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Long-Term Buy-and-Hold Strategies

Long-Term Buy-and-Hold Strategies

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Jonathan Cook: On today's episode of The Investing Revolution, we're going to talk about three of the most popular strategies in real estate investing. We're going to talk about the long term buy and hold the cash flow strategy and the BR strategy. This is the Investing Revolution, a podcast designed to help your real estate investment strategy. On this podcast, we'll teach you the actionable steps to take in pitfalls to avoid so that your real estate investing can thrive. Welcome to the investing revolution I and your host, Jonathan Cook and with me is my lovely co-host Christine Bennett. How are you? I am doing well. Yes, yes. Today, we're going to talk about some really fun, exciting stuff. This is like it's definitely one of my favorite podcasts.               

Christine Bennett: Oh, we're going to talk about all my favorite things for now.

Jonathan Cook: Oh my gosh, this is so today. What we are going to talk about is strategies. We're going to dive into the SFR strategies and definitely not. And SFR is the the single family rental strategies, right? We're going to get into all or, well, probably not all, but we're going to get into the most popular versions of the single family rental strategy.

Christine Bennett: Look, guys, there are so many ways, so many strategies we we're going to we're going to dive as deep as we can, but there's a lot of ways to make money here. We're going to talk about the most popular, the ones that we see most often, but we're not excluding or saying there aren't great other options to make.

Jonathan Cook: Oh, absolutely. And what's interesting is especially when we get to like the build to rent model, and because that's relatively new every couple of years, there's going to be new models that come out. There's going to be new strategies that we will dive into in later episodes when we find a little bit more out about them, for sure. And there's models that exist now that we're not going to get hyper focused in on. But what we're going to do today is we're actually going to take the single family rental strategy, which is like an overview strategy. We're going to dive into several of these. These like hyper focused strategies. Why should you buy a single family rental and then what strategies are we going to operate in? And we talk about strategies a lot. I know, I know I do, because let's talk about why a strategy is so important, and I know we've given an overview on this. But having a strategy, a very specific strategy is it's one of the first steps. I mean, we discussed it when we were talking about, how do you get started in this? It's such an important step to have your strategy really ironed out. You have a focus. This is what I'm trying to accomplish. Because Christine, I know, I know you have seen this and we may have both done a little bit of this when you just decide I'm I'm going to invest in real estate. I'm just going to go. I've got I've got this whole idea. I'm going to start buying real estate. It's a good investment. Which way? Oh, I forgot that.

Christine Bennett: That was a page, Jonathan. Hey, hey, personally attacked here, buddy. I've been there. Done that. Well, from it.

Jonathan Cook: So let's talk about real quick before we actually dive into the individual strategies like can you discuss and I certainly have my own handful of stories like why is the strategy so important? Like like we gave an overview in a previous episode, but like, let's talk about what happens if you don't build a strategy early. First thing, like what? How do you start investing in real estate if you don't build a strategy? You watched HGTV this one time and said, Oh, that looks fun.

Christine Bennett: So here's the deal. It's like, it's like trying to make a recipe without the ingredients or without the recipe book. It's like, Hey, I'm going to go put some carrots, some celery, some green beans, and maybe some filet. What are you going to do with that? They're all great items, but until you have a plan on how to put it all together, you have a big ol hot mess in your kitchen.

Jonathan Cook: I think that that's such a good analogy. It's almost like, OK, I want food even. It's just, I want food. There's bunches of food in my house. I'm just going to cook it all. I'm going to cook. I'm just going to grab, Oh, I like kidney beans. Oh, I also like cheesecake. You know, I can mix that to you. At least got to know I'm building a dinner or I'm building a lunch, or I'm building, you know, whatever. And then it's all right. So what am I building the entree? Am I building? Am I building the main course of the entree? Am I building the meat itself, or am I going to make a steak? I'm going to make chicken or whatever. And then they're side items, and then there's different courses. And then there's real estate. Investing is very similar to that

Christine Bennett: Strategy is just a fancy word for make a plan. Yeah. Oh my gosh. Before you execute. Otherwise, you just have a big mess. So.

Jonathan Cook: Analogies aside, I want to use I want to talk about the dangers that I see in going at this without a strategy like the true honest to God dangers like no metaphors like actual properties because I know you've seen them and I know I have to.

Christine Bennett: You mean like people lose money and get sued and.

Jonathan Cook: Yeah, yeah. Yeah, that happens. Let's talk about that. Yeah, so

Christine Bennett: It's a real thing.

