You may already know, but if you don’t, there are more people grow to be millionaires from real estate than anything else. But how do they do it? It’s classically not from fixing and flipping and it usually doesn’t happen very quickly. It’s not too sexy either. It’s your basic principle of buy and hold.
Buy a piece of real estate and you hold it for an extended phase of time. But how can you build more with buying and holding than you can as a “flipper?” Let’s first look at a term that’s thrown about quite a bit when referring to real estate investor. An investment is generally something passive. You buy it, whatever it is. It could be stocks, bonds, coins, whatever. You then hold onto it and allow it to appreciate. Fixing and flipping is more like a job. Yes you’re self employed, but it’s still a job. You have to be aggressively involved day to day. Just like a day-trader isn’t so much an investor as he/she is, well, a day-trader.
Now back to buy and hold. Why is this so powerful? Let’s glance at the most common investment people do, single family homes. As an investor, you buy a house, you normally take out a mortgage on the house and you rent it to someone else. This mortgage, or leverage is what really amplifies your return on investment. Let’s say you bought a $100,000 home. The market is appreciating at 5% and you’re earning $600/month in rent. You have some expenses, so when subtracted let’s say you’re earning an additional 5%. You’re earning a 10% return on your investment.
You do have some work to do such as leasing the property and maintenance. But if you owned stocks, you sometimes buy more or sell some or analyze its performance. There is some work, but it’s still an investment.
Let’s take that same $100,000 home. You now only put 10% down and finance the rest. The market still only goes up 5%. But now you’re earning $5,000 on your $10,000 investment. That’s a 50% return. That doesn’t count that someone else is paying down the mortgage, plus the tax advantages of depreciation. That’s a great investment.
So now what? First, you now have a great investment without owning a job. Second, sit back and let that property appreciate for a few years. Let’s say five years. That property is now worth $128,000. Refinance the property and pull out $13,000. Take that money and buy another like kind property (now worth about $130,000). You now get a leveraged return on two properties. Wait another five years and do it again and you’d have four and again in five and you’d have eight. So in 15 years you’d own eight properties.
Don’t do anything else but manage those properties. Over the next ten years let the tenants pay down (and perhaps pay off if you don’t keep any positive cash flow) the mortgages. When it comes time to retire or do something else, you now have well over $1,000,000 in net equity. Even more if the market is providing a higher rate of return.
No, there’s nothing too much sexy about it. It’s a slow and stable approach. But if you talk with most people who accumulated their wealth in real estate, that’s how they did it. It could be homes, or offices or apartments, but the theory is the same – buy and hold.
Memphis Buy And Hold is specializing in locating, purchasing, renovating and managing single-family and multi-unit properties and possesses over 8 years of experience in real estate investing and property management in the Memphis and Nashville markets… Learn More…… www.memphisbuyandhold.com