In this episode, Cynthia Meyer and Veronica Woods discuss 5 Buy and Hold strategies and 3 key questions to ask yourself to know if a "buy and hold" strategy is a good fit for your goals.
In this episode of the Rental Property Café™ Video Podcast they cover:
Buy and Hold Strategy 1: Buy and Rent [00:01:10]
Buy and Hold Strategy 2: House Hacking [00:01:29]
Buy and Hold Strategy 3: Hold a Mortgage [00:01:53]
Buy and Hold Strategy 4: Buy a Note from another investor [00:02:13]
Buy and Hold Strategy 5: Real Estate Investment Trusts (REIT) [00:02:28]
Key Question 1: Are you hands-on or hands-off? [00:03:13]
Key Question 2: How much capital will it take? [00:07:45]
Key Question 3: Is it easy to get started? [00:13:49]
- “Just in general, I want to encourage folks to think buy and hold means you're going to hold it for a while. You may have to sell it sooner, but you should think about holding it for 10 or more years.”– Cynthia Meyer
- “Sometimes having a more effective team can save you money over the longer term. The do it yourself paint jobs and getting your friends together to do certain repairs doesn't really work when you're trying to build up a portfolio.” – Veronica Woods
- “The more of your time and effort and sweat equity that you can put into the project, the more potential reward, but also you're taking more of the risk yourself.”- Cynthia Meyer
- “There's no perfect strategy and depending on where you are in your life and what's important to you. There are always going to be different trade-offs to all of these strategies.” – Veronica Woods
About the Rental Property Café™
The Rental Property Café™ podcast offers a real estate tool kit for busy professionals who are building a real estate portfolio. In each episode, co-hosts Cynthia Meyer & Veronica Woods explore ways to grow a successful real estate business while growing your career.
About Cynthia Meyer
Cynthia Meyer is a financial mentor, CERTIFIED FINANCIAL PLANNER™, CFA® Charterholder, real estate investor, blogger, and the founder of Real Life Planning. She offers unbiased financial planning and learning resources to real estate investors. Cynthia is a first-generation rental property owner, who built a rental property portfolio with her husband, Steve, while they were both building their careers. She lives in NJ, where she balances teenagers, her financial planning practice, and a rental property business.
About Veronica Woods
Veronica Woods of Daniel Woods Real Estate, real estate advisor and investor, is passionate about helping her clients create wealth, legacy, and lifestyle through real estate. She works with people to buy, sell, rent, and develop residential and small commercial real estate in Delaware County and Philadelphia, PA. An MBA in finance from the Wharton School, Veronica also shares her real estate wisdom with new investors on her YouTube channel.
Transcript - Rental Property Café™ Episode 7: Is a "Buy and Hold" Strategy A Good Fit For You?
[00:00:11] Cynthia Meyer: I'm Cynthia Meyer with Real Life Planning.
[00:00:15] Veronica Woods: And I'm Veronica Woods with Daniel Woods Real Estate.
[00:00:18] Cynthia Meyer: So this morning Veronica and I are talking about whether a buy and hold strategy is the right fit for you. Everybody's situation is unique and everybody has their own risk tolerance, their capacity for risk, their own goals and their holding period. In the context of these buy and hold strategies that we're going to talk about, we want to say, is it hands-on or hands-off? How much capital do you need and is it easy to get started? So we're going to tackle those today and we hope you enjoy the conversation.
[00:00:48] Veronica Woods: We can go jump into running through the different buy and hold investment strategies. A lot of times, we would just say, "Buy and hold, there's only one way to do it." Just for context of how to evaluate that for yourself, we did want to quickly run through a few of the more common ones that are more at reach for our typical clients.
#1 Buy and Rent
[00:01:10] Veronica Woods: The first one is just simply, buy and rent. Which is exactly what it sounds like. You buy a property and just use it for income generation. You can buy a single-family house. You can buy vacant land. You can buy yourself storage. All of those give you the opportunity to buy and collect rent.
