I am a big fan of buy and hold real estate investment. As I’ve written before, I think it’s the best investment around, but that certainly doesn’t make it easy to do right. While one article can in no way provide a definitive list of everything to do, this will hopefully provide a good framework for getting started.
Buying and holding real estate successfully requires a lot of very different tasks to be accomplished simultaneously or else it won’t work. The main points are as follows:
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
The Beginner’s Guide to Buy & Hold Real Estate Investing
Some buy and hold investors can get a little lazy. Flipping forces one to be disciplined by immediately showing whether a deal was good or bad based on how much profit is made. However, with buy and hold, there is no sale and therefore no profit or loss to tell you how you did. Thereby, it’s easier to justify getting poorer deals, at least subconsciously. Don’t fall for this trap!
Poor deals on the acquisition side will hurt buy and hold investors in the long run just like flippers. More money will be thrown away, cash flow will be lower and refinances won’t pull any money out (or won’t be possible in the first place).
Buy and hold investors should use the same aggressive marketing and negotiating tactics as flippers and not settle for anything less. While the type of properties buy and hold investors look for may be different than flippers (flippers should usually focus on slightly more expensive homes that will appeal to homeowners), each deal a buy and hold investor purchases should be good enough to flip at a profit in order to justify purchasing.
There are many ways to finance buy and hold deals, which I go over in detail here. Which method you choose depends on your goals and current situation. Some require a lot of cash, some do not. In brief, the best methods are as follows:
- Save and Hold: Save money from a job and use the extra to buy investment properties.
- FHA Financing: Buy up to a duplex or fourplex with an FHA loan (96.5 percent financing, but only available to homeowners), live in one unit and rent out the others.
- Flip and Hold: Flip one property and use the money to live off, flip another and use the money for a down payment on the third and hold that one. Rinse and repeat.
- Creative Financing: Subject to’s, seller financing and other creative financing can get you into a property for little or no money down. See Brandon Turner’s new book for more on this strategy.
- Private Loans: Fully finance with loans from private individuals, pay around 9 percent interest and refinance with a bank after property has seasoned (when the bank will loan on appraised value versus what you have into the property, this takes about a year usually).
- Partnerships: Partner with someone who has money. You do the work, they put up the money and you both split the equity, or something to that effect.
Always remember that it usually costs more and takes longer than you expect, especially early on. For example, the Sydney Opera House was supposed to cost $7 million, but ended up costing over $100 million! So budget carefully and add a contingency (usually 20 percent) for unforeseen issues.
Contractors and employees are notorious for overcharging, slacking or doing poor work. Hire slowly and fire quickly. The best contractors and employees generally come from referrals, so ask around. Often local REIA groups will have a list of referred vendors and contractors. And when you are vetting such vendors, ask for references and check them carefully. And for the love of everything good in this world, don’t pay contractors the whole amount up front!
It’s also important to work hard at accurate budgeting (See J. Scott’s book for help on that). Furthermore, always double check your budget against your results. It may be painful if there were cost overruns, but it is critical. You must make sure your buying criteria is right and that you are not under-financing these properties.
The big choice is whether to hire a management company or do it on your own. I went over this question in detail before. However, the main advantage to hiring a management company is that it frees up more time to look for properties. The disadvantage is that they cost money and can sometimes be incompetent.
Furthermore, no one will ever care about your properties as much as you do. If you do hire a management company, vet them thoroughly. And do not be afraid to fire them. A management company can make or break you, and the bad ones will break you sooner than you think.
If you decide to do it yourself, it has to be a primary focus. Property management is the ground floor of the real estate business, and without it, everything will fall apart. Learn the law and talk to an attorney to make sure you are in line. And you must learn to have a thick skin. Tenants will walk all over you if you don’t.
Eventually, you will have to hire someone for leasing, maintenance and bookkeeping. In the meantime, you will need to be able to do basic accounting yourself or obtaining bank financing will be all but impossible.
If you decide to do your management yourself, unless you are very handy, you should at least find a roving handyman you can call for maintenance issues. Eventually, when you have enough units, you can hire a maintenance man full time. You should also have plumbers, electricians, HVAC guys on call for when they are needed. Snake and Rooter and the like are expensive, but they are available for late night emergencies.
If you use a management company, the maintenance and turnover is the most important thing to watch, as overcharges will usually be there. If maintenance expenses get too high, demand an explanation. If their explanation doesn’t satisfy you or the situation doesn’t improve, switch management companies.
Buy and hold is the best way to get wealthy in my opinion, but it is not an easy get-rich-quick scheme. It’s a challenging get-rich-slow scheme. But trust me, it’s definitely worth it.
Weigh in: What did I miss in my guide? What advice would you give to someone just starting out in buy and hold?
Leave me a comment, and let’s talk!