The Ins and Outs of the Buy and Hold Property Strategy
When choosing a property exit strategy, you have three options: flip, hold, or finance.
Each works for different reasons, but if you’re really looking to get wealthy for the long term, the buy and hold property strategy can’t be beat.
What to Look Forward to from Using This Strategy
If you get this part wrong, you’ll always be flipping and chasing the next deal.
No matter how much money you make, you’ll spend it. We are human beings. That’s how we operate.
If we make a lot of money, we tend to spend it. You just end up being broke at a higher level.
So if you get this part wrong, you will always be working. You won’t be able to take time off because if you do, the money will take its time off, to.
If you get this part wrong, you will constantly be worried because you won’t have a safety net. There will be no end in sight. You’ll always be chasing the next deal.
Does that sound like financial freedom to you?
…But if you DO get this part right, you’ll have an air of confidence, knowing that money is coming in whether you flip that next property or not.
Your expenses will be managed because your income will be consistent. You’ll be able to take a breaks for spending time with family or just getting some time to yourself – without your business grinding to a halt.
Ultimately, you’ll be much closer to having the option of never working again. In fact, you’ll be getting there faster than 99% of the population.
5 Principles of the Buy and Hold Property Strategy
As you read through these, ask yourself, “Which one of these do I need most?”
Principle #1: Numbers
When it comes to buy and hold property strategy, you’ve got to know your numbers.
Ask yourself the following questions:
- Specifically, what is it going to cost you to hold the property? For example, over an average year, the basic expenses on a property are taxes, insurance, vacancy, maintenance, management, and, if the the property is leveraged, debt service.
- Will the income from the property cover those expenses?
- Ideally, will there be something left over for you?
Once you have the cost down, ask yourself how much the property actually generates. Is it more than what it costs you, or can you make up the difference from income somewhere else in your life?
Or maybe you have intentions for a property other than cash flow. If your goal is to hold it for the long run, this may be more of a speculation play for appreciation – just making sure either the property or you can support it.
You don’t want to over-leverage yourself to the point that it’s incredibly difficult for you to support the property you’re holding. And so… you’ve got to know the numbers.
You’ve got to make sure that, based on what you see coming down the road, either you or some nicely structured terms can support it. You’ve got to make sure it will pay you, not cost you.
Principle #2: Tenants
Next is the tenants.
Unless you’re holding vacant land or a lot in a new housing development, you can’t have properties without tenants.
Take your time selecting them. This will take some patience up front, but will pay off hugely in the long run.
Make sure to at least check:
- Whether they have the ability to pay rent
- Whether they have been evicted in the past
- Their credit score
- Their criminal record
In my opinion, their ability to pay rent is king. I really turn up my nose to people with an eviction record, and you probably will not see any past evictees in my houses.
Now, all this said, I do believe there are good people out there who have had bad luck in the past. I don’t ignore credit scores or criminal records, but I exercise some discretion at times. I evaluate these and make decisions on a case-by-case basis.
Principle #3: Management
Management is the most underrated aspect of escaping the rat race. Yet in many regards, it’s probably the most important piece of the puzzle if you want your income to be more passive than active.
It is as important, if not more important, than the property itself. You should exercise as much due diligence on your property mangers as you do the properties they’ll be managing.
I mean, you can manage your own properties… that’s fine. You can do that. But it’s work, and it’s not fun work.
It doesn’t pay much to manage your properties, either.
On the flip side, you may enjoy this type of work. In fact, it might be better than the work you’re currently doing at your job! But it’s not for me, and honestly, it’s not for most people.
In general, you probably DON’T want to manage the properties… but you DO want to manage the property managers.
How to Find Good Property Managers
The #1 question I’m asked about property managers is, “How do you find a good one?” Boy, isn’t that the million dollar question!
Here’s the quick answer: You work with a lot of bad ones until you get lucky.
Now, that’s a little facetious, but it’s not too far off from reality.
After all the dirty water that’s flowed under this bridge, here’s how I do it now:
- First, I ask for referrals from other satisfied cash flowing investors in the area. Just go your REIA, interact with some other investors who are holding properties, and find out who they’re using. This isn’t foolproof by any means, but it’s a starting point.
- Second, I start the managers off with just one property. Then I go through the process and wait until that one property is up and performing before I give them another one. I’ve gotten burned more than once by giving all my properties to the first manager I liked, so this is how I do it now.
