One of the best ways to accumulate long term wealth in real estate is through buy and hold investments. The idea that somebody can pay down your mortgage for you, all while growing equity, is a great thought. That said, it doesn’t mean that everyone can do it. There is a lot that goes into investing in buy and hold properties. Finding a good property takes the right price point, good tenants and maintenance. All of these areas can be very time consuming and draining, but if you can find the right property, it can have a huge reward.
With buy and hold properties, the purchase price and location are the most important factors. The same concept can be applied to any property, but location with a rental property truly is the most important thing. Your cash flow is directly correlated to rental demand, which is directly based on the location and amenities of the property. You can find a great property to live in, but if the rental demand is low, it is not a great rental candidate. Conversely, you can have an average property, but in a great location you can demand higher rents. Purchase price is always important, but not as important with rental properties. If your goal is to hold onto the property for years, your current equity situation is not as critical as the location. Before you buy any long term property, you need to know that your location is in demand and will likely stay that way for the foreseeable future.
You can make the numbers work in your favor on any deal if you really want to. With long term holds, it is important to know and acknowledge all the numbers. At first glance, a property may appear to have strong cash flow and upside, but numbers can be deceiving. You should fall in love with the numbers and not the physical property when it comes to long term holds. If you fudge the numbers or have unrealistic expectations, you are only hurting yourself. Be as realistic with everything in order to determine exactly what kind of property you have. If you overestimate the expenses and underestimate rents received (and the numbers still look good), you know you have a solid long term investment.
Buy and hold properties are different from rehabs, but there is still a certain level of improvements that must be made. You may think that you can provide minimal updates and still get top dollar rents, but this is often not the case. You need to know your area and what else is on the rental market, but if you have an average property you will probably have average rents. Any work you do should be in line with your area, but on almost every property you will need to do something. These upgrades have to be accounted for and budgeted.
Regardless if you have one single-family rental or a large portfolio, you need someone to manage the property. Managing can be as easy as fixing a clogged toilet once every few months, or as complex as dealing with tenants on a regular basis. If you opt to hire a property manager, it will have an impact on your bottom line. The average property manager will charge 8% of the rents received. If cash flow is tight, you can opt to take care of the property yourself. This means that you need to make yourself available for all of the many issues that tenants have. You also need to have people you can call to handle everything from minor issues to a collapsed roof. What you can’t do is be unprepared when issues happen or ignore them when they come. As a landlord, you are only as good as the tenants you bring in. Once you start neglecting them, you run the risk of them not paying their rent on time or even at all.
The final piece in owning property long term is acknowledging that they will need work at some point in the future. Even if you put work in right after you buy, it doesn’t mean you won’t have to spend more down the road. Dishwashers stop working, washing machines overflow, furnaces only last so long and fireplaces need seasonal maintenance. If you own any property, you will spend money on it throughout the year to keep it running properly. The same should be the case with your rental properties. If you want to get the most out of it, you need to do everything you can to preserve it. This means spending money sometimes before you need to and definitely when issues come up. You need to have a reserve fund in place to deal with these items as soon as they appear. If not, you will cost yourself a lot more down the road.
Owning long term real estate can provide tremendous wealth, but it won’t happen without some due diligence and work on your end. There is a lot more that means the eye when you own a rental property. Before you buy, make sure you know exactly what you are getting into.
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