The 3 Tenets of Buy & Hold Investing
Once you understand the The 3 Keys to the Successful Real Estate Investor Model, you are ready to explore The 3 Tenets of Buy and Hold Real Estate Investing.
Every buy and hold investor needs the following three components to get started and to continue to grow their real estate investments.
Even though the three tenet framework is a bit obvious, it is good to keep in mind because it allows investors to compartmentalize the three most important areas of buy and hold investing. Without this framework, buy and hold investing can seem like a million items on a to-do list.
Real estate investing is all about taking action. You have to find opportunities and make deals.
In traditional buy and hold investing, the investor holds title to a property, which means consummating a deal is all about purchasing real property.
The key to making deals is successfully navigating through the four aspects of a deal, which are (1) sourcing, (2) evaluating, (3) negotiating, and (4) closing. I will cover the anatomy of a deal in the next article, for now just know that you cannot have an investment unless you have a deal. Said another way, you have to own real estate to be an investor.
Buy and hold real estate is a capital intensive business.
In order to purchase real property you have to pay the seller of the property at closing or in installments after the closing. Either way, the seller gets paid by the purchaser, which means the purchaser has to have money. In most cases, the money comes from a lender.
There are several ways to finance property including (1) conventional mortgages, (2) commercial banks, (3) private lenders, (4) hard money loans, (5) portfolio lenders, and (6) seller financing. I will explore all six of those common ways to finance property in a forthcoming article, but today you just have to know that you cannot be a buy and hold investor unless you have a long-term plan to fund your investments.
As George Washington says to Alexander Hamilton in the musical Hamilton, “Winning was easy, young man. Governing's harder.”
With money, making a real estate investment can be very easy since there are always opportunities available. However, successfully managing a property over a long period of time is a very difficult undertaking.
Deals and Financing are usually a one-time shot, but management is a day-in and day-out necessity that does not end until a property is sold. In fact, I would argue that buy and hold investors are primarily in the property management business. It definitely has to be a core competency. The good news is that competency can be delegated. But, even when management responsibility is transferred to a third party, the buy and hold investor has to actively monitor the performance of the manager to insure that the investment is being managed effectively. (I will talk a lot more about property management for the buy and hold investor in future articles.)
In summary, think of Deals, Financing, and Management as three legs to your buy and hold real estate stool. Your investing stool will not stand if you are only good at one or two of them. Instead, to be successful as a buy and hold investor you have to master all three tenets. The goal of this article and my other articles is to make sure you have the resources you need to be great with Deals, Financing, and Management and to ultimately succeed as a buy and hold investor.