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Well, good morning and welcome, everyone.I am your host, James Orr, and this is another module in the Real Estate Investing Secrets course.Today, we're going to go over the secrets of buy and hold real estate investing.
And if you remember, when we went over the seven real estate investing strategies, we covered some of the information about buy and hold, but this is the deep dive into all the secondary categorizations for buy and hold and how it works.
So we're going to drill into that today.
So as I go into the different details of what the buy and hold real estate investing strategy is, and I kind of try to explain to you what's going on, realize that there are a ridiculous number of exceptions to everything I'm about to say.Sure.
When I go and explain to you about how we think about risk for buy and hold, or when we talk about accessibility or how we finance it or how we get in or out of the deal or whatever we're talking about with buy and hold realize that you could say, but James, what about.
this way, we do buy and hold, you know, when we do it this way, that risk isn't there.
Or when we do it this way, you know, we think about financing very different or when we do it this way, we can use self-directed retirement accounts or whatever we're talking about.And yes, there are lots of different exceptions.
If you do variations on the Bible, what I'm trying to cover is the most common and I'll, I'll sometimes talk about some of the exceptions, but I'm sure that there are a lot of ones where I'm like, yeah, we're not covering it that way.Yes.
You can do buy and hold like this.And yes, there are lots of exceptions that. How you do it or how you structure it or how you figure out the deal or how you think about the deal where it's not quite in line with what I've defined here.
And also I want to point out. In addition to there being exceptions about, you know, how you think about it and how I think about it and how I'm kind of defining it.
Um, sometimes I'll say something about a deal and you'll say, Hey, I don't actually think that's true.I think that it's different than that.
Just because you don't think there is a chance that X can happen, you know, certain types of risks, certain types of downsides or whatever it is, doesn't mean that it won't happen.
This is designed to be a starting point discussion to help you make better investing decisions on your own to better understand all of the different real estate investing options and strategies that are available to you.
What the pros and cons are for each one, how they different, how they fit into different types of strategies of what you're trying to accomplish and how all that works out.
Make sure you do your own research and understand fully all the nuance to what's going on when you're going to implement a particular strategy.And I'll try to help you understand that by giving you a kind of like a
preview of what the different battlefield look like for doing different types of strategies.But it's really going to be up to you to dig in and say, OK, I'm really going to go do this now.
How will this work out for me and my particular situation, my particular market, my particular set of skills and weaknesses and strengths and how that's all going to work out?OK, so buy and hold variations.
So the traditional buy and hold, you're buying a property, you're going to hold it forever.You're going to put tenants in there.You just kind of keep the property.You're going to cash flow it.
Sometimes you're going to put finance, sometimes you're going to pay cash.But
What the traditional one is, the most common version of buy and hold is you're going to have a down payment, usually going to be at least 15% because that's usually what the traditional financing are going to offer you.
And if you do 15% down, they're going to charge you private mortgage insurance if you do it that way. Or more commonly, you're going to put 20% down or 25% down to get a better interest rate.
And whenever you put more than 20% down, you will not have private mortgage insurance.As of right now, lenders can change that in the future, but that's been a rule for a long time.I would not expect them to change that.
Or in some rare cases, you're going to put more than 25% down.And in some even rarer cases, you might be buying properties all cash. So that's kind of how we think about traditional buy and hold.
With traditional buy and hold, a lot of times we're buying single family homes, condos, townhomes, those will get included as well.Duplexes, two units at a time, triplexes and fourplexes.So you could buy anything like that.
Most of the time, you know, you're going to be kind of in this, this main area of single family homes, do fourplexes.That is considered residential financing.If you go above four units.
like five units and above for like apartments and things like that, multifamily units, um, that turns into commercial financing.The type of finance you can get for commercial financing is very different than residential financing.
Most of the time, they're not going to be 30 year fixed rate financing.Um, most of the time they're going to have some type of balloon.A lot of times they're going to have some type of variable interest rate.
So realize that the financing changes, and we'll go over that in a ton of detail when we go over the financing particular module where we go into like all the different things about financing.
But realize that financing does change between single family homes, condos, townhomes, duplexes, triplexes, and fourplexes.That is one type of financing.And then multifamily, five units and above is completely different.It's considered commercial.
I'll also include in the buy and hold variations, short-term rentals, like vacation rentals, VRBO type stuff, and medium-term rentals.I think those get included in buy and hold, they're just variations on the same theme.
And I'll also throw in there kind of like these other business models, like doing like an assisted living business where you're buying a property and you're renting out the bedrooms to people that need assistance in their living, kind of like older people or people with some type of challenges where they need assistance in living there.
So that's another variation of buy and hold where you're doing this property and it's more like starting a niche business and including real estate in your kind of investment strategy.
So yeah, you're getting a property and yeah, you got to run this business of kind of putting people in there and providing additional services for them.But that's a variation of buy and hold in my opinion.
I'll also lump in their student rentals where you're buying a property and you're putting in, you know, one student per bedroom or two students per bedroom and you're kind of setting up the house, furnishing the house and doing that.
So it's like a, a kind of step beyond. a vacation rentals in some ways to do that or storage units.You know, I'll put in storage units as another variation of buying old.
So like this is all encompassing the traditional buy and hold kind of group of strategies when you're doing that.So that's what I'm talking about when I'm talking about today's thing.And if you're thinking about.
You know, we're in a market right now, as I'm recording this in March of 2024, we're in a market where real estate prices have gone up a lot.
Rents have gone up, but maybe not quite enough to counteract the much higher prices and also the much higher interest rates that we're seeing.And so cashflow on rental properties is harder than it has been in a while.
Um, not like it's harder than it's ever been, but harder than it's been in a while.And I think that people are looking for ways to improve cashflow and there are ways to improve cashflow in the buy and hold world.
I mean, you could do short-term rentals or student rentals as two very easy ways to massively improve cashflow on properties.
The other variation is instead of putting 15% or 20% or 25% down, actually saving up enough, investing in something else until you have enough to buy the property's cash and completely eliminating the need for interest rates in your kind of calculations.
If you can save up and pay all cash for a property and you're able to eliminate the need to get a loan, then your cash flow will improve a lot on your particular property.
And people are like, but that, James, that'll take, you know, 10 times as long.It doesn't take 10 times as long.If you actually do the math, it is usually a little bit longer and it does usually result in a little bit lower net worth overall.
But as far as getting to financial independence, getting to the point where your rental properties can provide you enough income, where you are financially independent and you don't need your job anymore, it's actually not that much slower than buying properties with, you know, 15% or 20% or 25% down when those properties are not producing a ton of cashflow with that level of financing.
having a few paid off properties can get you to financial independence a lot faster than getting a little bit of cashflow on properties where you're putting 15, 20, or 25% down.
Although maybe you do some strategy where you mix this, and I don't think we have a specific class on this scheduled for the real estate investing secrets, but like this idea of modeling, actually maybe I do, where you're modeling different types of retirement plans.
Maybe I'll cover this during financial independence.We'll have to see what I plan to include there. The idea is that you can optimize your strategies to do certain things to get you to different phases.
You can do things that get you a lot more cash flow in the beginning, build up a certain size portfolio, and then you can liquidate that portfolio, go to a much different place where you have a lot better cash flow on fewer assets, and you can decide to be financially independent that way.
The most common version is like a variation of what Robert Allen talks about in his book, Creating Wealth, where he talks about buying two rental properties a year for 10 years.
And then at the end of that, you could sell off 10 of the rental properties, use the proceeds from the sale of the 10 to pay off the 10 that you've kept, have no mortgages on them.
