Owning real estate is the most effective way to grow one’s wealth yet discovered. Unfortunately, that doesn’t make it easy. Buying and holding real estate successfully requires a lot of very different tasks to be accomplished or it won’t work. To summarize, there are five major tasks:
Some buy and hold investors have a tendency to get a little lazy. Flipping creates discipline by immediately showing whether the deal was a good one or a bad one by how much money was made or lost on the sale. With buy and hold, there is no sale. So it’s easier to justify (even subconsciously) poorer deals. Don’t fall prey to this!
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 leave higher interest private loans in place. Buy and hold investors should use the same aggressive marketing and negotiating tactics as flippers and not settle for anything less.
Finance is the hardest part of buy and hold investing. So much so that I wrote an article specifically for that – “Financing Buy & Hold Investing Deals“. Briefly, potential methods for financing are:
- Save money from a job and use the extra to buy investment properties
- Flip some properties and use profits to hold others
- Buy a duplex to fourplex with an FHA homeowner loan, live in one unit and rent out the others
- Creative Financing (i.e. subject to’s, seller financing, etc.)
- Use loans from private individuals to cover the entire cost, pay around 9% interest and refinance with a bank after property has seasoned (usually a year or two)
- Partner with someone; they bring the money and you do the work
“It always twice as long and costs three times as much as expected” is a common phrase that I’ve seen many fall prey to (myself too in my early days). Contractors and employees are notorious for overcharging, slacking or providing poor quality work. Be slow to hire and quick to fire. The best contractors and employees generally come from referrals. Ask for them from people you trust whenever you can. Often local REAI 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. 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 can sometimes be incompetent or even criminal (ask me how I know). If you do hire a management company, just as with contractors but even more so, 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 sooner 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. And you must have a thick skin and be able to tell a tenant ‘no’ or they will walk all over you. In addition, know that you will eventually need to hire someone for leasing, maintenance and bookkeeping. In the meantime, you will need to be able to do basic bookkeeping yourself or obtaining bank financing will be all but impossible. We started our own management company because we’ve had bad experiences with property managers and wanted full control. But I know others who have succeeded with management companies.
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 one full time. You should also have plumbers, electricians, HVAC guys and the like on call for such emergencies.
If you use a 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 such an explanation is unsatisfactory or the situation doesn’t change, switch companies.
There is, of course, much more to buy and hold, but these are the basics to know and succeed in real estate; the best way known to man to grow wealth slowly but surely.