demand for housing.
- Job growth is strong enough to attract new employees and help them afford housing.
- Home prices are affordable so you can easily enter the market and quickly recover your initial investment.
Due to the pandemic, the buy-and-hold market has changed since even just last year, as the housing market spiked 20% between 2020 and 2021, while inventory has gone down 30%. This means that there are fewer homes on the market for homebuyers and investors, but the ones that are still available are quite expensive.
That means the buy-and-hold market has also changed in terms of where it's thriving. Currently, the best places for buy-and-hold investors are Orlando, Tampa, and Jacksonville, Florida; Pittsburgh, Pennsylvania; Huntsville, Alabama; Houston, Texas, and Cleveland and Cincinnati, Ohio (just to name a few). All of these cities have the perfect blend of new jobs, industry expansion, population growth, and affordability.
On the other hand, some cities don't have the same thriving markets. This is because some areas, such as Los Angeles, New York City, and San Francisco, have high property values that would take an exceptionally long amount of time to recover their initial investments (about 25–30 years). This is especially true due to the financial impact of the pandemic.
Along with high property values, cities in California are not appealing to buy-and-hold investors because, for the first time, California is experiencing a population decline brought on by the pandemic. While this decline is quite small, it's something investors should keep in mind. Other cities that have population drops, such as the Bay Area, Los Angeles, and Chicago, are not valuable for buy-and-hold investors.
While there are cities that don't seem like an asset for buy-and-hold investors on paper, it's still possible to find an area that will do well if you do your research. Using PropStream's investor tools can help you find properties that are valued under the market by searching for aged homes. This can help investors recover the money they spent quicker, especially if you invest in the rehab tools to instantly increase your market value and rental rates.
What Should Buy-and-Hold Investors Know for 2022?
As 2021 comes to a close, 2022 is sure to see some of the impacts of the housing market changes. Let’s dive into what that means for investors.
More Renting and Fewer New Homes
As of August 2021, new home sales are down 24.3%. This is related to the drop in inventory and the fact that the demand for new homes is diminishing. Likewise, new homes are expensive to build thanks to rising labor and lumber costs. For buy-and-hold investors, this means that more people will be looking to rent, rather than buy, a new home. This also means that investing in new properties will be expensive, so choosing your market area wisely is critical.
With all that in mind, the rental market is set to increase throughout 2022. This is great news for buy-and-hold investors. Increasing homes prices mean that people will resort to renting, making the buy-and-hold market rise over the fix-and-flip market and the homeowner market.
The Bottom Line
The buy-and-hold market has always been an option for investors, but it's looking like an especially smart option as 2022 approaches. A long-term investment during a time when there is a shortage of homes is ideal for investors because there will be a high demand for homes to rent. The constant cash flow in booming cities is going to keep your buy-and-hold afloat; all it takes is some research and smart investments. Good luck!