AS AN INVESTOR WHICH THEORY WOULD YOU SELECT?

[Carlos M.]

Hell Everyone,

I hope all is well and everyone is making progress in all your real estate goals.

The reason why I am writing this post is because a good friend of mine and I have been debating two schools of thoughts (SOTs) regarding "buy and hold" properties and I decided to see what everyone on BP thinks.

Before I go into the scenario I want to state - The schools of thoughts are based largely other traditional theories and some generalizations.

Here is some background on the Investor before we move forward with the SOTs. The Investor is someone with ok real estate experience who works a fulltime job and has some liquid capital but by no means is well off or has access to tons of cash. The investor is looking to utilize real estate as a vehicle for a lifestyle change (become a real estate investor full time and quit day job.)

Ok so now the SOTs .... thun thun thunnnnnnnnn ......

SCHOOL OF THOUGHT #1

The Investor should target duplexes and triplexes in low end neighborhoods.

THE PROS:

This market has low barriers to entry and lots of opportunity due to low investor desirability within the market. Additionally because property value is low in this market, cash flow profit margins tend to be higher the normal and can be utilized to help the investor achieve the life style change faster. Also payments can be hedged/secured by way of Section-8 programs.

THE CONS:

Tenant quality is not as good, so on the property management front the investor could expect to encounter more problems with property management, repairs, and cash collections. Secondly, low end markets do not appreciate as well. Properties in the low end market can even depreciate over the years. Properties tend to be a bit more run down so initial upfront costs to make the property rent ready are typically higher.

SCHOOL OF THOUGHT #2

The investor should target Single Family or Multi-Family properties in midgrade neighborhoods that have future positive outlook.

THE PROS:

Quality of tenants tends to be better so property management issues and cash collection should occur less frequently. Desirability is higher thus demand is stronger which increases rent prices overtime. Additionally aside from rent roll, value can be achieved on the investment by way of appreciation. Properties values for midgrade market properties tend to increase overtime. So for an investor who is doing buy and holds, the possibility for long term increases in rental cash flow and home values tend to be higher.

THE CONS:

The negatives in this scenario are higher barriers to entry, less opportunity to frequently find deals and more investor competition. Additionally, profit margins are not as high initially because of the higher purchase price.

So there you have it, please add your thoughts based on what “school of thought” you would select or recommend ... if you would like to add another SCHOOL OF THOUGHT please feel free!

Thanks for all your feedback Everyone!
Carlos