Exercise Flexibility With Buy & Hold Investment Properties
By JD Esajian on August 18, 2014
There are schools of thought shared by certain investors that are difficult to change. One of these is in regards to seeing a buy-and-hold property all the way through to ownership. These investors own rental property with the goal of paying off any mortgage until they own the property outright. Regardless of any changes in the market, they will continue to pay every month with the sole goal of using the property for a retirement vehicle. While this is a good goal and a viable plan, there are times you may need to be somewhat flexible in your approach.
Owning a property free and clear gives you the best chance to maximize the properties revenue. Getting to that point will take many years, depending on the type of financing you have on the property. Imagine if you owned a property in 2006 and you had ten years left on your mortgage. Property values peaked during that time. If you were to have sold it in that period, you probably could have sold it for 10-20% more than you paid for it. Having a big picture and long term property goal can keep your business structured, but there are times when you need to be flexible and consider all your options.
Is your goal for the property to sell for the highest net profit or to have 100% cash flow coming in every month? If you are looking for the highest profit, you should always keep an eye on the market and see if there is an opportunity to get top dollar. By selling in 2006 or at the top of the market, your bottom line would have been more even with having a balance on the mortgage. The mistake that many investors and homeowners make is thinking that values will always go up. As we have seen in the real estate market, that is not always the case. The market may go up, but it also may take a dip. By waiting until you have zero balance, you may be missing a prime time to sell.
Another issue with waiting until your home is free and clear is that this process takes years to get to. During that time, your home will become outdated and lose some of its value. An older house will slowly become less appealing, meaning you will not get top market value unless you spend money to update it. You also need to worry about tenants causing damage or not paying their rent during this time. Tenants, like buyers, want to live in updated properties that have a modern feel to them. Every year that your property commands less, rent will end up indirectly taking money out of your pocket. At this point, you can either spend money to have the property updated or ride it out for as long as you can. You can do this all the way until you own the house outright and consider selling, but even then you need to do some updates.
Older properties also call for higher operating expenses, increased repair costs and difficulty in making the property functional. All of these costs should be deducted from your bottom line when it comes time to sell. You may think you are increasing your cash flow by not having a mortgage, but you may be opening the door to increased vacancy. Like most things in life, there is usually a small window to make decisions. That window in the real estate world may have been last decade when home prices were at an all-time high. Savvy investors that capitalized on the market used their profits to buy other properties and increased their portfolio that way. Those investors who insisted on sticking with their plan may be bemoaning the fact that their value has dropped significantly since that time and may take years to get back to that point. It also may never get back to that point, meaning their small window has now closed.
In addition to opportunity lost, there is something to be said about being flexible when it comes to making big decisions in your business. These decisions are never easy, but they are much easier if you have an open mind going into them. There is nothing wrong with having an end goal, but this should be used more as a guide than an iron clad plan. On every rehab, sale and property you own, there will be monkey wrenches thrown into your plans. How you can adjust on the fly will determine how successful and profitable your investing business will be. Deciding to sell at the right time is not an easy choice and can leave you second guessing yourself for years. If you put everything on the table and don’t rule any option out, you will have a clear mind to make the best decisions.
How you view your rental property can often change from lease to lease and year to year. Owning a property free and clear gives you a multitude of options, but if you missed your selling window it may steer you into renting for the foreseeable future even if you own the property outright. By looking at all of your options and keeping an open mind, it allows you to take advantage of more profitable opportunities.