Going a little deeper into buy and hold strategies

In Real Estate Investing 101, Part II, we cover buying and owning property for long-term appreciation and wealth creation. This is by no means a get rich quick scheme, but it is one of the most proven ways to build wealth over time.

Find a suitable property

As with flipping, property is a necessary ingredient. In fact, the same sources will work for buy and hold strategies and for investing. The main difference is that buy and hold strategies are generally a bit less stringent in cost control, as well as conditions. One can be in the property for a little more money because there is no short-term margin to mind. REO (bank owned property), pre-foreclosure, short sales, older homes in need of updating, and solid but ugly properties are still the best options.

Rental houses are more price sensitive for marketing. While a change can be made at any price level, rentals are a bit more demanding. While it certainly requires knowing the market, usually in the Atlanta area the best options are in the $125k to $250k area. There are opportunities below that, as well as above, but the meat of the Single Family Residential (SFR) the market will be around this range.

Under $125k- Pro- Just like with a flip, these properties are easier to take with you when they’re not producing. Fraud- Even with a generous appreciation, the actual cash value will not increase as much as with more expensive properties.

$125k to $250k- Pro- This is the most active area of ​​the market. There are more tenants available, so it may be easier to keep the property occupied. Fraud- This is the most active area of ​​the market. There are more properties to compete against for tenants.

$350k to $500k – Pro– These are executive rentals and typically tenants will be more attentive to the property. There are property owners who focus on this market because it is quite profitable and not very problematic. Fraud- There are higher costs to maintain the property when it is not rented, and it may require more spending between tenants to update the property. Tenants will be more demanding with amenities, fixtures, and finishes.

Over $1 Million- Pro- The rental rate at cost is usually higher due to the rarity of SFRs. Most of these properties will be commercial, which typically have longer leases and often do not require the owner to make improvements or maintain the property. Fraud- For the SFR market, this is a rare rental. Certainly there are some that work well, but they will be shorter term (usually) and require increasingly expensive marketing to complete. For commercial properties here in Atlanta, you have to be very careful because there is a LOT of commercial space available.

Putting the numbers together

As with the article, I have an excel spreadsheet to take a closer look at the deal. It’s not fancy, but it helps keep all the important points front and center so details don’t interfere with the big picture.

When completing the spreadsheet, the light gray areas are for users to enter information. The light green areas have calculated values. Remember, the more accurate the input information is, the more accurate your earnings analysis will be.

As with remodeling, it is very important to know what the initial costs will be, both for the acquisition and for any required renovations. Unlike flipping, however, if the investor wants to cut costs and has the necessary skills, doing more of the work themselves, rather than hiring contractors, may be more manageable. Most investors are not going to have a bunch of projects going on at once. If you DO plan to have many projects going at the same time, or if you don’t have the right skills, hiring contractors is a better plan.

In the linked worksheet, we can see that the fictional investor bought a property for $200k. He needed another $25k in renovations. After renovation, the unit has an expected rent of $2,250/mo. and requires around $1800/mo. wear. I considered vacant terms, as well as necessary maintenance through the use of reserves and reserve funds. These are included in the monthly maintenance costs. I specifically expect a 90% occupancy rate. That may be a bit high, but I also tried to balance it below the expected annual increase in value.

As we dig into the numbers, what we find is that the cash flow totals over $550k over the thirty year period. Additionally, the property increases in value by over $300k. This means that if the property is held for the full thirty-year term, the mortgage would be paid off and the investor would have raised nearly $1.1 million over the thirty-year term after the property was sold. Even after discounting the original total investment, there is still a profit of $800k.

But, the real magic is in the leverage. In this example, the investor advanced less than $80,000 and ended up with more than $1,000,000. If one spends a little more on a property that doesn’t need as much renovation in the beginning, one may have a better overall return.

Putting together a good team

Every good investor needs partners. These are the people one needs to have available:

Real estate agent– A good agent will know what is on the market. The agent should be able to help minimize initial costs, while ensuring that the property is suitable for rent and is easily marketable for that purpose.

Rental Agent- Knowing how much a certain property can be rented for is valuable information. It is also valuable to have someone ready to market the property as soon as possible to reduce downtime.

Inspector– Spending a few hundred dollars on a good inspection is money well spent. Losing a faulty HVAC system or roof problem could cost thousands of dollars. Knowing that a particular coating or electrical system has proven unreliable can also be very valuable. If one can find an inspector who will provide good cost estimates of the repairs and updates that need to be done, one may be able to reduce the number of contractors that need to be consulted before purchasing a property. The inspector can also provide valuable information about the long-term viability of the property’s expensive systems.

Mortgage Loan Broker– Unless one is going to own/occupy the properties for several years at the beginning of the property, it is necessary to work with a mortgage broker who understands investment loans. Structuring the loan right for the investor can lower monthly costs and increase the cash flow of the property.

Rental Marketing Strategies

The objective of this exercise is to rent the property and keep it that way. There are a few things to keep in mind to maximize long-term return and minimize risk.

Hire a good rental agent. They are part of the team. A good agent will help get the proper exposure for the property, as well as make recommendations that will make the home more marketable. These are specialists. Depending on the individual agency they are with, there may be a one time fee or it may be a monthly percentage.

Stage the property. A vacant home makes it harder for renters to move mentally, just like buyers. A few rooms that are well organized will really increase the value in the mind of the renters, so it is usually worth the cost. This is especially true for high-end homes, but it can be the thing that tips the scales for ANY property. With rentals, this can be really prominent, as few rental properties are organized.

Set the rent appropriately. To get, or be more likely to keep, a good tenant, be flexible. A good tenant can cost less money between rentals. If it is a longer term tenant, there will be fewer vacant periods.

Be flexible about lease/purchase possibilities. I’ve heard that about 1 in 8 lease purchase sales closed. If offering a lease purchase is what it takes to get a good tenant, or to keep a good tenant, stay open to the possibility. It may be worth the risk for the property to sell. Additionally, if the buyer/tenant would like part of the rent credited toward the down payment, most lenders require that only the amount above market rent be applied toward the down payment. Typically, this money is forfeited as collateral if the sale does not close.

Research. Plan. Prepared. Remember the old adage that it takes money to make money. This is also true when buying real estate to hold. Aiming for money is less important than investing it, but spending it properly is still important. Also, understand your own market and your own limitations.