#2 House Hacking
[00:01:29] Veronica Woods: Then, we have what we call house hacking. I don't know who came up with the term house hacking. Essentially it's buy, live in part of the unit, rent out the others. Or you can buy and operate a business in one of the units and rent out the others as well. You're actually living or using a portion and then just generating rent out of the other units.
#3 Hold a Mortgage
[00:01:53] Veronica Woods: You could also hold a mortgage, so you can be the bank for investors. You could partner from a strictly lending point of view, but you could also be an equity investor in helping an investor or homeowner fund a property. I will turn it over to you and go over the last two.
#4 Buy A Note From Another Investor
[00:02:13] Cynthia Meyer: We also have buying a note from another investor. So this is an investor that has made a private loan to somebody. Do it for a real estate project and you're buying that note with certain terms from that other investor on a secondary market.
#5 Real Estate Investment Trusts (REITS)
[00:02:28] Cynthia Meyer: We are going to talk about real estate securities including REITs, the most common real estate security and there are both publicly and privately traded REITs. And then, we're not going to talk today about for accredited investors but those are also topics that an accredited investor could do as a high net worth investor, things like syndications, for example, and opportunity zone funds. We'll touch a little bit on real estate crowdfunding, which is new in the real estate space.
[00:02:57] Veronica Woods: Okay, so hopefully that gives you the broad array of buying whole opportunities. We're going to take those five that we say we going to focus on and give you three key questions to evaluate what would be the best fit for you.
Key Question #1: Are You Hands-On Or Hands-Off?
[00:03:13] Veronica Woods: The first question to help you evaluate whether a strategy is a good fit for you is, do you want to be hands-on or do you want to be hands-off? Even though I phrased the question like that, it's really not a black and white issue. There are different shades of hands-on to hands-off. It really evolves thinking about your quantity of time, skill and interests that you have at hand. Interests mean, like you may just not have the personality to deal with some of the headaches involved in certain strategies. You really have to be introspective and figure out what's best for you. What hands-off means involving some form of professional property manager. Even that is shades of gray. There's some property management companies you can go to and they don't want you involved at all. They just want you to collect the check. There's some that do view themselves more partnering with the local investor. All that being said, out of our five that we talked about, we're going to just talk in terms of more hands-off and more hands-on. I'm going to start with talking about the strategies that are more hands-on which are the "buy and rent" and the "house hacking- buy, live- in, and rent". It's good to just be honest with yourself about how much you want to do and what it just makes sense to outsource from the beginning.
[00:04:36] Cynthia Meyer: There's also the house hacking strategy, as Veronica mentioned earlier. And by the way, Veronica, that I believe the term was coined by Brandon Turner, one of the co-founders of Bigger Pockets. In one of his earlier books, is that the house hacking idea that you could have your house for income. There are also things with less control. More hands-off, if you will. One would be holding the mortgage on a property. So you are lending money to somebody to buy their property. Typically, you're going to get a higher than a market rate of interest on that because the borrower may have been turned down by a traditional institution for some reason or another. Therefore, you're going to charge a little bit higher premium for the risk that you're taking on. You still do have to be hands-on with your due diligence around the borrower. There are certainly credit risks and property risks in there. There are note servicing companies that do allow you to outsource collected payments from the owner. Veronica, in your experience have you had in a secondary note market, for example, or in the mortgage market, you have anything that you would add to being the lender?
[00:05:39] Veronica Woods: Yeah, I would just mention that if you've had experience being a hands-on land lord, or property manager, you will do a better job at managing that risk about the due diligence. If your partner, the investor that's doing the on-the-ground work runs in the difficulty, if you have that experience, you can quickly jump in and assist.
If you're a pure lender and you don't have any expertise to add, then you're really at the discretion of the investor to figure it out for themselves. That's just something to keep in mind.
[00:06:15] Cynthia Meyer: The most hands-off thing and the place where many people start these days when you're first building your foundation is in real estate securities. Those are things like real estate mutual funds, individual homebuilder stocks, the real estate investment trusts, publicly-traded funds, real estate ETFs exchange-traded funds, for example.