And then you've got rental property, rental income on the 10 free and clear properties that you have.His math is His math has some pretty aggressive assumptions, in my opinion, but there are versions of this where it works great.
And so maybe we'll talk about that in another class in the future.OK, so this is the different Bible variations went off on a tangent there.
Hopefully we'll have enough time to be able to finish the rest of the presentation in the amount of time that I was hoping to a lot for this.So. Let's talk a little bit about financing buy and hold.
We talked about this, we talked about the seven strategies, but let's go into some detail now.So most common financing for buy and hold, you're going to be getting traditional non-owner occupant, aka investor type loans.
And that would include being able to put 15% down and getting a non-owner occupant loan with private mortgage insurance.If you go to a lender and you say, look, I'd like to get a loan.I'd like to buy an investment property."
They'll say, great, we would like for you to put 20% down and we will be able to give you this interest rate and you need to have this credit score.And so would you like to do that?You're like, well, I would actually like to put less than 20% down.
They're like, well, we would prefer you put 20% down.And you say, no, I'm insisting that I put less down.And they say, okay, I'll tell you what we'll do. we're willing to go a little bit lower on the down payment because it's riskier for us.
If we have to foreclose the property, get the property back, we may not be able to sell it and get all of our money back out because there's going to be some costs of doing this, of holding costs, some periods of time while they're doing the foreclosure.
So like, look, it's riskier for us if you don't put 20% down because we don't have that buffer there in case we need to foreclose on you and get our money back.If you're insisting on putting 15% down, we will make you that loan.
However, we're going to charge you a slightly higher interest rate for the privilege of doing that.
And in addition to that, what I'm going to do is I'm going to require that you go to this third party insurance company that is going to protect me in case I need to foreclose on you and I need to actually get the property back and I risk losing money.
And so you're going to require that you go to this third party insurance company called Private Mortgage Insurance, and they're going to ask you to pay the private mortgage insurance premium to protect them in case you default. That's what PMI is.
So if you want to put less than 20% down, the lender's probably going to require that you buy this private mortgage insurance to protect them in case you default on a loan.If you put 20% or more down, there's no PMI.
And so that's a really common type of financing. A lot of times you'll put 20% down in order to buy an investment property for buy and hold.
If you put a little bit more down, like if you put 25% down, that tends to improve your interest rate and also make it so that you're borrowing a little less on the property, which tends to, the combination of those things, the lower interest rate and also borrowing less improves cash flow.
So a lot of folks will look at this and they'll say, I can put 20% down and my cash flow is going to be whatever it is. $50 a month, but if I go put 25% down, not only am I going to get a better interest rate, but I'm also borrowing less.
And so my cashflow might be $150 or $200 a month, or whatever it works out to be.I have to do the math using the spreadsheet. So those are the most common financing strategies that you've got for financing buy and hold.
However, there are some more unusual methods.You can go find grandma at Thanksgiving dinner.You could say, grandma, I'm starting to invest in real estate.And grandma's like, oh, that's awesome.
And you're like, you know, go into these lenders and they're, they're charging me seven or 8%, um, in order to get these loans on these rental properties. and she's like seven or 8%, those banks are crooks.They're only paying me 2% on my CVs there.
How about I just loan you the money that I have in CVs, you could go buy the rental properties with those, and you pay me 4% or 5%.I make more, you pay less.It's a win-win, and we just kind of do this directly.
And so grandma agrees to fund the purchases of your rental properties because she wants more money than she's earning on the CDs.And you want to pay less than going to the bank.That's what private money is.
And so it's people that you know, that you're going to go get loans. We're not talking about hard money.Hard money is people that are in the business of making loans against real estate usually.
And those guys are usually going to charge you much higher interest rates, and they're going to be shorter term loans, and they're typically going to be commercial loans.
So hard money is not usually a source of financing for financing buy and hold properties, although there are lots of exceptions to this.I know a hard money lender here locally.
that was doing like these two-year hard money loans as sort of like a hybrid.
A lot of times to help people wanting to do the BRRRR strategy, the one where you buy properties, you do rehab on them, you rent them out, you refinance them, try to pull as much money as you can out of the deal, ideally all of your money out of the deal, and then you hold that property with long-term financing after you've refinanced it.
That's what BRRRR stands for.But we're not really talking about that with traditional buy and hold.Traditional buy and hold is not BRRRR.We'll talk about BRRRR in a different class.
but most people will do the private money loan if they're gonna do it that way, not usually hard monies.Now, you can also bring in a partner and the partner could have all cash to buy the property.
They could act like the bank and you could pay them a fee to do that, which would kind of be a variation of private money loans, or they can go to the bank and they can get the financing for you.
Like there's all sorts of variations if you wanna bring in partners to do that.Partners can kind of like kind of wrap around any of the other investing strategies.
You can bring in partners and kind of fill different roles that you're unable or unwilling to do. Now, other creative financing might put the strategy into more of a real estate entrepreneurship group rather than traditional buy and hold.
So I'm not going to cover buying properties with owner financing or buying properties on lease options or buying properties subject to.We will talk about that when we talk about real estate entrepreneurship, the creative financing module.
However, traditional buy and hold, that's really, really unusual. And we don't usually group it there.
I'd kind of move it more towards you're more in the business of creative financing, more in the business of real estate entrepreneurship if you did that.So I don't really normally associate that with traditional financing.
So that's kind of why we have the financing listed over there.OK, so that's all the financing by and of old. What about holding, the holding period?Well, buy and hold tends to be a neutral type of real estate investing strategy.It's not super active.
It's not like you're constantly having to go out there every month, find a motivated seller, tie up a deal with a contract.
find a motivated, you know, kind of like tenant buyer or rent to own buyer to go and put the property and then actively go out there and find those where you're doing that every single month to do that.
It's not that active, but it's also not like, you know, you buy a stock, you listen to your account, you don't do anything, which would be much more passive.
So buy and hold tends to be more of a neutral strategy where there's some passivity to it, especially if you bring in a property manager and you're kind of just managing the property manager.But even that is not completely passive.
The, the, the, the like process of managing a property manager is work.It requires your oversight, requires you reviewing everything that they're doing.Like there's work involved in even managing a property manager.
Um, and then there's working and acquiring the property.And then if you decide to sell a property to this, there's actual activity involved in doing it, but it's overall very, very neutral.So it's not on the super active side.
It's not on the super passive side.What about the holding duration?
A lot of buy and hold real estate investors, their holding period, their desirable period for holding the property is forever, or at least very long periods of time where you're holding a property for 10, 15, 20, 30 years or into retirement once the property's paid off.
So a lot of times the holding period for the buy and hold real estate investing strategy is forever.Now, sometimes buy and hold investors will decide to leverage up their equity to take larger positions.So they may buy a property, hold onto it for,
five years, 10 years, however long it takes for them to feel like they've got a lot of appreciation and a lot of debt paid down in the loan.
Then they'll go and they'll sell their property and they'll take the equity that they built up and they will use that in order to buy larger buildings or more properties or some combination thereof.
Or sometimes what they'll do is they'll build up their equity property, going up in value, the loan being paid down the property where their equity is growing.They'll then take that equity.
They'll sell off this property and they'll use the proceeds to simplify their lives and pay off other properties that they own.
Kind of like what I talked about with that Robert Allen creating wealth book, where he talks about buying 20 properties over 10 years, and then you sell off half of them and pay off the half that you kept.
So that could be another version of this where, you know, instead of holding forever, you hold.And so you get to the point where the proceeds from selling off a portion of your portfolio can pay off the remaining one.
