Real Estate Investing: Perfecting the Buy-and-Hold Strategy
In the first post of the series, we learned about key factors to consider when investing in residential real estate. Now lets take it a step further and learn how to invest strategically in order to achieve the best (and most profitable) outcomes.
Matthew Martinez, president of Beacon Hill Property Group in Miami, now invests exclusively in commercial real estate, including residential multifamily, but he cut his teeth buying three-family homes in the Boston area. He had no experience. Like most newbies, he didn’t know what he didn’t know.
“Ignorance is bliss,” he said. “I didn’t realize that real estate investing had so many parts. Sometimes you need to get into it just for the experience.”
For Martinez, who has written three well-received books on real estate investing, including “How to Make Money in Real Estate in the New Economy,” it’s important to get in the game. What you learn during your first experiences will make the next few transactions easier, and hopefully, more profitable.
“Real estate is definitely a place where you can build net worth and build a passive income stream,” he said.
Fortunately, he was able to tap the brain of a long-term investor in local residential properties he knew if he ran into trouble.
Martinez said that buy-and-hold investors should not try to time the market. They can’t depend on homes rising in value. Instead, predicate deals on whether the income stream from rents will be greater than the expenses of owning the property. If this “cap rate” (net income divided by expenses) is positive, then you have a chance of making profits the entire time you own the home. If you’re lucky, it will also appreciate in value by the time you sell, increasing your total profits.
Before buying a property, Martinez closely examines both sides of the cap rate equation to see if each could be improved upon. If he calculates that he could increase his top line by, for example, fixing up a place so that it would command a higher rent, that would increase his cap rate. Or maybe he can decrease his divisor by, say, installing an energy efficient HVAC system. Then, again, his cap rate would go up.
To limit her costs, Danielle Moy, a Coldwell Banker Residential Brokerage agent in suburban Chicago who buys with other investors and on her own, often concentrates on the condo market. Condos usually have fewer unexpected expenses. Repairing burst water pipes, replacing a furnace, or dealing with other expensive mechanical problems — all costs borne by the owners of single-family homes that can result in a big hit on an investor’s profits — are handled by condo associations.
Even though she has to pay association dues, which cuts into her income stream, the stability of this expense makes it easier to accurately figure out her expenses. Too, it makes managing the properties much easier; the association handles most of the emergencies that arise.
When starting out as a buy-and-hold investor of private homes, it’s good to manage the properties yourself, according to Martinez.
“You’ll understand better how to add value,” he said.
You’ll be in a position to know, for example, what improvements are likely to result in the biggest return on your investment. And once investors grow their portfolios and need to hire property managers, they’ll be better at supervising those operations as well.
Moy keeps her expenses low by working hard at prospecting for bargains. She’s always on the look out for homes that haven’t hit the market yet.
“When I go to estate sales, for instance, if the owners are there I talk to them and ask if they’re interested in selling the properties,” she said.
Help can be hard to come by
Moy also maintains close relations with contractors and handymen. That’s vital. Investors need trusted contractors so repair costs don’t spiral out of control. They also need to have the work done quickly so the home can start generating rental income. It can’t sit idle for a few months while the contractor disappears. The taxes, utilities, insurance, and other monthly costs add up too quickly.
“You have to have a reliable handyman.” said Moy. “Otherwise, you can spend a ton of money.”
That’s buy and hold in a nutshell: Find a good buy, maximize your rents, and control your expenses. But it’s not easy to do it successfully. Like any other business, it’s complicated and many investors fail because they’re too casual or not hands-on enough to make it work.
“They’re are always opportunities out there, but you have to be committed to making a business out of it,” said Martinez.