What's right for one person is not necessarily right for the other person. You're obviously going to want to make a choice that's right for your specific goal and time horizon. How you're going to use the funds eventually. But that can be an inexpensive way to get started and very hands-off.
[00:06:50] Veronica Woods: I do want to bring in one more. I just thought of the house hacking. Why it may be a little less headache as far as being hands-on because you're so close to your rental units. I personally have house hacked. My office is a quad. Where my office is in one unit and then we rent out the other three units. So having the proximity just makes it a little easier to keep your eyes and ears on what's going on. It's hard to have something truly in the middle, but I would say, being so close to the property because you're actually consuming the rooms yourself, it does make it a little easier to monitor. You can move on when you're tired of it. You can transition from a house hack to a full rental. That will allude to in one of our next question about how much capital it takes.
Key Question #2: How Much Capital Will It Take?
[00:07:45] Cynthia Meyer: Yes. The most capital-intensive type of buying hold strategy is obviously to buy and rent. It certainly you have to put a down payment on a property. If it's an investment property, you're going to have some cash reserves in advance to pay the first year of maintenance and capital expenditures, any renovation costs that you might have to pay. So certainly, buying and renting something is the most capital intensive. Even a small community in the Midwest, right? It costs a lot of money to buy a house. That's why so many people, as Veronica mentioned, get their start in real estate investing by starting with some kind of a house, where they're trying to offset the heavy expenses of buying a property with rent from other tenants.
It's also capital intensive to hold a mortgage on a property, obviously. You're going to put even more capital into the transaction if you're holding the mortgage. So you're providing the lion's share of the cost of the acquisition. You're the bank for another investor. Although in some cases, a mortgage holder might be a second mortgage, a second lead behind another loan from a developer or an investor to help get them through the purchase.
It is not very common for individuals to be mortgage lenders. In my experience, most of the clients I have that do hold mortgage notes are investors who have tried to divest of their property through an owner-financed sale. They're looking to manage the tax consequences of that situation by taking the money in a little at a time.
[00:09:15] Veronica Woods: In terms of the less capital intensive, one of the great things about the house hack, if it's a multifamily, you can buy a duplex with as little as 3 1/2 % down with an FHA mortgage if you agree to live in the property. Versus if it was a pure investment property, you're typically putting down 20 to 25% for that same type of property. That's why it's such a good strategy as a newer investor that you just have less funds that you have to bring to the table. Typically, you only have to live in the property for a year. Then you have that loan locked in then still for 30 year rate. You can move on and do it again. I know a lot of investors that got their start by moving around every year and taking advantage of that.
[00:10:06] Cynthia Meyer: By serial house hacking, if you will.
[00:10:08] Veronica Woods: Especially if you don't need lot of space, it is a very efficient strategy. The other strategy we talked about at the beginning is buying notes. Buying notes is really a secondary market and you can buy notes there in first position. You can buy notes there are in second position. You could buy performing notes where the borrower is actually keeping current with the payments. You can buy non-performing note, which is the borrower is behind or may be even on the threat of foreclosure. Notes are typically bought at a discount. That's the whole benefit of getting in, not when you're creating the initial note, when we talking about holding the mortgage, but buying that note from maybe that person who initially took out or held the mortgage and just got tired. So I just looked up a quick stat, the average performing note is typically bought at an 84% discount to the loan balance and the a non-performing note is roughly at 52%. This is from Paper Track. It's one of the few kind of note exchanges that are out there. There are a number of sites where you can find information about available notes across the country, but the fact that it's at a discount, that means it's less capital intensive.
[00:11:25] Cynthia Meyer: I think this is really fascinating area of real estate investing right now that not as many people are aware of. We can tackle that in one future episode as just a standalone topic, because I think a lot of folks would be interested in it.
[00:11:38] Veronica Woods: The last benefit for the notes and I would say I'm interested in that topic myself as an investor, but one exit strategy from notes is to actually take possession of the property. So you buy a non-performing note, you go through the foreclosure process, then you can switch to the buy and rent strategy and you can fix up the property and then own the property. So there are a lot of different exit strategies, but that is another way to get in on the other side to actually acquire a property.