Then you've simplified your life down.You're only keeping the properties that have historically been kind of like lower headaches, lower maintenance, um, good cashflow on them.
And you're deciding to pay off the mortgages on them in some cases, and you're deciding to hold those long-term.So that could be a variation on the, the, the forever holding duration with buy and hold when they do that.
And I think I discussed everything I had on here.Yup.So good.Okay.What about exiting the property?
Like what, how do you typically, if you are going to not hold the property forever, how do you typically get out of a property that you own as a buy and hold?Well, you could sell the property inside the multiple listing service.
It's usually with a real estate agent or broker doing that, or you could decide to sell the property for sale by owner yourself. So you can decide to market the property, list it for sale by owner and try to find a buyer.
Or in some rare cases, maybe you decide to do a auction on a property that you own in order to get rid of it very quickly.But that's a relatively unusual strategy for doing that.What about exit financing?How are you going to finance?
How is the buyer coming in who's buying the property from you typically going to have financing?Well, a lot of times you're not selling the property, so there's no exit financing.
But if you do sell the property, a lot of times you're going to come in and you're going to be selling it to someone who wants to live in the property.You have a single family home or duplex or triplex or fourplex.
Somebody wants to move into that property and live there.They're going to go get owner occupant loans.They're going to put, you know, 5% down or three and a half percent down or 10% down or 20% down.
And they're going to get financing where they're living in the property to be able to do that.That's traditional owner occupant loans.
Or sometimes you'll have an investor coming in who wants to buy the property and they will get traditional non-owner occupant loans where you're selling to the investor and they're putting 20% down or 25% down or in some rare cases that 15% down and deciding to pay the PMI of the loan.
Or in some rare cases, somebody will come in and they'll pay you cash for the property and they'll buy the property from you that way.Now, I want to point out
that when you sell a property and the buyer gets traditional owner-occupant loans or traditional non-owner-occupant loans, what it looks like to you when they finally close is cash.It's not anything different than someone coming with cash.
The difference happens to be in what's the probability of them closing.
And if there's anything weird about the property that where it couldn't get a loan on it, some condition of the property where it's not going to qualify for financing, then a cash deal is more advantageous that way.
But what you end up if you sell a property with traditional owner-occupant loans or traditional non-owner-occupant loans, or you sell a property to someone who's paying off cash is you get cash at the end.
It's not like you're carrying back a note and offering owner financing because we don't typically do that.We don't typically use all the creative financing strategies like owner financing and
selling a property and leaving your existing loan in place by having to buy it subject to, or doing a lease option or lease purchase if you've got this buy and hold strategy.That's more of a kind of like you're doing real estate entrepreneurship.
Although I could totally see a buy and hold investor deciding to, I want to liquidate my properties over the next three or four or five years,
Why don't I go ahead and start offering the property on a rent to own right now to a tenant buyer who wants to rent the property from me from a year or two, and then they're going to buy it from me directly without any real estate agents involved.
So I'm going to sell it for sale by owner on like a rent to own, and then they're able to sell the property a year or two or three down the road or four years down the road.
Then they take that money and they redeploy it in whatever way that they're planning, whether they're buying more properties or whether they're paying off existing properties that they're planning on keeping forever.
That could be a way to exit with a slower pace. and to minimize expenses and fees of exiting the properties.Okay, so we talked about exiting.
Now here are all the real estate investing secondary categorizations that we plan to cover in this particular class.
We're going to go over stuff about, you know, the money required to do buy and hold, the credit required, the investing style where this is more real estate investing or real estate entrepreneurship, the kind of stability of the investment, whether it's a
So how scalable it is in order to get to certain net worth levels, all the skills required in order to do it, uh, your risk exposure rating of like how risky it is to do buy and hold and the profit timing, whether you're getting profit really quickly, really slowly or never at all.
Um, the kind of marketing and the target market to do that, the best market. to do these strategies in, the availability of these types of deals, and whether or not you can use retirement accounts when you're doing this.
So is buying and hold investing more of a real estate investing activity or more of a real estate entrepreneurship activity?
Real estate investing are typically people that are taking money that they have, investing in the deal, and they're hoping to get a return on that money.
Real estate entrepreneurship is people that usually have time and in many cases, a little bit of money to invest in a business where they're going out there and they're investing their time and a little bit of money in order to get a return on their time and that money.
So like real estate entrepreneurship is people that are marketing defined, motivated sellers. tying up deals, then selling them to, um, you know, tenant buyers are putting rent to own tenants in the property.
And then they're kind of like using their time and their energy and maybe a little bit of money, a little bit of marketing money here, a little bit of money to give to the motivated seller in order to get them close to deal.
Maybe a little bit of money in marketing in order to find the rent to own tenant buyer, a little bit of money in reserves, a little bit of money in rent ready costs to fix up the property, but they're intending to do this as an ongoing business.
That is more entrepreneurship. buy and hold, I think for the majority of investors, it is going to be, they're going to find a deal in the MLS.They're going to take a big chunk of money, 15% down, 20% down, 25% down, sometimes all cash.
And they're going to use that to buy a rental property.And they're expecting to get a return on their money.That is more investing. Okay.
So for buying a whole real estate investing, most folks are typically investing money with the hope of getting return on that money.
Short term rentals can move the needle from being a little bit more like investor to be a little bit more entrepreneurial.
As the amount of work you're willing to do in order to increase your returns, you tend to move from more pure investor to more entrepreneur.
Like on a pure side of investor, you just take money, you put it in the stock market or real estate investment trust, or you kind of like invest as a limited partner in some type of partnership where you are really a much more passive investor, where you're trying to get a return on your money.
And you're relying on the work of others to do that.
The more work you take on where you're doing yourself, you become much more real estate entrepreneurial, where you're relying more on your labor as part of you getting the return on that money that you've got invested.
If you've got any money invested at all, which you usually do.Okay. All right, money required.So money required to do the buy and hold real estate investing strategy.The most common.
What you'll typically see for buying real estate investors is at least 15% down to buy the properties.
Most commonly, probably 20% down, sometimes pretty commonly 25% down because the increase, the improvement in the interest rate and the reduced amount that you're owing usually results in a pretty significant improvement in cashflow, such that a lot of investors, if they've looked at and compared 20% down to 25% down, and they have the extra 5% down,
will choose, voluntarily choose to put that extra 5% down because it improves their returns at such an increment that is worthwhile a lot of times to do that.So make sure you do that analysis.
And if you have the ability to put 5% down, then maybe consider it.If you don't, then put 20% down. So that's really what's going on there.So usually 15 to 25% down, sometimes someone will put a little bit more down.
You're still going to need closing costs in order to get the loan and close on the deal.A lot of times you're going to need to put a little bit of money in the property once you buy it to get it into perfect rent ready condition.
No, but all the things that come up on inspection that you're unable or unwilling to negotiate to get the seller to pay for, because you want the deal.
And a lot of times the deal would fall apart if you insisted on them doing certain things, depending on the market condition.If it's a really strong buyer's market, maybe you can negotiate to get them to fix everything, but that's pretty uncommon.
So you'll need some money in order to get the property prepared to rent.Or, you know, in some cases, you're going to you're going to choose to try to get a tenant in there in a reasonable amount of time.
And so you're going to accept slightly lower rent on that first rental period.
And so you set aside a little bit of money, at least on paper, in order to accommodate having a little bit lower return on that first tenant where you don't have 60, 90 days to really get the maximum rent on that property.
When we talked about this, we talked about tenant screening and and kind of like determining rents.We'll talk a little bit more about it when we talk about rent comps. but that idea for rent ready costs of having that set aside.
