Up to this point, the discussion has centered on three real estate investing strategies, Subject-To, Retailing, and Foreclosures. In this article, we are continuing our pursuit of the best investing strategy for the beginning investor.
In my opinion, the new investor will do best using an investing strategy that will allow him to enter the market easier, without the necessity to acquire complicated knowledge that takes to much time to implement. This is our goal, which brings us to the next strategy in our discussion, the buy and hold strategy.
Buy and Hold
The buy and hold method of investing is really two separate strategies. The first event is the purchase of the property and the second, is to hold the property as an investment. As in every buying strategy it is always important to buy right, however, with the buy and hold method you will have ownership of the property for many years, so if you didn’t buy as effectively as you would have liked, you will have plenty of time to make it up.
This strategy is usually thought of as the traditional way of real estate investing. In fact, if you consider what the word “investing” really means, you may conclude that this method is probably the true investing strategy. What I mean by this is that when the property is purchased, it usually involves money out of your own pocket (the investment) and then the property is placed in your portfolio, so to speak, for long term gain. Here, you have the traditional investment model.
Buying the Property
Buying the property is a term that can be used loosely. Buying generally is associated with using money as an exchange to acquire something, in this case a property. However, for our purposes I am going to use the term, “taking possession or ownership” of the property. I am using this term because taking possession or ownership may not involve your money or in some cases any money in the exchange.
Taking possession of the property can be done using several different techniques. The two such methods we have already discussed are the subject-to and foreclosure methods. Some other methods to acquire property would be owner financing, lease options, and placing a down on the property and getting a new loan.
Since the topic of acquiring property has been discussed in the previous articles in this series and will be further discussed in the remaining articles, we don’t need to elaborate on it any further here. Just keep in mind that you need to have an exit strategy prior to taking possession of the property. Again, you should work toward getting the best deal possible, but because you will hold the property long term you can make up any marginal deal during future years.
Holding The Property
The process of holding the property involves two distinct aspects for the investor. The first has to do with how well the investment performs and the second involves the management of the property. These are important points to consider before you enter into any deal. As an investor you will want to evaluate to what degree the investment will perform. In other words, what return can I expect on my investment.
An investor’s return can be estimated from the income, appreciation, tax benefits, and expenses on the property. Cash flow is usually an important factor to consider as you estimate the day to day expenses. You want to be sure that the property will produce enough income to pay any debt service and other expenses associated with it.
The investor would also be hoping for appreciation, where the property would increase in value from year to year. This is not always a given. The past few years have shown a fairly flat market and in some parts of the country homes have lost value. Another positive for the investor is equity build up. As the mortgage is paid down by the tenant, the equity in the property increases.
There will also be the enjoyment of tax shelter from the ownership of the property. The investor will be able to show depreciation over several years on the property.This will reduce his gross taxable income from year to year and give him more spendable income due to paying less taxes. As you can see there are great financial advantages to owning investment property.
Secondly, the property has to be physically managed. Property management, if not done correctly can be a nightmare. The investor will have to determine if he will manage the property himself or hire a management company. The answer to this question is partly determined by whether or not there will be positive cash flow on the property and to what extent the investor has experience in dealing with tenants.
Managing rental property is not for the light of heart. The investor is running a business and he must treat his investments as such. From time to time, difficult decisions will need to be made Dealing with tenants can be very challenging. The investor as a business owner must walk a fine line between understanding people situations and what constitutes business. People do have problems in life, but as a business owner it is his job to make the business profitable, while at the same time not to be insensitive to the needs of others.
The property will have to be maintained to satisfy the tenants and the requirements of state and local codes. Even beyond this, however, there is a pride that comes with ownership. Having properties that are safe, in good repair, and look good will attract the best tenants. A major goal of managing property is to keep tenant complaints to a minimum.
The buy and hold strategy has been my main method of investing in real estate over the years. I acquired several properties and managed them myself. The management responsibilities were not always easy and at times a real headache. To me the most difficult and challenging aspect was dealing with the tenants. Over time I was able to see certain patterns of behavior and through trial and error I was able to develop better management skills.
Doing repairs and general maintenance, especially when tenants move out was always a challenge for me, since I had the obligation of full time employment. It would be necessary for me to take leave from work in order to get the property ready for the next tenant. I would usually do most of the work myself and hire a helper, but when there was work that needed someone with greater skill or a required license I would hired it out.
I enjoyed doing the work on the houses since my full time job was more office related. Keeping the properties in good repair gave me the pride of ownership, and it reduced my expenses, while increasing my cash flow.
The buy and hold method of investing is a good strategy for the investor. It is no doubt the most well known and widely used technique for investors. It can be a good strategy for the new investor as well. It was the strategy that I used when I began my own investing career. However, when I began investing the buy and hold method was about all I knew at the time.
Over the years, I became aware of other techniques that I tried and liked better. The other techniques were easier, less risky and required less money to be put into the deal. The income potential was also very good. It is these methods of investing that are yet to be discussed in this series, so please keep reading. I am sure you will be as excited as I was to have learned about them. Thanks again for you time. I hope this article has been helpful, if so please leave me a comment.
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