[00:12:10] Cynthia Meyer: Ah, I hadn't thought about that that's really interesting. It sounds to me like that's not a first purchase for somebody, right? That's for somebody who knows what they're getting into, I would imagine.
[00:12:19] Veronica Woods: Yeah. I mean, I do say that there is a lot with technology. I think it's a lot easier to get into notes today than it was even like 10 years ago. You go to some of the sites, they have all the due diligence outlined for you. They have payment history. They have the title report, maybe have an inspection report.
[00:12:40] Cynthia Meyer: You know in all my years as a financial planner and a financial educator, there are a lot of people who are interested in real estate, but they have not yet built the personal foundation that is going to allow them to make an expensive purchase of a property. Still being exposed to the real estate sector is great for diversification and asset allocation. Your mix of investments to that is going to lower the ups and downs of being an investor. One of the best ways to get started, and you can do this with your first job where you have a 401k plan, is in real estate securities. Many plans offer a real estate fund or offer a target date fund that includes a real estate fund, so you can get exposure to the sector. There are easy and inexpensive ways to participate in that as we mentioned earlier without recommending any particular fund, I can say that getting exposure to the sector, it's not like you're going to put all your eggs in that basket, but getting exposure to it in whatever you're doing in your- in your IRA or Roth IRA, or your 401k plan or a textbook mortgage account including real estate in the investment mix may be appropriate for your situation.
Key Question #3: Is It Easy To Get Started?
[00:13:49] Cynthia Meyer: I hope that people will consider it, even if they're starting with a small amount of money. And how about number three? Is it easy to get started? There's certainly a learning curve right, Veronica?.
[00:13:58] Veronica Woods: Yeah, and I think the learning curve involves feeling, " Am I making wise decisions?" There's capital involved and you have to figure out how much you want to do yourself or not and make wise decisions about your team. That's part of what makes it a little slower for people to get started is, you don't have a team. You're starting from zero and it takes time to build relationships to really have a solid team to be able to really make good decisions and quickly. You can't snap your fingers and have an income-producing property. You got to find the property. You may have to do some work. You have to find a tenant. All that takes time. It's not like pushing the button on your trading site to buy a security. That is something to think. As you build up assets, you have more leverage on multiple fronts from financing as well as just experience and then it becomes easier. Its always harder at the start. But once you get started in building a rental property portfolio, it does get easier. So I do want to give some hope out there that is not always as hard when you first pull that trigger on your first property.
[00:15:10] Cynthia Meyer: I totally agree with that. When Steve and I first got started, we ran some numbers first. We picked a market and then we picked a team. Not the entire team, right? Like we didn't necessarily have the rehab or construction team yet. We picked an investment-friendly Realtor® and a professional property manager. Two people who knew each other and who could collaborate with us on finding good properties. And so then, we started to look at them. We had a longer period after we bought our first one. Then we started figuring it out and then we bought the remaining properties. We bought them more quickly. Now we're in a stage where we've just finished a reverse 1031 exchange from a single-family home to a duplex. We're in the middle of another 1031 exchange. We're making some positioning in our portfolio to try and grow our number of doors. We love having that team. I cannot emphasize how important it is to have a realtor and a property manager who understand investing.
[00:16:05] Veronica Woods: It's sometimes it takes trial and error. I have gone through a number of contractors.
[00:16:10] Cynthia Meyer: I think we all have.
[00:16:13] Veronica Woods: Be patient and it's really is like relationships with people. If it's something that you know that you want to work on longer-term, you'll really take your time and building that team together and buy properties of your team's expertise. At the beginning, you need this team, but then if you want to scale up and maybe go from a single-family to an apartment building.
The other thing that I think has made it a little easier to get started in some of the other areas, even holding a mortgage is technology. I think investors, people with the money, and people with the know-how have been able to connect on a lot of platforms online and this is made more visibility the information. Before you were, trusting just the family friend that you were going to loan the money to. Now you have more people to pick from. You can pick a project that you want to fund directly or by a note and you just have more visibility to information. So I think that has made a lot easier to get started even on the lending side.