- Third, as soon as I get a property manager, I immediately look for a back-up property manager. When I interact with my property managers, I always casually mention the other property manager. This causes performance to increase and expenses to “magically” decrease due to that inherent air of competition. I don’t pit them against each other – it just happens naturally when they become aware of each other’s existence.
Now, I don’t know if you’ll hear this three-step method anywhere else, but this is the safest way I’ve found to do it. And I’ve owned and managed a lot of properties, both for myself and for my clients through Cash Flow Savvy. It hasn’t been smooth sailing the whole time and we’ve made a lot of mistakes, but with these steps, we now operate much more smoothly than we did in the early years.
Principle #4: Profit Centers
Next are profit centers. This is a biggie.
When analyzing deals and deciding whether or not to purchase a property, most people only really look at two things: cash flow (“How much money is this going to make me?”) or potential appreciation (“This is a nice area and two Fortune 500 companies are moving here soon, so this is a good buy!”).
But cash flow and potential appreciation are only two profit centers from real estate. There are two more that most people overlook: depreciation and amortization.
This is most likely because they don’t understand how they work. It doesn’t help that these two profit centers work under the radar, making it easy to miss them.
But even though the profits generated from depreciation and amortization aren’t as tangible or as noticeable as cash flow and appreciation, don’t get it twisted. They are there working for you whether you pay attention to it or not.
Depreciation is a deduction the IRS allows you to take each year for the wear and tear on your property. Very nice of them, right?
You can’t depreciate the land, but you can depreciate the structure ON the land, which typically translates to about 80% of what you paid for of the property. This deduction can be taken for 27.5 years.
You may never get to put a $1,000 of depreciation in your pocket. Rather, you’ll be able to KEEP $1,000 of depreciation in your pocket in the form of not having to send it to Uncle Sam.
Since you don’t actually receive the money from depreciation, most people don’t even notice it – but you’d certainly notice if depreciation didn’t exist. It’d hit you in the form of a larger tax bill, and who wants large tax bills?
This is another profit center that’s misunderstood or ignored. Amortization is the paying down of the debt on your property.
But it’s not you who will pay it down – it’s your tenant.
I’ll break this down for you in an example.
Let’s say that each month, you collect $1,000 of rent and pay the property bills. Then, you pay your debt on the property. You’re left with $250 cash flow.
Everyone just sort of chalks up the $750 as money that went toward maintaining the property as a loss. They assume it’s gone – disappeared.
But it hasn’t disappeared. You got $250 of the cash flow, but some of the $750 is yours as well. A portion of that payment you make to your debt. It goes to principal.
So it’s not a complete loss. Not by any means. It’s a significant gain over time.
Through amortization, your tenant builds your equity.
How the Profit Centers Work Together
Here’s another example: Let’s say you have a property with a cash-on-cash return of 8%. It’s in the Midwest in a southern community with an annual appreciation of 3%. The depreciation might be around 9%. Amortization might be around 5%. That’s a total ROI of 24%.
Well, where in the world are you going to get a 24% return on your money?
I want to talk about these numbers – the appreciation, depreciation, and amortization.
If you held that property for 3-4 years, took all that return, and annualized it, it would probably come out around 24%. (Basic properties that produce 8% cash-on-cash returns are typically 20-30%.)
That’s a reality. If that paid you 24%, where in the world are you going to get a 24% return on your money?
I always find it funny when people say that buying a new water heater for their property “ate up an entire year’s worth of cash flow” and “made it a waste of time to own the property.”
What they’re forgetting is that the other 16% is still working for them. They may have lost out on one profit center, but the other three were still working for them.
This is how the four profit centers work, and they’re the reason why real estate has created more wealth than anything else on the planet. It’s not just based on cash flow – it’s based on cash flow, appreciation, depreciation, and amortization, and if you put leverage in there, it’s five times the growth of anything else out there.
Principle #5: Growth
Principle five is growth.
Now, you could hold one property. You could buy it and just hold onto it forever, and it would grow on its own just fine. There wouldn’t be anything for you to do but collect rent and pay the property’s expenses, and your wealth would grow.
But you can considerably speed up this process by using the profits from your property to buy more properties.
When those properties appreciate, you can refinance them to pull out the money and buy more properties. It’s a process.
