In today’s world, we are conditioned to look for instant gratification. Regardless of what it is, we want it now. This is certainly the case when it comes to investing in real estate. If you search for a real estate show on TV, you will find multiple home flipping programs. There is nothing wrong with trying to turn your money over quickly, but there is another way to invest in real estate. Some of the most successful investors have built their portfolios with buy and hold properties. This won’t give you the same instant gratification that a flip will, but in five to ten years these could very well be the best investments you end up making. That said, the market is currently pointed in the direction of long-term rental properties.
Years ago, if you bought a house you were most likely going to own it for a very long time. Many homeowners viewed their properties as a way of forced savings. They could live in the house for thirty years and, after the mortgage was paid off, they would be sitting on a nest egg for retirement. Rapid appreciation changed the way we look at our properties, but the principles of home ownership are still the same. If you buy today, with an eye on the future, you often see a greater return down the road. Instead of making a quick dollar today by flipping, you can make five times that by selling in the future.
There are two reasons why an investor would consider owning rental property: cash flow and equity growth. Depending on the property, down payment and rental amount, it is possible you can have the best of both worlds. If you have a property that has low expenses and demands a strong rent, you will see the benefits of cash flow every month. This money can be used to purchase other properties, pay down debt or for any other part of your business. The stronger the cash flow position, the more valuable the property is as a rental. You won’t see thousands of extra dollars a month in cash flow, but it is certainly possible to see hundreds. If you use this money wisely, you can quickly grow your investing business.
Some investors look at rental properties solely as long term holdings in their portfolio. Under this scenario, the monthly cash flow may not be as great, but this isn’t nearly as important to them. They are willing to take a minimal amount of cash flow every month for a good property that may hold greater value in the future. They know they are going to hold the property for five to ten years and aren’t hung up on monthly cash flow or current property values. They are using their tenants to pay down their mortgage and increase their equity. They have bought in areas that have a strong upside and, instead of selling for a small profit, they are willing to wait ten years to hit a home run. While the market has recovered over the past five years, it still hasn’t taken off like some have predicted. The housing market is cyclical. Sooner or later there will be a steady bump in demand, and subsequently housing values. By waiting years until that day comes, savvy rental property investors can get the most out of the property instead of taking a quick return and moving on.
By paying down the equity owed on a property, it will give you multiple options. Owning a property free and clear and collecting 100% cash flow is the ultimate prize, but not every long term investor wants to wait that long. You don’t have to have a zero balance to take cash out of your property. If you accelerate your pay off by making an extra payment a year or holding the mortgage for ten years, you will greatly reduce your balance. All the while, property values may very well go up and you will have the option to pull some cash out through a refinance or take a second mortgage on your property. If your mortgage balances are reduced, you can still keep a low monthly payment while pulling out cash you need for other projects and showing cash flow every month. The lower your balance owed, the more options you will have.
The best real estate portfolios are a mix of short term rehabs with a few long term rentals mixed in. Saving for retirement has become a real problem currently across the country. Even if you have money coming in, you may not be as set for the future as you need to be. A strong portfolio of rental properties can set you up very nice for retirement, or sooner if need be. While ten or twenty years may seem like an eternity, it will be here much quicker than you think. There is a line of investors who sold strong rental properties before their maximum value just to see a minimal return in the short term. If they had fought through the tough times that every landlord faces and resisted the urge to sell for a quick buck, you could have been sitting on a property that you could have used for retirement. Holding long term properties isn’t always easy, but if you make it through there is a real pot of gold at the end of the rainbow.