[00:17:19] Cynthia Meyer: There's this revolution that's happening in the real estate investing space that is really just getting started in terms of technology and digital impact on the sector. This is something that happened in my career as a financial planner. This is something that started in the 1990s and people's access to information about the capital markets, right? About buying securities, for example. The cost has really been compressed for people buying securities. What used to cost $300 or $400 now cost pennies. There's just so much more information available right now if you're an investor in traditional securities. That is just starting to happen in real estate. First there are more real estate markets, right? They're not consolidated like they are. As these technology tools and digital tools and kind of community-based platforms are evolving, investors are getting more information and that's going to help them make better decisions.
[00:18:12] Veronica Woods: On the house hacking side, in terms of one challenge that I want to mention, you have to want to live there. I was trying originally trying my house hacking strategy, there was a property where the numbers made sense, but I didn't want to live there. It just had to be a gut check of," I don't know if this neighborhood is ready for me to implement this strategy." And I had to forgo something to maybe spend a little bit more money for an area that I felt more comfortable and living in. That's just a reality, it sounds like a good idea, but you do have to be willing to live in the property or else you will be committing fraud.
[00:18:51] Cynthia Meyer: Sure. I want to jump in and say that Veronica mentioned the traditional house hacking methods, which is you buy a multiunit, you live in one unit, you rent out the rest either to residential or commercial tenants.
There's something that I would call a house hacking 2.0. You already own your property, but you want to generate extra income from it. That could be things like taking roommates, renting it out in an Airbnb for the weekend, or some other vacation property portal. Maybe renting out your parking space for storage in your garage. Those are strategies that are a little bit easier to start. Especially if you already own your place.
Another area that's a little bit easier to start is buying a note from another investor, which we talked about. Now, obviously, there's some due diligence involved, but there are marketplaces, and brokers for this as Veronica mentioned earlier. That does make it not as difficult as it used to be, where you really had to be in a private network to know about these. And then obviously investing in real estate through some kind of publicly traded real estate investment trust or ETF or mutual fund, very easy to get started. That's something to get done generally with the click of a button.
I was wondering if we can go back to talk a little bit. I've heard you say that people have to have realistic expectations. You know, to talk about expectations for financial returns, and the real estate cycle. You maximize your returns if you're going to be willing to hold something for a full real estate cycle. I was hoping you could speak a little bit more about that real estate cycle because I'm not sure everybody understands that.
[00:20:15] Veronica Woods: Yeah, in general people think of a real estate cycle is 10 to 20 years. And sometimes people think that a buy a whole strategy of two years is going to do it for them in terms of reaching their financial goals. If you're thinking about buying hold or how long do you think you'd want to invest in this area? If it's 3 years, you're definitely will be leaving money on the table. Now there are some old-school investors and they say, "Buy and hold forever." That may or may not always be the best financial thing to do. The thought of holding longer-term is something I think you should have is kind of the forefront of your mind if you're thinking about buy and hold investing. We always talk about there's a mix of you make your money on cashflow or you make your money on appreciation. Some neighborhoods is more cashflow dependent. So you really have to hold the investment longer in order to get your target 10% or whatever return you want. There are other areas, that are higher appreciating where maybe you can hold the investment for a shorter period of time. It's good to be realistic of what kind of market you're in and how long that time horizon really should be. If you're thinking that it's probably two years....
[00:21:32] Cynthia Meyer: no.
[00:21:33] Veronica Woods: That's what you're thinking, then maybe you should rethink your strategy.
[00:21:37] Cynthia Meyer: Yeah, agree with that. Just in general, want to encourage folks to think buy and hold means you're going to hold it for a while. You may have to sell it sooner, but you should think about holding it for 10 years. Real estate is direct property investment. If you're looking to generate both cash flow and appreciation from something, you've got to hold it for a longer holding period. In many cases, we don't know how quickly something is going to sell anyway, right? We've all seen those HGTV shows, where the flipper can't sell their property and the interest clock is ticking. With a long-term investment, it's long-term, right? We're not day trading real estate. The target return obviously also is going to vary by a number of factors. The more hands-on something is, the more of your time and effort and sweat equity that you can put into the project, the more potential reward, but also you're taking more of the risk yourself.