It does start off a little slow. For the first couple of years, it’ll feel like nothing is really happening.
But a few years down the road, it will start to speed up. By the fourth and fifth year, it will speed up very quickly.
The idea is to leverage as much as you comfortably can to build your wealth. Then, once it all cash flows, eliminate the leverage to sustain your wealth.
I recommend you just refinance, refinance, refinance until you get your cash flow to where it supports you without your having to work. Then, start allocating extra portions of your cash flow to pay down the debt on your income properties.
Your properties help you acquire properties, and then they help you pay them off. You just pick a property (I always like to look at the one with the highest rent) and knock it down. Once that debt is eliminated, it’ll create a significant spike in your cash flow.
For example, if I had a property that paid me $2,000 in rent and my debt on it was $1,000, I’d be making maybe $500 cash flow on it. But once I paid off that $1000 debt, that $500 cash flow on that property would probably shoot to about $1500. That’s why I like to look at the highest ones first.
The Flop to Your Flip
You don’t get to do any of this if you only flip properties and contracts. Instead you just constantly market, chase deals, and flip properties. This will earn you a lot of money, but this cash should fuel the acquisition and management of your cash flow.
In other words, you may need both parts for a while, but eventually, you won’t need to flip. You CAN do it as long as you want, but you won’t NEED to keep getting up and chasing deals if you’re holding some properties.
And you don’t need to flip at all if you don’t want to, even to get started. You can create that initial wealth through your job or another endeavor, but you’ve still got to buy properties to hold or all of the wealth and freedom that real estate promises will never be yours.
You’ve gotta hold.
A Better Outlook on Life and Wealth
When you’re doing a job you hate, all you can think about is retirement.
That’s how I used to be. All I wanted was to get to the point where I didn’t have to work anymore… because I was doing something I didn’t like.
But once I got enough cash flow to stop working, I realized I did want to work. I just wanted to do something different.
If you master the buy and hold strategy, this is the choice you’ll get – to either continue working on something you love, or retire early.
Pretty sweet, right?
Ryan Bagley Badass-ery
All this makes me think of Ryan Bagley, an Epic Pro Academy member with a sole focus on buying and holding. He did it on the side while serving our country (Air Force, I believe).
In just a few years, though, he retired and is relaxing on the beach. I think he just moved to Florida.
…All because he chose to hold more than he sold (and with creative financing structures as well).
Just last week, he sent me a message in our private Facebook group saying the following:
“Picked up our 26th rental today and crazy as it seems, my first subject-to deal. Thank you Matt and Mercedes for showing me the light, and much needed thank you to my new best bud Johnny Miller. And of course, I can’t leave out the lady whose referral made it possible, River Wang [a fellow Epic Pro Academy member].”
He contracted this beauty with zero down and zero out of pocket. No payments until February 1st. The house is rent-ready, the loan balance is 165, and the fair market value is 180-185. Nice one, Ryan!
This isn’t the most exciting road to freedom, but it is the fastest.
And I have to say, at Ryan’s young age, being retired and on the beaches of Florida is pretty damn exciting. The road to get there might not have been flashy, but he sure got to the exciting part quickly, and it’s going to last indefinitely as long as he manages his assets well.
That’s Ryan “badass” Bagley for you.
There’s a Little More to It…
So that’s the buy and hold property strategy for you! It’s not flashy, but it’s crazy effective.
But this strategy is only ONE of nine pillars in the REI Ace framework. You can learn more about these pillars in other blog posts or my podcast, but if you really want to learn them in depth, learn how to apply them directly to your business, and get some face-to-face time with the experts, you’ll want to attend our upcoming Epic Intensive: The Cash Flow Conclave.
The Conclave is a jam-packed, 3-day, invitation-only event.
I’ll be there, of course, along with the following guest speakers:
- Jeff Garner – “How to Influence Sellers and Win Deals”
- Tim Berry – “Asset Protection and Tax Hacking”
- Corey Kendig (Epic Pro Academy student) – “Massive Equity Acceleration”
- Stuart Gethner (Epic Pro Academy student) – “ROI Multiplied”
- Josh Miller (Epic Pro Academy student) – “Piles of Cash AND Streams of Cash Flow”
The Conclave is coming up fast and spots are limited, so claim your seats now!