“Buy and hold” real estate investing has been promoted for years by people like Carlton Sheets or Ron Legrand for good reason. Investing in real estate is a phenomenal way to build wealth and income. Before I began my investing career, I listened to as much of this educational material as I could get my hands on. This information was pivotal in my development and understanding of the fundamentals of real estate. However, while I had a good grasp of the basic principles of real estate, I did not understand the importance of developing a long term strategy first. Having worked in this business full-time for over 6 years now, I have come to understand how different long term investment goals require an understanding of the many submarkets in my city.
With prices at historical lows, there is an unprecedented opportunity to invest in real estate that is disproportionately lower than rental rates. Where home prices have dropped to half of what they were just 3 years ago (and even more in some markets), rental rates are only slightly lower. This has allowed investors to buy income producing properties that have tremendous cash flow.
Knowing When You Want to Sell Before You Even Buy
As an investor, cash flow is obviously important, but is it the most important factor? I think many investors like the idea of immediate cash flow but forget to ask themselves how long they want to keep the property. I would venture to say that having a firm grasp on your long term strategy is vitally important in deciding where to invest. Why? Because some submarkets are excellent for cash flow, but may not be easy to sell in the long run. On the other hand, some markets may not have quite as much cash flow, but may be much easier to sell (and experience appreciation) in future years.
There isn’t a right or wrong answer to this question. Some investors plan on buying and owning property indefinitely. For them, the monthly income stream is the main reason for the investment. In this case, it may be perfectly acceptable to buy in areas characterized by lower owner occupancy rates, cheaper housing, lower median incomes, etc. It may not be the kind of area you or I would want to live in, but that doesn’t mean it won’t be a good long term rental property. On the other hand, if an investor wants to buy in an area that will enable him or her to sell the property at some point over the next 10 years, it may need to be in a different submarket. This investor may need to sacrifice some monthly cash flow for a market with higher housing prices and higher owner occupancy rates. Over a ten year period, this investor may not have made as much money on the monthly cash flow, but will have the ability to sell the property and an opportunity to make money on appreciation as well.
Regardless of your long term plans for an investment property, make sure the market you are buying in aligns with your future plans. There is so much opportunity out there right now – just make sure you are seizing the opportunities that are right for you.