Buy & Hold Investing

Why Invest in Real Estate?

Being an owner/investor of residential real estate has been increasing in popularity ever since the get-rich TV gurus to today's house flipping reality TV shows. There are many good reasons why this is happening.

1. Real estate offers more predictable returns than investing in stocks and bonds.

2. Real estate offers a hedge against inflation because rental prices and the property's cash flow often rise by the rate of inflation.

3. One of the top methods to diversify a real estate portfolio is to buy and hold rental properties for the long haul.

The Advantages and Disadvantages of Holding

It is a well-known fact that most "old money" wealth in the U.S. was gained by acquiring land. With that being said, owning real estate for the long term brings an assortment of management, maintenance and legal concerns that stock market investors don't ever have to worry about.

This is one reason why lots of real estate investors, particularly novice rental property owners, are poorly-prepared to cope with the obligations of managing rental property. The process can be quite stressful for some because you have to screen and lease it out to prospective tenants, repair or service anything in the units, but a successful property manager understands the needs of both the owner and tenants.

With the management side of owning rental property taken care of by a licensed professional, your focus can now shift towards lowering costs and adding value to the property.

Financing: You can certainly use traditional financing like a conventional loan, FHA, low documentation, hard money, and even crowd sourcing money as well as possible seller carryback loans.

Let’s say for example, you bought a $4250,000 property for $350,000 and you used a hard money loan which typically has substantially higher interest rates than a conventional loan.

You may not be able to refinance out of that loan using the actual value for another six to twelve months due to traditional lender guidelines and waiting periods. So, you can use a hard money loan to get into the property and once six months is up, refinance the loan to a lower long-term rate.

If you are buying a duplex property, you can buy it as a primary residence with just 3.5% down using an FHA mortgage. You can live in one unit and rent out the other unit until you want to buy a different primary home. Investors beware of moving out too soon due to capital gains tax exclusion rules.

Increasing property value: If you want to get a really good buy and hold property, you want one that needs a little work. At a minimum, the flooring can be modernized, add walls trim if it is lacking, put on a fresh coat of paint, and upgrade the kitchens and bathrooms. Before putting in a final offer on the property, factor these costs into your budget. With a few simple and desirable upgrades, the property's rent may be raised another 25-30 percent.