And if you're putting low enough down where you're going to have negative cashflow on a property, it is prudent for you to set aside the amount of negative cashflow you're going to have until your cashflow, until your rents have crept up enough where you don't have negative cashflow anymore.
So when you analyze your deal using the world's greatest real estate deal analysis spreadsheet, which I'll give you a link to here, if you don't already have it, uh, when you analyze the deal with that and you put
so little down that you have negative cash flow on a property, which might be 20% in your market, depending on what's going on, the interest rate you're getting, and the property you're choosing.
But if you have negative cash flow there, the spreadsheet will calculate for you and tell you, okay, you have this amount of negative cash flow now, and that will last for the next one year, two years, three years, four years, five years, whatever it is, and then we'll find out how much the total amount of cumulative negative cash flow, the sum of all the negative cash flows that you have for the next three years is, and then you should,
to prudently make this investment say, well, I know I'm going to have this negative cashflow.Why don't I set this money aside when I first do the deal as part of my reserves to have set aside in order to do the property?
So for example, let's say you're buying a property and you're putting, you know, let's say you're doing a Nomad strategy.Actually, let's use buy and hold.You're doing buy and hold property and you've got a negative $100 a month in cashflow.
And you have $100 a month in cash flow for the first year.So the first year, you're going to have $1,200 in negative cash flow.But next year, when you renew a lease, you're going to bump lease amounts up by about $50.
And so next year, your negative cash flow should be about $50 a month.So you're having like $600 in negative cash flow for that second year. You had $1,200 cash on the first year, $600 in the second year.
And by the third year, when you raise rents, another 50 bucks a month, you're probably not going to have any negative cash flow.
Well, the spreadsheet, the world's greatest deal analysis spreadsheet will calculate the sum of all of those negative cash flows until your negative cash flow goes away.And so it'll add it up for you.
And I'll say, OK, in this case, you have about $1,800, $1,200 for the first year and $600 for the second year and negative cash flow.So in order to prudently invest in this deal, you should either
increase your down payments in order to get rid of that $100 a month cashflow, which is probably going to be about $20,000 because it's about $50 per 10,000.For every $10,000 you put down, it usually improves cashflow by about $50.
Interest rate has some impact in there, but it's a really good rule of thumb.So if you put down $10,000, you'll improve your cashflow by about $50 more.So if you put $20,000 more down, you might not have any negative cashflow.
You'd have about break-even cashflow. So you can either choose to put $20,000 more down and get rid of your negative cash flow to buy this property.Or you could say, look, I will have negative cash flow probably for about two years.
The first year, it's going to be negative $1,200.The second year, it's going to be about negative $600 for a total of about $1,800.Let's round up and call it $2,000 just for the sake of math.
And so you can either put $20,000 down and get rid of it from the very beginning, or you could set aside two grand in order to hold yourself over and pay out of pocket the negative cash flow for the first year or two until you get to the point where it's breakeven.
So it's prudent for you to take that $2,000 and to set it aside in order to buy the property, knowing that you are going to have, very likely to have, negative cash flow for at least that long.
Because that's what you've modeled it out and said, based on my proforma, some real reasonable assumptions about rents going up a little tiny bit, and my expenses going up, but my mortgage payment is probably going to be fixed.
I'm probably going to have this negative cash flow for this period of time.And the spreadsheet does all the math for you, but you can look at it and do it on your own if you want to as well.
You'll have that down payment, you know, 15% down with PMI, 20% down, 25% down, or as much as cash if you want to do it that way.Closing costs, your rent ready costs to get the property ready to rent.
And if you're getting below market rents or whatever you're doing there, you can kind of like model that in as well.Plus. Cumulative negative cashflow plus reserves.
And for most of you, I think you're probably going to have at least six months of reserves in order to prudently make this investment.Doing less than that is going to increase the risk of your investment.
Doing a little bit more that will reduce your risk a little bit more, but I think six months, maybe 12 months on the, on the more conservative side, if you're willing to do that, it would help you with reserves.
So that's typically the money required in order to do the buy and hold strategy. Now, less commonly, you might also see, less frequently, larger down payments putting more than 20% down.They're putting 30% down, 45% down, whatever it is.
Because a lot of times, if you're doing a self-directed IRA type loan where it's non-recourse, they're going to require you to put more down than 20% down.
So you might see more down payments or in some cases, the lender wants you to see a certain DSCR for your particular portfolio.
Maybe it's your, you know, your 12th property and they want to see an overall portfolio wide DSCR of 1.25 or 1.3 or whatever it is.
So they may require you to put more down in order to improve the cashflow on this property to make sure that your DSCR for even this property or your overall portfolio is kind of where it needs to be.
And we'll talk about that in financing maybe a little bit.So larger down payments might be. less frequent, but you might see those or bringing in a money partner, someone who's willing to take that off your hands.
If they're going to, they're going to put up the down payment and the closing costs and rent ready costs and cumulative negative cashflow on any reserves that you might have.
So you don't have to do it or buying all cash and doing, you know, the entire strategy where you're doing that and then reduces the amount you need through having reserves.
Um, you know, because it's months of reserves and if you don't have a mortgage payment, then the amount you need and, and, and sheer dollars gets reduced. So you might see some stuff like that.We're doing that now.
This applies to both buy and hold and things like short term rentals or student rentals where you might need things like, you know, furnishing the rental or, you know, furnishing the rental for both the short term rental vacation rentals.
And or if you're doing student rentals, you might want to furnish the properties, probably want to furnish the properties in order to really improve your cashflow doing that.
So and the kind of less common thing, if you're doing a short term rental and you're buying a vacation home, you might be able to get a 10 percent down down payment option for buying a second home.That's like a one time.
I think you can only do it once, but you can get financing where you do 10% down in order to buy a vacation home.So you might be able to reduce your expenses if you're buying your second vacation rental there.
So that's sort of the money required discussion for doing buy and hold. What about credit required?Well, the most common is to qualify for traditional investor financing, those non-owner occupant loans.
The typical credit score needed for those, and these change all the time, and they may have loan programs, they modify them, and there's lots of, if you have this, then it's actually a little bit higher.
If you have this criteria, it's a little bit lower, but typically it's gonna be in that 700 credit score range.There are some exceptions may be available for very low debt to income loans going down to 680.
It's less common situations if you're buying without a loan, all cash, a credit score is not going to be required at all.
So if you've got a credit score that is unsavable, I don't know if that is actually a real thing or not, but if your credit is so bad and you're unwilling or unable to go ahead and improve your credit, you can do buy and hold real estate investments without getting a loan at all.
You could just buy cash for the property and then credit's not even going to be a factor.Or you could pay cash or you could partner somebody.Well, I guess cash is the first one.
Or you can partner with someone who's getting a load where your credit score is not even a factor to be able to do that.So those are kind of like less common situations.
Most commonly in order to do buy and hold, you're gonna need a credit score in that kind of 700 range.The better you have, probably the better your interest rate is going to be.
The lower you have, there may be some kind of like workarounds or exceptions you may be able to fall into.So you're gonna want to call a lender and do that. And I'll make an important note, the credit score requirements can change over time.
So check with your local lender for the most up-to-date credit requirements.Please do not go to them and say, James told me on this class that I can get a loan with a 700 credit score.My credit score is 701.Give me a loan.No, that's not how it works.
I don't have any pull for doing that.You got to go talk to the lender and find out what the actual lender requirements are and use those there. All right, so skills required.
So I mean, it should be obvious to a lot of folks that different real estate investing strategies require different skills.If you're doing fix and flip, it requires different skills than if you're doing a traditional buy and hold.
