Is there any end game besides buy and hold?

Question

It seems the general ladder that people here work on is:
wholesale/other job/realtor to
rehabber to 
low end single family to 
nice single family/multi family/commercial.

This all ends at buy and hold.

Is there some other fully mature way to use real estate to build/preserve wealth?

I'm asking because I'm biased against being a landlord. I saw how hard it can be watching my father manage a few single families when I was growing up. Plus, it just doesn't seem exciting enough to babysit either a tenant or a property manager for x amount of hundreds of dollars per month per property.  Maybe this is my immaturity showing! I'm willing to do it, be tough, and manage renters well if I have to-- but I'm hoping to find better/different options.

This topic may have been covered before- I've searched several times and not been able to find it. Point me in the right direction if it has.

What's your end game strategy?

How has your strategy changed over time?

Chris Clothier · Answer

Using a strategy of buy & hold as a way to build wealth of even a supplemental income for retirement is not commiserate with having to be a hands on landlord.  There are also additional ways to build wealth - not simply collecting a couple of hundreds of dollars per month per property.  Other positives are capturing depreciation, seeing a property appreciate over time and principal debt reduction (if you use leverage) paid by a renter.  Even a small handful of properties (5-8) with an average rental income of $800 leads to $4k-$7k of passive gross income per month when they are paid off.  I have seen several families, including mine, structure trusts so that properties are able to be passed from generation to generation and those properties produce a substantial passive income each month.  I love active investments that provide very good and sometimes substantial quick returns, but I also firmly believe in developing a portfolio that will provide passive returns that grow over time.

Michael Lauther · Answer

Kama, I am a buy and hold landlord because hard money lending has proven to be a loss. Hard money is hard for a reason and one needs to be very aggressive to make it work. wholesaling is a term that is used loosely today. Truly finding  properties that can be purchased and resold to investors is a skill and possibly an art. Many wholesalers do not have the knowledge of their target area that is necessary and do not bring value added because they are getting the properties in the same way that most buy and hold investors already have access to. I find properties in a specific area that I have taken the time to be familiar with and  network in my area and only buy at a discount that meets or exceeds the 2% - 50% guide. i have built a team to help me rehab and manage these properties and with a lot of effort have been able to attain a 20% cash on cash return. The key to this return is to buy distressed property and complete  a intelligent rehab. If the property meets the 2% 50% rule this alone would return 12% cash on cash (no leverage) Doing the right rehab and buying right could increase that return to 20 %  a year over the next 10 years This will have doubled your money in 5 years and again by the time  expenses start to eat into your return.That said each of the properties I own could be sold for a profit and still meet this guideline. I am considering setting up a marketing strategy to sell these properties or take on partners to expand my reach. But as long as the market is still going down or flat I am content to hold on the properties that meet my criteria.

Bryan Hancock · Answer

Many sell the houses and carry back paper.  There is a whole different set of problems with that end scenario.  Nothing is without risk or effort.

Wealthy folks also let their money work for them instead of the other way around.  Choosing a good private equity fund or manager of projects is a good end game for these folks.  Many spread their bets across funds or managers to hedge risk as well.

There are also other asset classes.  You can invest in literally thousands of other businesses or securities.

Rich Weese · Answer

The two disadvantages that Will listed are very significant. In my opinion, there are the only two reasons you buy real estate! The opportunity of having appreciation which leads to a free and clear property and the ability to depreciate as you travel towards that goal.

Carrying back paper on sales will never compare with buying and holding real estate. Your paper is constantly going down in value and becoming worth less while you're real estate has an opportunity of going up in value and also eventually being free and clear.

Kama-I'm not sure exactly what you meant about your father avoiding one big tax hit by selling the home by owner. Maybe you are talking about selling it on an installment sale so the gain is stretched out over a period of years. I would think the better situation would be to simply exchange the equity into a larger piece of property which would give him a new tax basis and some additional depreciation. This isn't as difficult to do as it might seem. I do expect the tax codes to get messed with again but it seems like they always offer the opportunity to find a way legally around most of them.

There is no way to know what the changes might be but as others have said, you really can only worry about the present and the things that are within your control now and face later things later.

I would be very careful about hard money lending. I tried that with another experienced bigger pocket member a couple years ago and approximately 50% of the loans went bad..... Rich

Rich Weese · Answer

Chris- I couldn't have said it better, so I won't try! Your process of investing will mirror mine in almost ALL characteristics. Rich

McKellar Newsom · Answer

If you do decide to do some hard money lending, call your state governing board to confirm the rates allowed.

Another issue with lending is that you are not in control of the payoff time unless you have pre-payment penalties.

If you decide to lend, make sure you feel comfortable foreclosing on a non-payer.

I personally prefer rentals to lending because I like to see my assets go up not down in value over time.

Kama Ward · Answer

@jeff- I actually like going to the dump, too. The guys are friendly, especially when it's just me and the little truck. I could get sick of it in the future though.

@Rich - 50% going bad sounds horrible! Duly noted.

I meant my father selling his house on installments- sorry for the wrong term there! My father is getting up there in years and just has one house left- He doesn't need the income, and is ready to be done with it. But he always likes (legally) avoiding taxes! Perhaps he could 1031, and we could partner somehow.

Overall, I get the picture- buy and hold is where it's at- advantages are just too great.  I'll put effort into learning to be a really good and profitable landlord.   Educated guess- every 3-4 rehabs equals enough $ for one decent free and clear sf rental for my market.

If I do decide to try hard money lending- I'll go through a reputable broker and start small.

Chris Martin · Answer

I believe an oversight on Rich's part, regarding "there are the only two reasons you buy real estate! The opportunity of having appreciation which leads to a free and clear property and the ability to depreciate as you travel towards that goal..." There is one other reason. Cash Flow. Lightly encumbered and (obviously) F&C properties can spit off a lot of free cash and much (or all) of it tax deferred in today's tax environment.

Jeff S. · Answer

It sounds like you have time to devote to this. For me the actual buying is the biggest fun (rush) and there are many avenues to take from there.

Going to the dump is kind of fun. I like renting a moving van then just hosing it out so I don't have to use my own vehicle. It is amazing what you can pull out of a basement. Those mattresses are the biggest pain though.

Kama Ward · Answer

Of course I think passive income is great, but I enjoy being active in real estate. I guess my original post may have been unclear. I'm not looking to do nothing and make money! Ha! Right now I like (what I perceive to be) the greater risk and effort of rehabbing rather than owning rentals.  That's why I thought hard money lending (or something else) might be a good next step instead of leasing sfrs. Risk, change, tens to hundreds of thousands at stake, always a new deal to evaluate. But I would be less tied to an exact location and no more trips to the dump. (i know i don't have to go to the dump now- just using a dirty example of hands on).

Is there any end game besides buy and hold?

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