Buying properties to hold for investment purposes may not be as straightforward as you think. People often think that a rental property is forever – but many factors go into how long an investor holds an income-producing property. Market conditions – including sales and rental performance, financing and the goals and objectives of the individual investor all play an important part.
How Long to Hold that Rental Property?
If you were to take a poll, most would probably believe buy and hold properties are meant to be owned forever, passing on only in death. And for most investors who kind of dabble in real estate – purchasing a property here and there, this may be true.
However, professional investors are aware that not every buy and hold property is forever…
There are some properties that indeed will stick with you forever, but there are others you may only own for a few months or a few years.
Let’s take a look at the various buy and hold strategies employed by real estate investors and when to use each once.
Short and Mid-Term Investment Property Strategies
Seller Financed and Subject-To Rentals
Seller financing is a fairly common strategy employed by investors to acquire rentals. Many times you will stumble across a homeowner who doesn’t really need the lump sum a cash sale will bring but is ready and willing to get rid of an unwanted property. You can often negotiate with these sellers to take monthly payments now while setting a firm sales date and price in the future be it 3, 5 or 10 years down the road.
At this future date, you can either refinance the property into a permanent loan –continuing to own it, or you can sell it. Selling the property is especially attractive if appreciation been in your favor over time as you negotiated a sales price years in advance that is well below current market prices allowing you to pocket the difference at closing.
Appreciation paired with seller or subject-to financing is a smart and viableway to build a rental portfolio.
Nominal or Negative Cash Flowing Properties
Not every rental will cash flow, in fact, some investors buy in areas that may be experiencing awesome appreciation with the understanding they will LOSE money every month in rent. This loss, however, can be offset by the sale of the property at a future date, while the tax benefits of owning the rental property are maximized during its ownership.
Losing money on a property – at least on paper – monthly is never a good position to be in and knowing when to sell is part art, part skill and a lot of luck. You’re effectively trying to predict the market peak. And ultimately, of course, this type of buy and hold investment is short term in nature… investors will have different lengths of times they can support losing cash every month before selling.
At the end of the day, any property that is acquired by funds – including private or hard money funding and subject-tos – that have an expiration date will fall into a short or mid-term strategy. At this point, these rentals will either need to be sold or refinanced.
Long Term Investment Property Strategies
Most investors look at the business as marathon rather than a sprint – and long-term investing requires long-term financing. As you now know, institutional lending is the primary means by which many rentals are secured. Knowing your monthly payment for the next 30 years, regardless of inflation, fluctuating interest rates, and rising rents is a beautiful thing.
Stepping outside of traditional loans for a second, investors need to understand that once you begin to acquire multiple rentals, being able to present them as stable investments and profitable investments is key in being able to refinance into permanent loans if and when those notes become due.
Keeping excellent records of rents paid, filing taxes annually, and generally treating your business like a business from day one are how the pros build rental empires long after securing traditional financing has become all but impossible. Also, using a lending resource like CIX.com can get you the funds for the property today while setting you up for the exit, or conversion to permanent loan for tomorrow.
Mashadvisor.com offers up some key advantages to long term hold strategies:
Another long-term benefit of buy and hold real estate is equity. Equity, like appreciation, relates to the value of aninvestment property. Unlike appreciation, however, equity is the difference between the market value of a property and the amount of the mortgage needed to be repaid. A straightforward way of understanding this is through a simple equation: equity = asset (property) – liabilities (mortgage). Equity is most important when the property is being sold. While it often isn’t a prime reason for investing inbuy and hold real estate, equity is a nice added bonus that comes with the strategy.
Become a Master of Buy and Hold Strategies
Getting creative and knowing how and when to use the various strategies available to you as an investor is what separates the pros from the rest. Not every deal will fall into the neat box of being a long term investment bought using an FHA loan from day one. Sometimes you will have to employ a short term strategy while nurturing it to your long-term portfolio.
Before having an understanding that it’s ok to own a property that doesn’t cash flow, you may have skipped over a great appreciation play in a hot market. Now you know to be on the lookout for deals that may not allow for monthly profits but are experiencing double digit appreciation annually. This is risky business – but there are times when speculation can pay off. Caution is key in these scenarios.
As with the different types of investing profiles, be it, wholesaler, fix and flipper, or landlord – there will be some overlap with the use of these buy and hold strategies for the professional. Buying a portfolio of investment real estate is about figuring out how to fit properties into the appropriate box that works for that particular deal on that particular day.
No two deals are alike, but once you understand the various methods available to both acquire and hold properties you’ll quickly be able to figure out which is the best route for any given deal. This knowledge is KEY to lasting as an investor and building a rental portfolio that can sustain you and your family for the rest of your life…
