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Keys to Long Term Success in Buy and Hold Real Estate

by Michael Zuber on June 17, 2012 · 8 comments

  

I have been investing long enough to know the difference between a buyers market and a sellers market. When I started 10+ years ago it was a buyers market in my chosen area, and over the first 3 years of my investing career, the market changed in a big way.  We went from buying solid deals to watching everything in the market become overpriced for our chosen model.

Let me paint you a picture. We had 8-10 little houses at the time and it was clear that we either needed to stop buying or we had to change our model in a big way. Since we couldn’t survive long term on these initial houses, which were producing $1,300 – $1,500 a month positive cash flow total, we decided to change our model.

We decided to change our model, and therefore had a few options:

  1. We could have thrown our financial model out the window like lots of other buyers/investors/speculators. 
  2. We could have changed our chosen market from a semi local market to an out of state market. 
  3. We could change from buying single family homes in our market to a different segment.

 
Since we didn’t believe in changing our financial model, and we are too much of control freaks for out of state investing, we decided to investigate different segments of our market — specifically we spent six months investigating small apartment buildings with 5-20 Units.

During our research a couple of things stood out.

First, in our market, small office buildings offered much better returns than four plexes at the time, and they required commercial financing as opposed to residential financing. As you may recall, 6+ years ago residential financing was easy to get but commercial financing wasn’t.  For example, to buy a 5-plex we were required to put 20-25% down, but to buy a 4-plex we could have put down 10% or less.  In addition, commercial appraisals were more strict and detailed, with very little room to fudge the numbers.

As it turned out, this model change did great things for our business.  Once we decided to switch our model, we simply listed one property at a time to sell. Once the property was in escrow to close, we simply went out and found a small apartment building that offered a great return. We then moved our equity via a process called 1031 Exchange from over priced single family homes into commercial properties ranging from 5-20 apartment units.

As we look back, this simple adjustment allowed us to capitalize on an over heated sellers market and move our equity into additional units producing significant cash flow. I wanted to bring this up because the market we are in is changing, and while I don’t think we are any where close to a healthy sellers market, we all should be prepared for the eventual market shift.

In closing, the key to long term success in buy and hold real estate is not keeping everything you buy, but instead, ensuring that you capitalize on your equity in the most efficient and meaningful way possible.

in other words, I look forward to selling the 25+ properties I bought at or near the bottom of the market, and moving the equity into a lot more units over the next 2-5 years.

Good Investing

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{ 8 comments… read them below or add one }

tod r June 17, 2012 at 8:55 am

Hi Michael, are your investors’ terms similar to your single family deals? Have you pooled investors money into one building to meet larger down payment?

Thanks for sharing!

Reply

Mike Z June 18, 2012 at 1:40 pm

Hi Tod

Yes the terms are the same for Multi Families.

As for Pooling Investor Money I don’t believe in the concept as I like straight forward deals and 1-1 relationships with clean deals.

Good Investing

Reply

Ryan Mullin June 17, 2012 at 3:45 pm

Hey Michael,

Do you ever plan on going back to the little single family houses? ..and do you think that you will have a problem with liquidity in apartment buildings and commercial vs. single family houses?

Thanks!
-Ryan

Reply

Mike Z June 18, 2012 at 1:41 pm

Hi Ryan

I still chase SFH deals that meet my model it is just getting harder and harder to find. As for liquity in apartments I am chasing cashflow and not capital gains so it is not a consideration of mine. I am happy to own the apartments until I die assuming they are producing as expected

Good Investing

Reply

James June 17, 2012 at 11:45 pm

Great post I find it interesting that it took 8-10 little houses to produce an income of $13-15k… You see in my market an $80k SFR yields $900-1,200… so with 10 houses you would produce $9k-$12k per month minus expenses… Though I still dream about commercial apartment buildings… ahhh maybe next year… :o)

Reply

Mike Z June 18, 2012 at 1:43 pm

James

Real Estate Investing is a process and just like the game you start with little Green Houses and then when the time comes you trade for Red Hotels (Apartments).

You will get your tern to exchange

Good Investing

Reply

Al Williamson June 20, 2012 at 8:28 pm

Nice post Mr. Z. I’m a big fan of 1031s myself.
I don’t have anything to add – just enjoy reading your stuff.

Reply

Mike Z June 20, 2012 at 9:01 pm

Al

Thanks for taking the time to post. It is nice to know someone likes the article

Good Investing

Z

Reply

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