Profiting from real estate for today or as part of a retirement strategy, is a common goal for many investors.
The flexibility of real estate investing allows it to be pursued as a full time career path, a part-time business and or just a hobby. No matter how much time you dedicate to building your portfolio, there are some tactics you can implement to maximize the return you receive from your buy and hold investments.
We’re huge proponents of creating your real estate investing business plan, even if you’ve already started! In previous articles, we’ve discussed where to find a gold mine for quality affordable real estate, we also focused on breaking down real estate investment income.
Buy and hold real estate typically infers that the property owner is also a landlord. Regardless of whether you choose to manage the property yourself or use a property manager, investing should be strategic. Purposeful investing leads to predicable returns. After all, a big motivation for investing in real estate is the greater level of control you have over the investment and how it performs.
Now, let’s take a look at a few key investment strategies and criteria you can employ in your long-term real estate portfolio.
Using a Community or Neighborhood Plan
Utilizing a community plan allows you capitalize on the forecasted growth and expectations for development. A community plan is a comprehensive document produced by a city that outlines city zoning and building requirements for that location. Because the community or neighborhood plan is focused on the entire economic and social development of an area, it applies to both residential and commercial property.
The document details what will pass zoning and code approvals for any development activity. If you have a vacant lot that you would like to infill with a new build, the plan will give you the requirements to build on it.
When it comes to purchasing existing property, the plan also outlines improvement requirements, perspective infrastructure improvements and the number of vacant parcels in the community.
Basically, the community plan document details a community’s needs and wants for development.
You can use the community’s goals to craft a long-term strategy around that commitment. As an investor, this strategy thrives on being able to forecast where a community is going in order to provide fixed rental income. A clever way to maximize returns is to profit from speculative appreciation from a growth in property values. Just remember that appreciation is variable and occurs over the long term holding of the property.
Buy and Hold Cash Flow
Cash flow is the life blood of fixed long term passive income. Ultimately, the buy and hold strategy is really about cash flow. This is the fixed income the investor makes after expenses like mortgage, taxes and other improvements. To determine cash flow, estimate the gross rental income and subtract expenses and vacancy rates. Estimated gross income may be found by looking for other available rentals in the area. The average of what they are asking for is a reasonable estimate of market rent. Multiple the rent by 12 months to get the annual gross income from the property. We also suggest using 10% vacancy.
Time Horizon for Payback
Buying with Cash
Purchasing a property with cash leads to more up-front costs but because there is no debt, the property will be able to pay back your cash rapidly. In the end, an investor ends up with house that is free and clear with none of their own money invested anymore. It’s a free investment!
There are a couple of ways to determine your investment payback. As we said before, you have to recognize that real estate is a long term play.
With that in mind, the Gross Rent Multiple (GRM) is an effective way to calculate how long it takes for the rents to repay in investment. It takes annual gross rents and divides by the amount of cash you have invested (purchase price). Maximizing payback period (making it as short as possible) is preferred by aiming for a payback period of 5 or less. In reality that is very fast to receive your cash back.
How long would it take your bank to pay you in dividends the same amount as you have invested?
This is the ultimate path to financial freedom, an investor using this strategy has secured their own financial future after the payback period is complete.
Buying with using a Mortgage
To buy investment property using a mortgage, the key is to focus on the financial product: a low, fixed interest rate allows the investor to lock in gains. We consider this strategy financial arbitrage to build wealth. The loan is secured by the real estate and is denominated in today’s dollars. This is important because the loan is repaid in weaker dollars because of the time-value of money. This method allows the investor to leverage inflation and the ever-weakening of fiat currency for their advantage. This means that the actual cash outlay to keep the property feels less expensive over time because as time goes on the dollar becomes weaker and weaker.
Real estate is an important asset class to have your portfolio because it allows the investor to have more control over the investment and use some of the tactics outlined above to achieve higher than average returns on their investment. Buy and hold is a patience game and should be thought of with a long term perspective.
Buy and hold investment property offers a secure form of financial freedom and income well above what one can reasonably expect from savings and 401k. By the time a person makes it to retirement they should have free and clear products (property) that offer stable, consistent cash flow. When an investor buys a property to hold, is careful to not over improve up front, and makes incremental improvements over a long term time frame it is simple for them to create a bright financial future for themselves and their family.