It requires different skills than if you're doing, you know, the Nomad strategy or the Burr strategy or wholesaling, that there are different requirements, different skills required for doing each of these different types of strategies.
So what are the primary skills if you want to become a buy and hold real estate investor? Well, number one, you need to be able to analyze deals.
You need to be able to use the world's greatest real estate deal analysis spreadsheet or your own version of a spreadsheet and understand what the deals look like, how much you should put down, what your cash will look like, what your returns will look like, and be able to decide of all the different options I've got available, all the different properties I can buy, which ones are the ones I should buy, which ones are the ones I should avoid.
And so deal analysis is a primary skill. for buy and hold.You want to be able to analyze those deals.Then you need to be able to find cash flowing deals.
You need to be able to go look in the MLS, analyze deals, find out which one you want to do, or work with wholesalers, or whatever it is that you're finding your deal source from.
You want to be able to go find these cash flowing deals in order to be able to acquire them.Then you need to understand and be able to do acquisition financing.
You need to be able to acquire the properties with this 15% down, or 20% down, or 25% down loans, or buying properties alt cash, like figuring out a way in order to put the financing together in order to do the deals.
So you need to analyze the deals, you need to be able to find the deals, you need to be able to put together the financing to do that.And then once you own the deal, you need to manage the properties.
It's the property management skillset and property management might be, you will need to learn all the skills to manage your property, or you need to be able to find a property manager and you need to be able to hire that property manager and manage the property manager.
So it's either direct property management skills or the management of the management of your property through managing the property manager.So really those are the four. kind of like primary skills for doing buy and hold.
I'm sure there are other ones that could help you and that would be kind of like being able to assess repairs, like all that stuff definitely matters.But these really are the four primary ones for doing that.
Now, the skills of property management can vary depending on whether you're managing your properties yourself.
you're doing the actual activity, you need to learn all this stuff about property management, or you're hiring a property manager, or if you're doing short-term rentals, the skills for managing a short-term rental are probably a little bit different than managing long-term rentals, as if managing like a student rental, it's probably a little bit different than managing short-term rentals or regular long-term property management stuff, or medium-term rentals.
So depending on what you're doing, they're gonna vary a little bit, and I just wanna point that out to you.All right, stability. So this concept of stability came from an article that was sent out from the Farnham street blog.
Uh, I think the author of the blog is Shane Parish.
And, and basically he went over this idea about, you know, if you, if you have something that is actively stable, you need to be engaged with that thing in order to keep it from crashing and burning, you know, like an aircraft, if you're not actively managing this aircraft.
Then the aircraft will eventually run out of fuel.Um, you know, if you don't have autopilot, especially that it's going to crash into the hillside or whatever it is.
And so you're going to have some problems if you're not actively managing what you're doing there.Or it could be passively stable where you just have something and you don't do anything with it.It's going to be fine. So how is real estate investing?
I kind of applied his ideas to real estate.I said, how is real estate investing stable?Are there strategies that are really passively stable work?If you don't do anything to them, they're going to be like, they're going to be totally fine.
You don't really have to do much.It's sort of like being take care of itself.
Or are there things where if you're not actively in there every day or every week or every month or every six months or every quarter that this thing is going to crash and burn, it's going to destroy you.Um, you know, kind of that.So.
buy and hold, I would consider, and I would say in general, real estate investing is, um, is actively stable.It requires you to be paying taxes.It requires you to be managing your properties.
A lot of times it requires you to be maintaining your properties.It requires you to be managing your manager.
So overall you have to actively manage real estate, but like on the scale of different real estate strategies, some are more actively stable, more, more active than they are passive.So I would say buy and hold is actively stable.
But short term rental, vacation rentals are even more active.They require more attention from you, more activity from you in general. Most real estate is sort of actively stable.However, some strategies choices are much more.
So let's talk about some ways to increase the active stability or the passive stability of real estate investing.For example, if you got a fully amortizing 30 year loan where you get a loan, you make monthly payments every month.
And after 30 years, that thing is paid off.That is less active than if you got a a kind of like commercial loan on a property that had payments that changed every year because their interest rate was variable.
And at the end of five years or 10 years or 15 years, they had a balloon payment, which meant that the balance of the entire loan was due and payable at the end of that time period, five, 10, 15 years, whatever it was, or you had to refinance into another loan at that time.
That is much more active than an advertising loan.So can you see that? There are ways that we can make this slightly more passive or slightly more kind of active by doing what we need to do there.
Or consider buy and hold real estate investing, where you buy a property once, you put a property manager in place and they put the tenants in place, as an example.
Or you're doing the strategy of buying fix and flip properties or doing lease options or doing BRRR, where there's a lot more activity involved for you to be able to get your property earning.With flips, you have to buy the property,
You need to hire the contractors to do the work.You need to oversee the contractors in a lot of cases.
You need to make sure that, or you need to oversee the general contractor, and then you need to go and sell the property, and then you need to actually close the property.
That seems more active than the kind of like buy and hold where you can be a little bit more passive.Same thing with lease options or where we need to find multiple people to do stuff. All right.
And then funding retirement via cashflow versus appreciation of debt payback.So think about whether you are buying properties in your marketplace where you're going to live off of the cashflow that the property is being produced.
So that is one way to kind of like invest in real estate with buy and hold.Another variation of this, especially in markets where cashflow is very difficult, but appreciation is very strong.
you could buy properties knowing that the property values are very likely to continue to go up and the debt is continuing to be paid down on the property and the amount of equity in your property is increasing such that maybe every X number of years, you take the equity in your property, you pull some out to live on, you kind of rebuy another property with part of the down payment, re-leveraging up to kind of acquire property but pulling some money out.
That is a much more active strategy than living off of the passive cash flow that's coming in for the property.
Um, so one of them is a, you're constantly trying to refinance or sell properties in order to be able to continue to pull money out of the property versus being able to do cashflow.
I taught an entire class once where we talked about buying in a market where you had really good appreciation versus buying in a market where you had really good cashflow.
And I showed you, you can actually achieve financial independence in both markets. However, one of them is much more active strategy.One of them is a little bit more passive and there are pros and cons to both of them.
But I think in general, there are more pros to finding a market where you can generate a lot more cashflow.
It's a lot easier to do it that way than it is to do it with the markets where it's mostly appreciation and it's really hard to do cashflow in those marketplaces.Okay.Let's talk about scalability.
Real estate, my opinion about real estate, and I'm going to have, I have a chart here to back some of this up, but my opinion about real estate is real estate is a amazing vehicle to get you to that 1 million to 3 million to 5 million, maybe even up to like that $10 million net worth.
It's harder, not impossible, but it is, is more difficult, less likely for you to be able to be a, you know, deck a millionaire, um, a hundred millionaire, like a billionaire.
Um, if you are trying to do it with buy and hold real estate investing or fix and flip strategies or something like that, it's just not as scalable.It's great for getting you to that million dollar and a couple of million to 5 million to 10 million.
but much harder to do it if you really want to get big numbers.
When you want to get to the big numbers, as this chart will suggest, you really want to have a business that you start, probably not a real estate business, although probably you could do it with a real estate related business, but that's really what it's about.
So this chart is from visual capitalists.I have the link on there.So if you want to go look at it, you can kind of look it up yourself, but this just shows you based on different levels of net worth.
So for example, someone who has a net worth of $10,000, what percentage of their net worth is liquid?What percentage is made up of their primary residence?
