Owning real estate has probably been the best route to wealth throughout history and is likely to be for generations to come. In fact, a 2012 Federal Reserve study found the average homeowner had $174,500 of wealth while the average renter had but $5100. So what could owning five or ten or twenty homes do for one’s financial outlook?
Unfortunately, buying real estate and holding it requires money and if you don’t start with any that can be a great challenge. Luckily there are many methods to overcome such a challenge. However, first it’s important to understand the most important principle of buy and hold.
The Buy and Hold Prerequisite
In the famous Stanford marshmallow experiment, children were given the choice between eating one marshmallow or waiting about 15 minutes without eating the marshmallow, in which case they would get two. Most kids failed. The researchers then kept track of the children and found that those who had waited for the second marshmallow had substantially better life outcomes.
The ability to delay gratification is paramount to success. Buy and hold is the second marshmallow. Buy and hold is the ultimate get rich slow scheme. Most buy and hold investors live substantially below their means for many years before building enough equity and/or enough cash flow to enjoy the fruits of their labor. They live below their means in order to grow their means.
But how do you start? Here are some proven methods:
Start out rich
This would be my favorite method, although unfortunately, it’s not for everyone.
Save and Hold
Many people with solid jobs that also want to invest simply live below their means and invest on the side. The advantage to this is it’s easier to get bank loans with a W2. However, it’s also much more challenging to find good deals with a job, and of course, you are stuck with the job. This is a fairly passive approach to real estate investment.
FHA loans are a great place to begin, although you will need a job to get one. It’s a great start for those looking to transition from a job to real estate investment. FHA will finance 96.5% at very low interest rates for a homeowner’s property. The great part is that you can finance up to a fourplex. So why not buy a fourplex, live in one unit and rent out the other three?
When a seller is motivated there is often an opportunity to get into a property for little to no money down. One method would be owner financing or a land sales contract. If the seller has some equity, then they can loan you the money to buy their house from them. Or more likely, they can loan a second to you behind a bank loan to cover the down payment.
Another option is to buy the property “subject to the existing financing”. This transfers the deed to you, but leaves the seller on the original mortgage. It will take a motivated seller and rapport to convince a seller to do these types of deals, but they’re done all the time.
Flip and Hold
This is probably the safest, most effective way to buy and hold. For investors who are flipping, try to live off the bare minimum and hold every 2nd or 3rd flip. For example, use the profit from the first flip to live off of and the profit from the second flip for the down payment on a property to hold. Then rinse and repeat.
Bank loans won’t cover the full cost of the property and hard money loans are too expensive for buy and hold, but there is a third way. The method I’ve most often used is to fully finance properties with a trust deed from a ma’ or pa’ lender—usually someone you know or have networked with—at 9% interest only.
Properties won’t cash flow in all markets at 9%, but in working class areas, especially in Midwestern and Southern markets, as well as smaller towns, they often will. It will take a lot of rapport building, so it’s best to have some deals under your belt. Write an elevator pitch (one paragraph explanation of what you do and offer) and say it to people often.
You never know who has money. If they show interest, invite them to lunch or a casual meeting. Make a business plan and a packet of case studies to show them. We’ve found once people trust you, they are quite willing to swap the 0.2% return they are getting in a CD for the 9% we offer. And if you are buying at the same discounts you would when flipping, you should be able to refinance the whole loan (or at least most of it) with a traditional bank in a year or two after the property has “seasoned.”
If instead of finding several private lenders, you can find one person with a lot of money. In that case, partnering makes perfect sense. They bring the money, you do the work and you split the equity 50/50. This is one of the most effective ways to buy and hold, although again, it will usually take a track record in real estate to convince such a person to partner.
Whatever method you choose, buy and hold can grow your wealth exponentially, so getting started is the key.