Large Cash Flow Versus Long Term Hold Investing Styles

With all the opportunities in real estate investing today there has been a very broad investor audience. From the seasoned investors like Warren Buffett, to the new Wall Street investors, the individual mom and pop investors and now even the new beginners. Actually new first time investors make up about 50 percent of all real estate investors today. With so many different investors there are obviously many different investing styles. WHAT IS YOUR REAL ESTATE INVESTING STYLE?

Strong Cash Flow or Long Term Hold

Large Cash Flow Versus Long Term Hold Investing StylesWorking with investors every day and hearing of all their different goals and objectives, I see the two primary differences in what types of property people are looking for. They generally fall into two camps, either Strong Cash Flow or Long Term Hold properties.

To be an effective real estate investor, it is imperative to know what exactly you want to invest in and why. Knowing the attributes of each investment type may be beneficial to identifying your desired investment.

The main distinction between the two is those buy and hold properties tend to be more expensive on the purchase with a smaller monthly cash flow but with a larger gain on the sale price. The large cash flow properties tend to be cheaper on the purchase with larger cash flow. The sale on the other hand will generate smaller and often much smaller gain on the sale price.

Attributes of Long Term Hold Properties

Sustainable Markets:

With 380 statistical markets (MSA) in the U.S. You can rest assured knowing that there are markets which are better poised and positioned to give you better, longer lasting more sustainable returns than others. Investors looking for long term are always looking to invest in emerging markets.

Sustainable Properties:

Once you identified the best market for sustainability, it is imperative to find the properties that will be the most sustainable. There are a number of things to look for that make up these properties.

Sustainable leases:

I have found great success in the 2-3 year leases. To maintain long term sustainability having long term tenants is paramount. Having a 2 or 3 year lease on a house will help you find tenants who essentially are telling you they too want a rental property for a longer duration. You tend to find tenants who are not interested in moving every year, but instead want the security of knowing they have a place to live for the duration.

The multi year lease removes the mystery to the landlord (Will my tenant renew their lease or will I be stuck with another vacancy to fill next year?) and the mystery to the tenant of course is (How much will rent be next year, or will I be asked to leave because the landlord wants to sell the house?) The transparency that comes with 2- 3 year leases helps both landlord and tenant.

I believe long term hold properties represent the Number 1 investment objective today. The key to the long term hold is finding the sustainability of all aspects of the investment from location to property to tenant and even property management for us passive investors. If you will be hiring property managers, you will want sustainability there as well and you want to hire the right property manager.

Attributes of Cash Flow Properties:

Age of properties:

It is rare to nonexistent to find a new property that is strong on the cash flow arena. Typically your strong cash flow comes from homes in the older areas and these homes tend to be aged and more tired out. Things you want to watch for are deferred maintenance and outdated features and benefits. What I mean by that is today people want homes that are at least 3 bedrooms and 2 baths. When buying cash flow properties, always try to find structurally sound and well maintained (or updated) property with at least 3 bedrooms and 2 baths.

Pro-formas:

Sellers tend to make a pro-forma appear to be stronger than the reality of them. Perhaps you are buying a property that is not turnkey and you must hypothesize a pro-forma. Either way you want to make all considerations for the age of the property and possible maintenance or deferred maintenance. These older properties can still be great investments and provide incredible cash flow. However, without proper due diligence, they are more susceptible to providing a much smaller producing cash flow than anticipated.

Exit strategies:

You want to know your exit strategy going into the sale. Strong cash flow rental properties tend to be more of a tenant style property as opposed to an end user type property. When investing in strong cash flow properties you want to identify all opportunities for your exit strategy. If the property is in a strong tenant occupied area your only exit strategy may be to sell to another investor. Investors of course limit your buying audience and they will want a good deal on the purchase. They will not be the buyer looking to buy for full retail like the buy and hold property buyers are.

Don’t Buy a Sports Car if You Need a Pickup Truck

The metaphor of course suggests you want to buy the type of property that is best suited to accomplish your long term objectives. I always consult with my investors before introducing them to property, interestingly enough, what they say they want to purchase does not coincide with what their objectives for investing are. Often I am told they want to provide a long term retirement plan by purchasing real estate that will increase in value. They then say they are looking for cheap property. This is incongruent as the cheap property will not be a suitable investment for the sustainability of a long term hold and the property value on cheaper property does not appreciate very fast, if at all. This is why knowing your long term objective before shopping for property is so important.

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