What percentage is made up of their vehicles, their retirement accounts, their life insurance, and it breaks it all down.And so you can see, look, if I really want to be a millionaire.
like looking at actual people's numbers for people that are millionaires, they have about this much of liquidity, whatever that is, 5%.They have this much in their primary residence, which I don't know what that is, maybe 20%.
They have this much in their vehicles, they have about this much in their, whatever this is, retirement IRA accounts, this much in life insurance, this much in other assets, this much in mutual funds, this much in stocks, fixed income, managed assets, real estate, and then business interests.
for getting to the kind of like 1 million to the kind of 10 million range, real estate can kind of get you there.
But as you get to these much larger asset basis, real estate becomes a much smaller percentage, such as it's much harder to get to be the hundred millionaire status using just real estate.
It's just a much smaller amount that as a percentage of your overall assets, you need to do something else in order to do that.So as far as scalability goes,
I would say that buy and hold real estate investing is great to get you to a certain point, but it's not going to scale you to, you know, the billionaire kind of net worth.
You can use it as a launching ground to get to the point where you've got enough income coming in from your real estate investments.
Now you can really go focus in on these other strategies, you know, take much bigger risks where you're not risking your real estate portfolio.You're risking your time and your energy, maybe a little bit of money in order to start a business.
If you really want to get to the billionaire status.So getting to like that 1 million to 10 million spot real estate's great for doing that. But much beyond that, it's going to be less and less important the farther you go.All right.
Now let's talk about risk exposure.We've got a whole separate class on risk.So this is really just about risk of buy and hold.So overall buy and hold has what I would consider to be a medium risk rating.
The risks include are not limited to, but they definitely include while you're owning the property, the fact that real estate prices can go down.
And I'll show you a chart during the kind of risk class, where I tell you about what percentage of the time real estate prices have gone down historically and by how much so that you could understand and really appreciate how much risk that is.
But the fact is. Real estate prices can go down and they have gone down and they will go down again in the future is my prediction.I'm not like a kind of like a pessimist or a naysayer, but I think it's just normal market cycles.
We see real estate prices not always going up and to the right.And so just being willing to hold through that period, I think is a reasonable expectation.
I'd rather you realize that these are these are going to be issues you're going to face and just prepare yourself for them rather than saying it's not going to happen and then be unprepared when they do happen.
Uh, you also could have the risk of rents going down during your ownership period.Um, it tends to move a little bit slower because rents tend to be for these one year fixed periods.
And so if you see rents start dripping, dropping, you know, for like a, a three month period and it lasts and they stay down for, you know, three or six months, by the time you get to the other side, it may not have even been a down.
So you may see a little bit of decline, but overall rents tend to hold up pretty well.It looks more resilient than a home prices.
And I probably need to make a chart on the rents to show you the same numbers that I'm going to show you with the price though.Also a risk of buying real estate investing is your credit is at risk.
If something happens and you get sued or you have an issue with the property where your finances take a hit, you could be risking your credit if you have to
but have foreclosures or give your properties back, you know, deed in lieu of foreclosure or something like that.And then you have all the traditional typical tenants and property management risks.You have the, you know, the risk of a slip and fall.
You have a risk of, you know, you or someone else violating fair housing rules while you're putting tenants in the property, or you have the risk of, you know, some type of accident happening on your property and being sued for that.
So there's all the normal, you know, tenants, property management risk associated with buying, investing in real estate.And so that kind of gives me this buy and hold as this sort of medium risk investment.It's not risk-free.
I don't think anything in life is completely risk-free, but it's not like this excessive amount of risk where you're doing really, really risky things in order to do it.I think it's a medium amount.
You could argue that there's slightly more risk with short-term rentals, vacation rentals.You're dealing with more people.They're less familiar with the property.
There's a lot more chances of things to go wrong because you have more people you're dealing with, but it's probably offset by the increase in income they are earning on that.So short-term, it does probably have that slightly higher risk, but
Um, you know, some of the other risks from short-term rentals also include risks of the rental policies changing with local governments, them saying they're not accepting short-term rentals anymore, or everybody used there is grandfathered in, but you can't do any more.
And there are limitations on what you can do, or your HOA saying you can't do short-term rentals in your rent, in your neighborhood or insurance companies saying, Hey, listen, we don't allow short-term rentals anymore.
Uh, we've had too many claims and we're not offering those policies anymore.So you have an increase in risk because of that strategy that you could face, uh, for doing that.All right.
Let's talk a little bit about profit speed. Take a sip of water.All right.Profit speed.
So there's certain real estate investing strategies where you're, you're working in order to make money because it's like a job.You know, you're, you're buying a property, you're immediately selling it.
You're getting a big pop of income and you're able to spend that.Buying a hold is not quite that strategy.Buying a hold is usually a combination of wealth building, holding real estate for a very long period of time.
And then usually a little bit of cashflow and a little bit of tax benefits that put a little bit of money in your pocket in the short term.
So this, this chart here, this return quadrant shows you the four primary areas of return that you have by owning real estate, plus the return you earn on the reserves that you should be setting aside in order to be able to do the investment itself.
So you're going to have to put aside some reserves.
You put those reserves in either savings account or stock market, depending on how much we'll talk about that when we do a reserves class, which I do not think is included in that real estate investing strategies or real estate investing secrets course.
I don't think I have a section here on reserves need to do a whole class on that. But basically you set aside the money in reserves and you're going to get a return on the reserve.
So a secondary return you're earning is the amount of money you're earning on those reserves.Primarily though, you're talking about these four areas.So appreciation, the tendency for property values to increase over time and paying down your loan.
The little bit amount of the principal that you're paying with each loan payment, the loan balance actually decreases.So that's part of the return you're earning when you're making these loan payments.
These two on the left side are the wealth building, the cash later parts of your return.So appreciation, property value is going up.Your loan balance is being paid down.You're building up equity over time in your property.
And then the equity in your property is the wealth that you're building by owning that particular property. But it's not something that you could easily spend unless you do a sale of the property or do a cash out refinance.
And so that's money that you're earning for later.So the left side are the returns you're earning for later cash later type returns.Contrary on the right side.
cash flow, which is the money you have left over after paying all the expenses on the property.You have the income coming in, the rents and any other income you have coming in from different things like laundry.
You have that coming in the property minus all the expenses, taxes, insurance, maintenance, property management, vacancy, mortgage payment, like all that stuff. subtracted out from there.And what's left over is cashflow.Sometimes it can be positive.
Sometimes it can be a little bit negative.And so you can have this cashflow coming in.That's money that you see right away.
Usually month to month, if you're doing like a month to month type of a monthly lease payment on that, sometimes it can be yearly.Sometimes it'd be quarterly, depending on how you structure it.
But most of the time you're doing like a vacation rentals could be more frequently.But really that's the cashflow you're getting on your particular property.That's more cash now.
And then the tax benefits you're getting by owning this property is money you save on taxes by owning this rental property.
And so you can choose to adjust the exemptions you have on your paycheck from your job, knowing that at the end of the year, you're going to have all these tax savings when you do the accounting for your depreciation on the property.
And you know that you're going to be getting, you know, 2,000, 3,000, or whatever the amount is per rental that you have in order to have that rental property.
Well, you can go back and tell your job, hey, look, I'm not going to have these taxes at the end of the year.I want to change my deductions, my exemptions coming out of my paycheck so that I actually get more money for my job.
They're going to under collect on taxes there because you know that at the end of the year, your taxes are going to be better because of the rental property that you own.It's going to wash out.
