Fundamentals of Buy and Hold
Buying and holding real estate successfully requires a lot of very different tasks to be accomplished simultaneously or else it won’t work. The steps are 1) Acquisition, 2) Finance 3) Rehab 4) Management and 5) Maintenance
Acquisition: Some buy and hold investors can get a little lazy. Flipping forces one to be disciplined by immediately showing whether a deal was good or bad. With buy and hold, there is no sale and thereby no profit or loss to tell you how you did. Thereby, it’s easier to justify to oneself poorer deals.
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 any money out (or won’t be possible in the first place). Buy and hold investors should use the same aggressive marketing and negotiating tactics as flippers and not settle for anything less.
Finance: There are a variety of ways to finance buy and hold deals. The quality of these methods depend on the individual investor and their situation.
Some good ways include, 1) Save money from a job and use the extra to buy investment properties. 2) Flip some properties and use profits to hold others 3). Buy up to a fourplex with an FHA homeowner loan, live in one unit and rent out the others. 4) Subject to’s, seller financing and other creative financing. 5) Fully finance with loans from private individuals, pay around 9% interest and refinance with a bank after property has seasoned (usually about a year). 6) Partner with someone who has money.
Rehab: Always remember it will cost more and take longer than you expect, especially early on. Contractors and employees are notorious for overcharging, slacking or doing poor work. Hire slowly and fire quickly. The best contractors and employees generally come from referrals. 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 carefully. And don’t pay contractors the whole amount up front!
It’s also important to work hard at accurate budgeting (See J. Scott’s book for help on that). Always double check your budget against your results. This is important to make sure your buying criteria is right and that you are not under-financing these properties.
Management: The big choice is whether to hire a management company or do it on your own. 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, vet them thoroughly. 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 ground floor of a real estate business, and without it, everything will fall apart. Learn the law and talk to an attorney to make sure you are in line. And you must learn to have a thick skin. Tenants will walk all over you if you don’t.
Eventually, you will eventually need to hire someone for leasing, maintenance and bookkeeping. In the meantime, you will need to be able to do basic accounting yourself or obtaining bank financing will be all but impossible.
Maintenance: 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 on call for when they are needed.
If you use a management company, the maintenance and turnover is the most important thing to watch as overcharges will usually be there. If maintenance expenses get too high, demand an explanation. If their explanation doesn’t satisfy you or the situation doesn’t get better, switch management companies.
Buy and hold is the best way to get wealthy in my opinion, but it isn’t easy. While this is by no means a definitive list of how to do it, I hope it at least helps.
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