In my judgment, investing in real estate to hold is the best method yet discovered for a person of modest means to become wealthy. Unfortunately, that doesn’t make it easy. Buying and holding real estate successfully requires accomplishing a lot of very different tasks simultaneously or it won’t work. To boil it down, there are five major components:
1 - Acquisition
4 - Management
5 - Maintenance
In my experience, these five components of buy and hold real estate investing are the basis for building wealth in real estate investing. I will explain each in detail below.
You make your money when you buy. And that is just as true for buy and hold as it is for flipping. Some buy and hold investors can get a little lazy. Whereas flipping creates discipline by quickly showing whether the deal was a good one or not given how much money was made or lost on the sale, buy and hold has no sale. So it’s easier to justify (consciously or subconsciously) lower quality deals. Don’t make this mistake!
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 money out or will force investors to keep high interest private loans. Buy and hold investors should use the same aggressive marketing and negotiating tactics as flippers and not settle for anything less.
Financing is generally the hardest part for buy and hold investing. Fortunately, there is an assortment of ways to finance properties to hold, but all of them require thriftiness. The first is to save money from a job and use that money to buy investment properties. For this model, FHA loans can be great here because you can buy any property up to a fourplex, live in one side and rent out the rest.
In addition, flipping and holding are by no means mutually exclusive. Why not hold every third or fourth property while flipping the rest? Or better yet, use creative financing (like subject to’s or seller financing) to buy a property for no money down. Or get a ma’ or pa’ private lender to lend you the full down payment. Or partner with someone who has money. Then they can bring the money and you can do the work. It’s not easy, but there are plenty of financing solutions available.
The Sydney Opera House was budgeted to cost $7 million and take six years to complete. It ended up costing $102 million and taking 16 years! In other words, it always costs more and takes longer than you think. Contractors and employees are notorious for overcharging, procrastinating or providing poor quality work. So be careful when hiring and be quick to fire if needed.
The best contractors and employees generally come from referrals. Ask for them from people you trust whenever you can. 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 thoroughly. And do not pay them up front!
It’s also important to work hard at accurate budgeting. Make sure to add in a contingency of 15-20% for the things that will inevitably pop up. And always double check your budget against your results. This is important to make sure 1) your buying criteria is right and 2) that you are not under-financing these properties.
The big question is whether to hire a management company or do it yourself. The 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 that some are incompetent or even criminal. If you do hire a management company, just as with contractors, vet them thoroughly. You should ask for referrals from people you trust and then from the management companies’ themselves. And do not be afraid to fire them. A management company can make or break you and the bad ones will break you quicker than you think.
If you decide to do it yourself, it has to be a primary focus. Property management is the nuts and bolts of real estate, and without it, everything falls apart. Learn the law and consult with an attorney to make sure you are in compliance. In addition, you must have a thick skin and be able to tell a tenant “no” or some of them will walk all over you. Furthermore, know that you will eventually need to hire someone for leasing, maintenance and/or bookkeeping. In the meantime, you will need to be able to do basic bookkeeping yourself in order to properly do your taxes, assess your situation and obtain bank financing.
If you decide to manage yourself you should at least find a roving handyman you can call for maintenance issues (unless, that is, you are very handy). When you have enough units, you can hire someone full time. You will also need to have plumbers, electricians, HVAC technicians and the like on call for such issues.
If you use a property management company, the maintenance and turnover is the most important thing to watch as overcharges will usually go there. If maintenance expenses are out of hand, demand an explanation. If the explanation is unacceptable or the situation doesn’t change, switch companies. The same goes for prolonged vacancies.
These are, of course, just the broad strokes. For more information, read ,The Millionaire Real Estate Investor by Gary Keller and How I Turned $1000 into a Five Million in My Spare Time, by William Nickerson or view the many articles and books on this site.