You're not going to have to pay anything in because you basically got this benefit from owning the rental property.You don't need to pay those in your taxes at your job.So you can improve your cashflow.
what I would call cashflow from depreciation, the depreciation on the rental property by changing the exemptions at your job.And maybe you get an extra, I don't know, 200 bucks or 300 bucks a month at your job from doing that.
So it's like cashflow coming in.So that's money that you get now. rather than cash later from appreciation debt paydown, you get cashflow tax benefits now by owning this particular rental property.
So the speed of the profit, how quickly do you make money and what size of money do you make at what interval?
Well, with appreciation of debt paydown, when you're doing buy and hold, if you're holding it forever, you're not really collecting on that money unless you sell the property, you do a cash out refinance.
So that's really like money that it's, it counts as your net worth, but you're not really able to access it unless you do something like sell the property or do some type of cash out refinance.So that's usually like a significantly delayed asset.
That's just building up over time for you.Now the cash flow and the cash benefits with most buy and hold real estate investors, if you're putting a tenant in the property, you're starting to get that right away, at least the cash flow.
You may not adjust your tax benefits and that may come more at the end of the year.So the timing of that may be about a year.Now, what is the like order of magnitude of these?Like what's the size of them?
Well, appreciation, you buy like a three hundred thousand dollar property and the property goes up three percent.You might see, you know, nine thousand dollars or so from buying a three hundred thousand dollar property that's going up three percent.
You know, people some people say their properties are more than that and they might be you maybe buy a more expensive or slightly less expensive property.But the order of magnitude is in that, you know,
$5,000 to $15,000 a month, I'm sorry, per year, a number for appreciation.Debt pay down depends on the loan balance and your interest rate as to how much you're doing that.But that could be in the few thousand dollar range.
Just kind of give you an idea per year to kind of get a feel for like the order of magnitude of that.But again, this is delayed and you might not ever see it if you don't pull the money out.It'll capture your net worth.
But unless you sell the property, you refi, cash out, refi, then you're not going to access that. Cashflow, depending on how much you put down, this could be a couple hundred dollars a month, somewhere in that ballpark.
Tax benefits, if it's free and clear, it could be, you know, $1,500 a month. or more or less, depending on the price of property and rents and all that stuff.But it's that order of magnitude.
Tax benefits, that could be, the really rough rule of thumb is about 3% of the original purchase price of the property per year.So if you're buying a $300,000 property, it's about $9,000 a year in gross depreciation.
You multiply that by whatever your tax rate is to find out how much you'd get in cash flow from depreciation.So if you're in the 25% tax bracket, it's gonna be, $2,000 and change.
About $200 a month is probably in the order of magnitude about what you're dealing with a $300,000 property on that.And there are lots of exceptions.
You could choose to do accelerated depreciation and move all that stuff forward and get it all in the first year.So there are different ways to kind of structure this.But in general, how quickly do you make money?
Well, you can make money pretty quickly, although it's usually smaller amounts of money and a lot of money, usually wealth building long term.And then what size of the money you can kind of see where those come in right away to longer.
Rents and security deposits are typically paid in advance.So a lot of times that first cash flow can come within 30 days pretty easily.
short term rentals and using a property manager can slightly delay your time to producing cash flow because a lot of times if you're doing short term rentals, there's a delay in the platforms that you're using to pay you.
There's usually kind of a little bit of a delay to do that.
And then your property manager, if you're doing that, you know, maybe they take, you know, 15 days or 30 days in order to do the accounting to get the money out to you from what they've collected.
Usually a percentage return of the amount invested, if you think about it this way, how much you're making a lot of times is a function of how much you put down.
This is like a cash on cash return on investment calculation, which we'll talk about when we analyze deals, talk about return on investment, or your cap rate if you own the property free and clear, which we'll talk about again in detail when we get there.
The cashflow from depreciation, which is that tax benefits number, uh, times your tax rate can be cashflow with each paycheck at the end of the year or at the end of the year with tax savings.
I think I talked about that when I talked about adjusting your exemptions for your job.You can also see wealth building through appreciation debt payback.That's the long-term stuff that we're talking about.
And then the return to your CMI reserves is every day.Honestly, if you're got money in the savings account, you can see that get adjusted or they credit you once a month or whatever it is on there.You'll see it at that frequency.
All right, so that's profit speed for buy and hold.What about finding deals?
Well, the most common methods, the ones that are going to happen the most for traditional buy and hold investors is going into the multiple listing service and buying a property from the largest selection we have available, rather than going to like a wholesaler where
There's a very limited number that are available or doing sellers to motivate sellers in order to try to find deals.A lot of times those would not be properties that we would select, giving a wide range of options.
The only reason we're buying them is there's something about the financing of them or the price that we're getting that is compelling us to choose those over the other options that we have.
But for most buy and hold real estate investors, when they want to hold a property forever,
They're going and they want to choose from the widest selection to get the best quality, the best ratio of price to rent that they could possibly find, structure, be able to do all their due diligence during the contract period and buy the property and minimize risk.
So the most common strategy for people do a buy and hold real estate investing strategy is going to be buying properties directly from the MLS through a real estate agent.The second most common, is all the for sale by owner stuff.
So for sale by owner, they're really two major groups.They're for sale by owners that are actively marketing their property for sale by owner.
So these are the folks that are, you know, they're selling their property without a real estate agent and they're putting their property up on all these other websites like Zillow and Redfin and stuff like that.
where they're selling it themselves and they're putting a sign in their yard and they're taking calls.That could be another way for you to find deals, although the percentage of those is a much smaller percentage than the ones in the MLS.
And then there's all the hidden for sale by owners, the people that are not actively marketing their property for sale, but they would sell to you if you contacted them via marketing, sending out direct mail.
Or you were networking with somebody and mentioned that you're looking to buy houses and someone says to you, well, I would be willing to sell this property.I haven't listed it yet.I haven't decided to sell for sell by owner.
I haven't called a real estate agent, but I would be willing to sell it.You know, if you just happen to tell me that you're interested in buying it, let's talk about doing a deal.So you didn't really find those via marketing.
You found those via networking, kind of talking to people and doing that.So those are the two kind of like subcategories for hidden for sell by owners. or the more unusual methods of finding these deals.
And they're not unusual that they're not great deals.They're more unusual because they're less common.
And that is wholesalers finding a wholesaler who's willing to sell you a deal, one that you'd want to keep long term as a buy and hold property or all the different auctions like
the IRS auctions or foreclosure auctions or things of that nature, or real estate owned by banks.When a bank takes back the property and they haven't decided to list it with a real estate agent yet, or they haven't decided to sell it themselves.
Now they may decide to, um, give you access to the real estate that they've owned, that they've taken back from sellers who have defaulted and you may be able to buy properties from there.
Again, these are relatively small numbers of properties that you can do, especially in our current market.Uh, and that may change over time, but that's really the strategies on how to find buy and hold deals. All right, analyzing deals.
So if you go to refp.com forward slash spreadsheet, you could download a copy of the world's greatest real estate deal analysis spreadsheet.It's free.And you're able to use this in order to analyze a lot of types of deals.
But buy and hold is probably, you know, the, the, the, a major main category of these. You just enter in all the numbers here on the left hand side, and there's a separate tab for doing overrides for anything you want to do.
And it will help you analyze the deal that you're buying right now and also into the future.
You kind of see a whole bunch of analysis and we'll do a separate class, entire separate class on deal analysis, where we walk you through how to use this spreadsheet in order to do your deals.
But this is what you would use in order to analyze your deal and see if it's a viable investment option for you and to compare different ones that you're considering when you're doing the buy and hold deal analysis. All right.Market conditions.
