Investors Opting For Buy& Hold Real Estate Approach
By JD Esajian on August 25, 2014
More and more investors are opting for the buy and hold real estate approach. Partially due to the high rental demand, there are more investors acting as landlords than ever before. Some of this population is comprised of homeowners finding too much value to not explore the rental market with their primary residence while some are inexperienced investors seeing how they like wearing the landlord hat. Regardless of how they get started, being a landlord is much more difficult than they imagined. Between finding new tenants, collecting rent and taking calls, being a new landlord can be a full time job. Before you enter the world of being a landlord, you have to know what you are getting into.
Having a tenant provide you with equity and monthly cash flow is an exciting proposition. There are few better things you can do to ensure long term wealth than acquiring real estate with the thought of hanging on to it for the long term. That being said, you can’t just buy any property and think the checks will just come every month. As the landlord, you have to run each property as its own little business. There are many areas which need to constantly be covered and updated. Things can be going great for six months, but turn in the blink of an eye. It is very difficult to have the property run on autopilot. If you want to get the most out of your property, you should know that it will be very much like having another job.
One cure for the amount of work that is needed is to enlist the services of a property manager. This can be a somewhat of an expensive proposition and not every property has enough cash flow to have this make sense. Before you look at any new prospective rental property, you should budget for a property manager. This is not to say that you have to use them but if all your time is devoted to one or two properties, it will be difficult to look for other deals. This is on top of any current full time work you may have as well. You may not make as much every month with a property manager, but they will handle all of the things you don’t or can’t physically do during the day. If not, you have to be prepared to make yourself available when calls come in and something needs to be done. If you really want to hang onto the property for the long term, you need to explore the option of hiring a property manager.
All it takes is one bad tenant to change your business. The first three years of tenants can be great, but if the fourth year is bad you may not own the property for a fifth. Not enough new landlords spend the necessary time in finding the right tenants. This means doing more than just posting an ad on craigslist and waiting for the phone to ring. What you do after the phone rings is what separates successful long term investors from those who have trouble along the way. Every interested tenant must go through the application process to ensure they are qualified for the property. Nothing you do will ever guarantee that you won’t have problems, but if you follow up with any references and do a little leg work on your own you may be able to pick out the tenants that will be a problem. You can have the best property in the best area, but if you don’t have good tenants you will eventually run into trouble.
The same is the case regarding the physical condition of your property. Even the best houses will have something unexpected come up along the way. Unless you are building the house from scratch and installing everything brand new you will always be on the clock regarding your appliances, roof and everything in the house. Even small jobs like fixing a clogged toilet or replacing a broken window will come at a cost and require immediate action. If you are spending any extra cash flow and don’t have reserves you are opening yourself up for trouble. You need to set aside money every month to this reserve fund regardless if you think you need it or not. The odds are you will in the next few months or at a minimum at some point in the future. If you have to take money from personal accounts or put the costs on credit it will restrict you from buying other properties, increase you liabilities and reduce your cash flow on your rental property.
Diving into the world of real estate as a landlord is as good an experience as you make it. It starts with finding good properties that offer enough room for you to take on a property manager if needed. From there you need to take the time to find the best tenants that offer you the best chance of paying their rent every month. You can also never have enough reserves in place because something will always come up, probably when you least want or expect it. Owning rental properties are great when things are going good but can quickly change when things are going bad. If you plan for the long haul and always think of the worst case you will increase your chances at having a successful long term rental property.