Having been in real estate investing for some 28 years I’ve met many investors who swear by one method or another. Those who have been the most successful long term typically have built their long term wealth through buy/hold real estate but many have used shorter term investments to boost their yields and to help them build a portfolio early on that cash flows well. I’ll provide some thoughts on this topic in the hope of encouraging additional discussion, and I beg patience as my thoughts may be somewhat scattered as I leisurely let them fly.
It really depends on WHY you’re in real estate investing to begin with. Unfortunately, many never ask themselves this question and just dive into real estate investing with the goal of getting wealthy. Based on my observations, most who dive in with simply the money aspect in mind fail to make it long term. Real estate investing can be tricky, is full of unknowns, involves what is to most a lot of money, and should be taken seriously. To truly realize powerful financial outcomes requires a certain persistence and having a long term vision and goal that you’re reaching for will help you in staying with it long enough to learn what you need to learn to become truly successful at it long term. So, knowing why you’re in it is the absolute first key, and that goal will affect your decision as to what the best approach you should take is. And throw out the “get rich quick” thought. Yes, you can get lucky or get a good deal early on and make a quick $100,000 but whereas that might seem like a lot of money, that amount can be taken away in bad deals so fast it’ll make your head swim if you let it go to your head as I have seen it happen to so many who thought their first few good deals were all there is. Everyone that invests in real estate for the long haul is going to have a few that don’t go right too, and that’s where the men are separated from the boys (and women from the girls).
Another important thing to consider is that you must gradually learn – and I mean really learn, by doing, not just by reading or attending seminars. And that takes time. So pick one type of investing to begin with to start learning the ropes and then grow from there.
If your main driving goal is to eventually have a strong passive income, then one of your main long term goals may be to build a good portfolio of quality rental property in up and coming areas, or areas that are stable and with good demand. You may gradually upsize your inventory as you grow, and you can decide whether you want residential, commercial, or a combination of both – these decisions are again impacted by WHY you’re really looking to invest in real estate. The buy/hold game is not something you should enter into lightly, and it is very important to have enough reserves to account for the maintenance and other issues that arise. I suggest when just entering that you manage a property yourself, but do so with a fee to cover management built into your proforma so that as you grow you can delegate this function to someone else while you focus on the higher leverage activities necessary to help you grow your long term wealth.
Many beginners jump into the buy/hold game too quickly and they often get wiped out as a result. The rule of thumb I use is that the new investor should have a minimum of six months living expenses on hand personally in liquid assets, and they should have at least $3000 of liquid cash on reserve in their company for each $100,000 investment they make. This is a bare minimum too, and assumes the property they’re investing in is in really good condition – if it is not the money needs to built into the financing up front to get it in good condition or they need to have the money to fix it up and THEN have the minimum reserve left. You could ask 100 experienced investors and all would give you a different minimum reserves number, and it may depend on where you’re at and what type of property, but the key point is the investor MUST have some reserves or availability of getting reserves quickly (like in 24 hours) if an issue were to arise. You would not believe how many I’ve seen who didn’t listen to this and paid the price.
Over the years I have built a solid portfolio of long term rentals, but I still invest in short term investments as well. My reasons for this are varied, and by sharing a few of these reasons perhaps it will provide some food for thought. I’ll focus on residential although I do take advantage of short term commercial opps as they arise.
My company (I do everything through corporations and LLCs, depending on the type of investment, etc) renovates numerous single family homes each year. Some reasons are: (a) my life mission is to help others; we take older property and rebuild it to current standards, with improved floorplans, modern insulation, systems, etc. and then we work with a good agent and credit counselor to help people who never dreamed they could own a home realize their dream. Many many tears of joy have been shed on my shoulder and it is a positively rewarding experience. (b) we renovate homes to bring neighborhoods back. Often we own multi-family property (we invest in multi-family for our long term portfolio) in the same neighborhoods and as they say all boats rise with the rising tide (as the neighborhood improves through a higher homeowner / renter ratio rents typically increase until they reach full market levels and that brings our property values up as well) (c) we keep a decent inventory of single family houses in our inventory (approx 100 at any given time) to balance our portfolio mix. Single family homes are easier to sell and tend to have slightly higher appreciation numbers than multi-family in the markets where we invest. We end up selling most of our single families in 5 to 10 years, often to good tenants, and then we roll the profits into more investments. We buy single families from individual homeowners but more often than not we buy multiple properties at a time from tired investors or investors that got in over their head and are losing their shirts. Usually we end up rehabbing a good number of these, either minor or major rehab, and we sell some and keep some as a part of the aforementioned portfolio strategy.
The rehabbing of real estate, single family homes or multifamily or commercial, is something to be entered into carefully. The investor should find someone who has done it and learn from them, if possible, and if not should learn as much as possible by watching home improvement TV shows, buying materials from knowledgeable investors, reading books, etc. and should start with a light rehab (paint, carpet, new fixtures, etc) but not a full “gut” rehab. Ease into the game as you will learn lessons that can only be properly taught by getting a little dirty in the trenches.
Then there are the strategies you can use for generating quick hits of cash, which are often good for the new investor who needs to build a few reserves before really getting in the trenches. These include flips, typically by assigning one’s purchase contract and double closes where one takes title and at the same time resells the property. I’ve done hundreds of assignments of contract, dozens of double closes, and even two triple closes. All are valid strategies.
Regarding assignments of contract, there is one very very important point that must be understood by the investor. First, the investor is NOT really an investor in the typical sense and must understand this. The investor is NOT buying and selling real estate. The investor is agreeing to buy real estate, is obtaining certain rights which I believe are in most states considered personal property, not real property, and is then reselling those rights (and must make sure the contract entered into does not prohibit the resale thereof). He or she is NOT selling real estate but rather personal property – rights to buy real estate under certain terms. If the investor does not keep this in mind and becomes a middle man between the original seller and the end buyer, then the investor is now engaging in what is known as “agency” and must be, in all states I am aware of in the US, licensed by the state to do so, or the investor may be breaking the law. Assignments are a good way, IF PROPERLY ENGAGED IN, to make some small quick hits, but they are NOT going to make you wealthy unless you really work it and it’s still a linear income stream and includes little or no leverage (leverage being the underlying fundamental principle behind most wealth creation).
Double closes are good when you may want a larger markup than would be viewed favorably by the end buyer on assignment. But they must be practiced with FULL DISCLOSURE. Too many reasons to go into here as to why. They are a little tricky and must be handled with care and the attorney closing the deal (or title company in certain states) must be familiar with them. Here the investor is an investor but for only a short time.
Taxes are an important part of investing and one must always weigh the benefits of cashing out and taking the tax hit versus rolling profits forward thru 1031 exchanges. Too complex to go into but once you really get in the game and start building your assets, you’ll need to learn the ropes about this.
I follow a strategy blending long term buy/hold with short term investments, even a few assignments and immediate flips (double closes) from time to time. These boost the growth rate of my long term portfolio, allow me to let all my rents go back to retiring debt on the long term portfolio (to a point when I “roll equity up” to keep a certain amount of leverage in place) and allow me to enjoy some of the profits along the way.
I hope this has been insightful and that it generates more discussion. Best of luck in your investing.