BUY AND HOLD REAL ESTATE INVESTMENT

Maximizing Income Property Opportunities

Some investors make acquisitions with the expressed goal of turning them into buy and hold income properties. Others make the decision after they make the purchase and the numbers or market justify holding versus flipping. A few others may feel they have little choice after renovating or flipping plans are disrupted.

So when is it time to hold?

When the numbers make sense.

Strategic buy and hold real estate investors always “make their money when they buy.” That can mean positive cash flow from rental income or buying with a significant equity cushion. Stay far away from negative cash flow, or overpaying and solely gambling on appreciation for profit. Buy and hold properties must support themselves from the income they can generate. Gambling in the real estate market has bankrupted millions of people. It is not a gamble when you acquire undervalued assets with built-in equity.

Thinking about holding onto a property for a while? How can you improve the numbers? What critical factors do you need to consider and ultimately master to make “buy and hold” real estate profitable?

There are three factors most investors will want to check when deciding if it is time to hold:

1.Real net operating income (NOI)—discussed in more detail in Chapter 22

2.Potential for consistent, long-term cash flow

3.Potential for positive appreciation

What if the numbers don’t work?

Refinancing and Optimizing Financial Leverage

After the rehab work is done, there should be even more equity in the property. Once rented, you also have rental income to help qualify for a new loan. If the property was financed with shorter-term hard or private money, this is a great time to refinance to lock in lower rate, and lower payment, long-term financing.

Sometimes the current numbers just won’t work for buying and holding a property. Perhaps you used higher rate, asset-based lending because the condition of the property couldn’t qualify for other loans. Or maybe it was because of the need for speed. Perhaps the payments can’t be supported by the property and its rental income. Maybe there’s a balloon payment in the next thirty-six months. What do you do?

For example, refinancing a $250,000 loan with a 7 percent interest rate and thirty-year amortization payments to a 4 percent interest rate would drop your debt service from $1,663.26 per month to just $1,193.54. That’s a substantial extra spread for creating real positive cash flow each month.

Another option is taking out a line of credit. This could be used to pay off any existing debt, provide access to additional capital for making future acquisitions, and serve as a security cushion for unexpected expenses and maintenance. Credit can also help avoid leaving equity captive in your properties when it should be working hard to help you achieve your financial goals.

For some scenarios, lenders may even offer mini-perms, or “onetime close” construction-to-permanent loans. These loans automatically roll over into more attractive loans after the rehab work is done or a property proves its income potential. The big benefit: It’s all done with one closing and one set of closing costs. Lenders offer these types of loans because they are based on the value of the property after it’s been improved and increased in value.

What’s the Best Leasing Strategy?

The numbers can also be improved by finding the optimal leasing strategy for your property.

There is certainly more than one option, including:

1.Annual and long-term leases

2.Seasonal vacation rentals

3.Airbnb-style short-term rentals

4.Extended stay rentals (i.e., not weekly, but not annual)

5.Corporate rentals

The last four of these options can offer substantially higher monthly rents than your neighbors are getting on annual leases. While there can be cons as well as pros for these strategies, they are worth exploring in order to maximize income. There are more turnovers, but the cost can be covered by the increased rental rate.

Intelligent Tenant Screening

Ensuring consistent cash flow and maximizing NOI relies on the landlord’s tenant screening and selection process. Rental turnovers are costly. Thorough screening can keep turnovers at a minimum.

Tenant screening and selection is very important; in fact, it can be make-or-break for the landlord. But it is even more important for real estate investors to find balance in this process. The key is understanding your local rental market conditions, available tenant pool, and the high cost of vacancies.

Many newbie landlords get hung up on an extreme vetting process or they don’t do it at all. Both are counterproductive. In certain top-end markets, investors may be able to demand top-notch credit scores and substantial deposits. In other markets, they may not be able to find tenants with 600+ credit scores, or who are willing to pay application fees. In some cases it may be a struggle to collect several months’ security deposit up front or to demand clean background checks, even if they are legal in your area. At the other extreme, you find landlords who don’t ask enough questions or do enough screening, and the results can be disastrous.

Vacancies cost money every day. Vacant properties can bring extra risk to the asset too, such as vandalism and squatters. If you are not getting applicants or filing the property on the terms you are requesting, back up and regroup—adjust your marketing and terms.

Property Maintenance and Management

Property maintenance and daily management often has the most significant impact on real net profit or loss when it comes to income real estate. The biggest choice here is whether to take the DIY approach and self-manage, or to outsource and hire a professional third-party property management firm.

In many cases, outsourcing this part of the business makes sense. Using a third-party property management firm frees up investors to keep sourcing new acquisitions and focus on building their business. If you decide to self-manage, be sure to leave room in your cash flow for hiring a manager, as one day you may not want or be able to manage it anymore.

Buy and hold real estate investments make sense for a lot of investors. When house flipping no longer has appeal, building a portfolio of cash-flowing properties is a great way to go. There’s passive income, tax advantages, and the potential for appreciation.

TAKEAWAYS

Do you see buy and hold investing in your future? If so, how can you transition from house flipping to buy and hold? What do you need to make it happen?

Start mapping out a plan for the short and the long term. This will help you recognize and capitalize on opportunities as they arise.