Buy and hold real estate may be the best investment around. But unfortunately, like all good things, there’s always a catch. Buying investment properties and holding them requires money, and if you don’t start with much, that can be a great challenge. Luckily, there are many investment property loan solutions to overcome such a problem.
Before you start seeking out money, you must understand the most important principle of buy and hold investment properties.
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Prerequisites for buy and hold
In the famous Stanford marshmallow experiment, children were given the choice between eating one marshmallow or waiting about 15 minutes with said marshmallow staring them right in the face—in which case they would get two. Most kids yielded to temptation and ate the marshmallow well before the 15 minutes were up.
The researchers kept track of the children over the years. Those who 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. After all, rental properties are 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 fully enjoy the fruits of their labor.
Once that principle is established, you can incorporate any of the following methods into growing your real estate empire.
1. Traditional investment property loans
Real estate investors don’t always need a rental property loan. In fact, it’s absolutely possible for people with decent jobs to simply live below their means and invest in real estate on the side. Getting bank loans is much easier when you can show W-2 income. Plus, a job also provides a consistent source of income—even if a particular investment falters.
However, it’s also much more challenging to find good deals when you are tied down with a job, and, of course, you are stuck with the job. This is a fairly passive approach to real estate investment, but it can still be very effective.
2. FHA loans
For the “save and hold” investor, FHA loans are a great start. FHA will finance 96.5 percent of the purchase price at very low interest rates.
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?
3. Flip and hold
This is probably the safest, most effective way to get into buy and hold. For investors who are flipping, why not hold every second or third deal instead of flipping it?
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.
4. Creative financing
When a seller is motivated, there is often an opportunity to get an investment property loan for little to no money down. If the seller has some equity, for example, then they can loan you the money to buy their house from them.
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. Be forewarned: This does trigger the “due on sale” clause of a normal bank loan, so the bank could potentially foreclose. And furthermore, it will take a lot of motivation—and plenty of rapport—to convince a seller to do these types of deals. However, they’re done all the time.
For more on the subject of creative financing, check out Brandon Turner’s book The Book on Investing in Real Estate with No or Low Money Down.
5. Angel investors
It may feel awkward to ask family or friends for money (as an investment or otherwise), but you shouldn’t pass up a major opportunity just because it’s awkward. After all, I went into business with my father and my brother. Family and friends can be a great source of capital, either as partners or as lenders.
And yes, you will want to be extra careful with their money. But then again, you should be extra careful with any investor’s money.
6. Private lenders
Traditional investment property loans won’t cover the full cost of an acquisition, and hard money loans are too expensive for the buy and hold strategy. Luckily, there’s a third option. The method we use the most to finance properties—both purchase and rehab—is a trust deed from a private lender. Usually, this is someone we know or have networked with, and we settle on 9 percent interest. Yes, unfortunately, you should expect higher interest rates from these loans.
Not all markets allow properties to cash flow at 9 percent. However, in smaller towns and working-class areas—especially in Southern and Midwestern markets—they often do. It requires a lot of rapport-building to convince someone to lend 100 percent to you. Therefore, it’s helpful (but not mandatory) to have some deals under your belt.
And remember, you never know who has money. Tell people what you do often—and if they show interest, invite them to lunch or a casual meeting. Make a business plan and a packet of case studies, if you have them. Once people trust you, they are quite willing to swap the 0.2 percent return they are getting in a CD for the 9 percent you offer.
And if you are buying at the same discounts you do when flipping, you should be able to refinance all or part of the loan with a traditional bank. Yes, you’ll have to wait until after the property has “seasoned”—the bank will refinance it based on appraised value instead of what you put into it. By buying it at a discount, you also protect the lender because you still have a substantial equity cushion even though they have fully financed the property.
Instead of finding several private lenders, you can find one person with a lot of money and partner with them. They bring the money; you do the work. Once you’re in the “hold” stage, split the equity however you both find agreeable. This is one of the most effective ways to buy and hold—although it again needs a track record to convince such a person to partner with you.
Partnerships can also work on a one-by-one basis, but I hesitate to recommend this approach. Lots of partnerships can create an accounting nightmare. More importantly, each partner has a controlling stake in their property, which can lead to all sorts of arguments and disagreements. This problem multiplies if you have a lot of partnerships.
Still, the approach can make sense early on with a few properties. Just think carefully about how to split the proceeds. Will you divide rental income 50-50? What about equity?
Don’t let a lack of money stop you from achieving buy and hold success. It may take time, but there are plenty of ways to find investment property loans to launch your buy and hold career.