What would you say about that? Like how should people think about setting some return expectations for themselves?
[00:22:35] Veronica Woods: I think you should ask the question, "What is the typical return in the area?" You can't speak in generalities. Each market is different. If you were scoping out a neighborhood or market, asking the realtor," What is a common return people get in this area?" That should be a good benchmark and then you have to compare it to what your target financial return is. Especially if you want to hold longer term, you may be willing to have lower shorter-term cashflow returns as you have the stability to hold out longer. There is a lot of emphasis on the first year cash on cash return, but sometimes that's not always the best way of looking at it, especially for a longer-term hold opportunity.
The first number I look at is how much cash flow are we making on a monthly basis. I like to be in and around the $200 a month per door from a little lower then I want to definitely feel like I'm in the area that has more upside and that's the benchmark that I, look at first. You have to be realistic because that's also a function of how equity you have in it. So you have more financing, a larger loan, you're going to have a lower cash on cash return.
[00:23:50] Cynthia Meyer: So interestingly, I like to dig into academia sometimes. I was doing some research for another project on real estate fundamentals and I came across an academic study called, The Rate Of Return On Everything. It was from.. in developed economies, what are historical mean rates of return from 1870 to 2015. So it's really a long period of time. Obviously, looking in the rearview mirror, the mean return for housing was actually the highest return out of all of the four areas they studied. So they studied treasury bills, bonds, corporate bonds, equity or stocks, and housing beat stocks by 16 basis points or 16 100th of 1% and had a lower standard deviation or volatility then the stock market in general. I think that's a reason why adding real estate to an overall portfolio helps diversify the portfolio and tamp down the volatility a little bit and help bolster returns is because housing as a sector has excellent long-term returns. Let's be realistic about them.
[00:24:55] Veronica Woods: I think people, you know, they throw away dollars to save pennies. Sometimes having a more effective team can save you money over the longer term and the do-it-yourself paint jobs and getting your friends together to do certain repairs doesn't really work when you're trying to build up a portfolio. That's something that might be easier to do in your own house when you're preparing to sell. I do think that most people learn along the way that having a strong team to play the different positions saves people more money over the long term. I think that hands-on hands-off decision really has to be, like I said, back to the time, your skills, and your interest. If you don't have any of those and you're just trying to be cheap, it's probably not going to be a good look.
[00:25:47] Cynthia Meyer: So just to summarize here, to figure out what is best for you, you want to make sure that you're asking yourself these three questions at a minimum. And then discussing them with any advisors that you use to help you in a process like a tax advisor or a Realtor® or a financial planner.
One, do you want to be hands-on or hands-off?
Two, how much capital do you need?
And three, how easy is it to get started?
And that's foundational for any decision that you're going to make about any of these buy and hold strategies. So Veronica, as always you're one of my favorite people to talk to and thanks for coming to the Rental Property CafeTM this morning. Any last words?
[00:26:32] Veronica Woods: Only that there's always going to be trade-offs. There's no perfect strategy and depending on where you are in your life and what's important to you. There are always going to be different trade-offs to all of these strategies.
[00:26:44] Cynthia Meyer: Thanks very much for listening to us today. If you like what you've heard, please subscribe to the podcast so you can hear of new episodes and check out different recordings that we've done previously to see if there's a topic that interests you. Email us at firstname.lastname@example.org. If you have an idea or a suggestion that you'd like to see us tackle on future episodes, we'll see you next time.
☕ See more financial planning guidance for real estate investors from Cynthia Meyer on the Real Life Planning blog: https://reallifeplanning.com/blog
Connect with Veronica Woods of Daniel Woods Real Estate: dwoodsrealestate.com/letsconnect
☕ Do you have a topic suggestion or want to be a guest on future episodes? Email your ideas to email@example.com.
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