So there are certain markets where it's better to do certain strategies and buy and hold tends to be a better strategy in markets with good cashflow.I think this just makes sense, right?
You know, if you're going to go buy and hold properties for long-term, uh, wouldn't you rather be investing in markets that have a reasonable amount of cashflow with a reasonable size down payment? Sure.
Could you still invest in markets that don't have great cash flow because you happen to live there and you want the ease of management and planning and managing yourself?Absolutely.
But an ideal market condition would be markets with good cash flow and markets with strong appreciation and rent depreciation. You know, cashflow is only one of the areas of return.
And if you focus exclusively on that, I think it could be to your detriment.I think that you could be missing out on a lot of upside that you could use in order to overcome negative cashflow on other properties that you're buying.
But if you go and you find a market that not only are you getting a reasonable amount of cashflow, maybe not the best.
But reasonable amount of cash flow, but you're also have a reasonable expectation for property values to continue to go up in value, increase demand for that property, you know, an incoming number of people living there instead of more people moving out.
But properties that are going to have more people coming in, population growth, they're building at a reasonable pace.
People are actually wanting to stay in this particular area that tends to push prices up over a long period of time, not very rapidly, but like slow and steady.
And then you see properties with strong appreciation and strong rent appreciation where over time rents kind of creep up on the properties and that's good.
So over a very long period of time, because a lot of times buy and hold, we're doing this forever.We want to see this over long periods of time, decades.
You can have definitely individual, you know, like intermediate dips along the way, but most of the time we want properties to go up in value and rents to go up in value.And we want to be buying properties that have decent cash flow to start with.
That would be ideal. Where is it challenging?Well, markets with significant negative cashflow with reasonable down payments, you're putting 25% down, it's still negative.
That's going to be a harder market for you to overcome when you're trying to buy or cashflow in a particular marketplace with buy and hold.Not impossible, but definitely more challenging to do.
Or markets with no or negative appreciation and rent appreciation.Markets where maybe you're getting, you know, $400 a month cashflow on a property, but the property's not going up in value at all.
And if you go to sell it five or 10 years later, you're actually going to end up selling it for the exact same price you paid.You're going to see no appreciation at all, or you're not going to see rents increase.
So the $400 per month that you're seeing on cashflow on that particular property, you can expect to see the same $400 next year and the year after that, and the year after that, and it's not improving. It's not going up at all over time.
So those are less than ideal market conditions, more challenging market conditions.And there are things that we can do to overcome this, right?There are things that we could do.We could change this.
We're going to go over an entire class that had approved cashflow, but like really short version is we could change our strategy.We could do more short-term rentals or do more student rentals or.
You know, we can decide to pay all cash for properties, you know, save up and then invest it by properties to all cash in order to solve some of the negative cashflow things or, you know, there's lots of things that we can do to improve cashflow, which will cover an entirely different class, but you can overcome these challenges.
It's not the end of the world. All right, accessibility, availability in many markets, there are plentiful deals that you can select from in the MLS.
So you can go there and you can say, look, there's a lot of deals where I could buy and the numbers would be okay.Then we're starting to look for the top five, 10% of deals where we're trying to find the best ones.
And we're starting to make trade-offs up.I'd rather have a little bit better quality property.
than a little bit more cashflow, or rather have a little bit more cashflow than quality, whatever your strategy is, you can then start selecting things and choose the top five or 10% of the marketplace and to buy whatever makes sense for you to do that.
In some markets, you're sifting and sorting for the top deals.That's really where you do it.In other markets, it might be challenging to find positive cashflow properties, except with significant down payments.
You know, if you go and you put 100% down, you buy a property for cash, that probably has positive cashflow. Now, if you go put 10% down or 20% down or 30% down, it might be harder for you to get cashflow in certain markets.
So realize that there's a range and you can make almost any property cashflow if you put enough down, but putting a reasonable amount down, you know, 20%, 25% down for a lot of markets.
I think that sometimes it's hard to find properties that will cashflow with 20 or 25% down in some markets.
And so you want to go then start being much more selective and looking at those deals, or maybe you're willing to have breakeven cashflow and you're looking at a deal that is really good quality is likely to go up in value and likely to pay down the load.
And that's what you'd rather have in your portfolio forever.
Once you finally get to the point where it's cashflowing better, and you know, you have a long-term plan and you've got reserves set aside, and you've got your cumulative negative cashflow set aside, and you feel very comfortable holding that property for a very long period of time while cashflow improves.
Interest rates may be a significant factor whether properties will cashflow or not.As rates go up, it a lot of times becomes harder for them to cashflow.As rates go down, it tends to become a little bit easier for properties to cashflow.
So just realize that that could be another factor as you look for what's available in my marketplace and what's accessible to me for doing that. Verify that you can use your property as a short term vacation rental before buying.
If you are utilizing that strategy to make sure that that is an accessible property and available to do that.So if you're doing a specific strategy, check to make sure you can do the strategy you expect to do.
It's not universally true that all properties can be done as short term rentals or student rentals or whatever.There are occupancy laws, there are laws about durations of leases and short-term rentals and things of that nature.
So be very careful about doing that and make sure you check before you close on the deal.All right, using retirement accounts.So can you utilize the buy and hold strategy with self-directed retirement accounts?
Instead of getting like a retirement account and investing in stocks and bonds and things of that nature, you can choose to get a self-directed retirement account where other people can use their self-directed retirement accounts in order to invest in real estate.
Can you do that with buy and hold? Sure, you can finance properties with self-directed retirement accounts, but it may require a larger down payment.
A lot of these portfolio lenders who are going to make these retirement account loans will require 35% down instead of 20% down in order to buy the property.
It's going to cash flow a little bit better, but it's going to require a much larger down payment for you.And there may be less than ideal loan terms.For example, it may be an adjustable rate mortgage instead of a 30-year fixed rate mortgage.
So realize that you can do this. but it may not be ideal.And there are some ways to kind of work around this, where maybe you invest in an LLC with your IRA, and then you actually invest with the LLC. into the property.
And some lenders look at that a little bit differently, and they may be willing to make you a 20% down loan where you are signing for the loan.
It's not a non-recourse loan that you normally get with an IRA or a self-directed 401k, but you're able to sometimes do that if you structure it correctly.
Or you can invest in other people's deals where you are the person putting the down payment into the LLC, and they're getting the property, buying the LLC where you own a significant portion of it.
maybe in all of it, in some cases, we were able to do that.It may not be easy to access these funds.
Realize that if you using this strategy in order to be able to retire early, sometimes it's hard to access this money until you reach certain milestones or age or whatever it is, be able to pull it out.
So you'll need to have a plan for figuring out what that will be, including the cashflow from these.So realize if you're buying these properties, you're intended to use them for cashflow might be tricky to do that.
if you are doing them inside self-directed IRAs or self-directed 401ks without a penalty, if you decide to retire early or whatever it is.All right.So that is it.That is the entire class on the buy and hold real estate investing strategy.
Of course, we're going to go into some more detail on all the financing and all the other related stuff in order to do the buy and hold.
But that was an overview of like buy and hold, how it works, how to structure things, kind of like different characteristics that we kind of look at it.So this has been James Orr.I think this is module
I think this might be six, module six of 46 for the real estate investing courses, real estate investing secrets course.And I will continue to teach these.Hopefully I will be done by July 1st.It is now March 30th of 2024.
So hopefully we'll have that done.Have a great day, everybody.Bye bye for now.
With home prices up, mortgage interest rates up and rents up, but not quite enough to counteract the higher prices and interest rates.Cashflow on rental properties in Riverside is harder than ever.
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