Jonathan Cook: Yeah, one of one of the, you know, stories that I get as a BDM, people call me and hey, you know, your property managers, I've got this great real estate investment that I want you guys to take over and manage for me. And they start describing, and what's funny is this. I mean, and this is going in my book as well specifically about this. This story is not one story. It is. I mean, I've heard this same exact story like uncountable numbers of like hundreds, literally hundreds of times. And it's it is so often like verbatim the same over and over and over that it's shocking. It is. So I had this real estate agent friend of mine and he got this great deal on a property. And I understand that real estate investing is a good idea. So because my real estate agent, Buddy, tell me this great deal, I bought it. And you know, he had told me or she had told me they had told me that, you know, the rent price should be some outrageous numbers. How it always starts out. It's it's it's some crazy, overpriced number. And you know, they had this property manager in their office that does sales, but really, you know, their sales weren't all that good.

Jonathan Cook: So they do property management on the side. So I gave it to this person to do the property management and they couldn't get the rent and it took a long time to rent. And then once we got it rented, the renter was bad. But because it's because property management and the investing in revolution or the investing in real estate. Because of how long it takes to notice oftentimes your mistakes, it'll go two or three years before they realize how much of a mistake that they made because it wasn't the strategy that they wanted. They were wanting, you know, appreciation and cash flow and the long term investment at the same time. And maybe they wanted to do some improvements in it later, like they're trying to mix all these strategies together in one property that doesn't fit all of them. It fits one probably really, really well, but it certainly doesn't fit all of them, and they are never happy. They will bounce from people to people to people until somebody usually me runs into and goes, Well, what was your initial strategy on this property? They're like, I don't know, a real estate investment. I wanted to buy a real estate investment.

Christine Bennett: I'm laughing because I've literally been there. I mean, you know, you, you go and you're investing and investing in real estate. It's elusive, you know, it looks exciting. It looks like fun. It looks like, you know, this notion of passive income. People are attracted to it. And like I said, I've been there. I didn't really know what my strategy was. I just bought it. And in hindsight, I figured I figured out that I was just waiting for it to appreciate. But I mean, we've all been there then. This is the whole purpose of today's show is to talk about talk about the strategies, because literally, I mean, it's not. It's not rocket science, and it's not. It shouldn't be pretentious. This is just have a plan, have have a goal in mind when you're looking at a property and you know, that's how you're going to set yourself up for success.

Jonathan Cook: Absolutely. So I mean, that's exactly right. You have to have a goal like that. You have to have a plan to get that goal or a goal to make the plan. Vice versa. Both of them simultaneous. Whatever. Let's let's let's get into this. So if we're talking single family rentals, so that's that's SFR, and there's going to be a ton of acronyms and we say a lot of acronyms.

Christine Bennett: Yeah, we're going to we're going to break those down.

Jonathan Cook: And we're sorry to you. But so we're going to we're going to explain some of these. So SFR, when I say SFR, that stands for single family rental. That's what I mean. When I say SFR, that means it's not apartments. It's not a multifamily unit. It's not a duplex, not a quad. It's not several properties in one address. It is a

Christine Bennett: House, one house,

Jonathan Cook: One house that is a single family residence. So we're talking about the single family rental strategies, and that is like an overview strategy that is the umbrella in which all of these other strategies are going to fall under. And I think it makes a lot of sense, Christine and tell me if you want to take it to one of the other strategies first. But I think the one that most people end up with or start with tends to be that kind of old school, long term buy and hold. It's it's I mean, that's what accidental landlords most of the time run into. And yeah, maybe they were never intentionally investing in a property, but maybe you've been you've inherited a house, or maybe you bought a house and you lived in it for a few years and you want to upgrade. But you're like, I don't really want to get rid of this one. And you know, it's it's a it's a hedge against inflation. It's a good investment for your retirement because appreciation that's going to come naturally and a lot of the time that's going to be way better than what, like a, you know, CD is going to hold or, you know, some sort of other safe investment. But long term buy and hold is a really safe strategy if it's done

Christine Bennett: Properly, of course. Of course, you know, long term, it's this concept has been around for a really long time. Very simple. You buy it, you hang on to it. And in the interim, you are making sure that you have some cash flow. So you have a tenant or resident and you are looking at your numbers and saying, you know, how much repairs is this property going to take? How much how much does it cost to basically run this property? At that point, you have to change your mind to an especially accidental landlords, and we have this conversation almost daily is changing your mindset that this is now a investment vessel. You know, this is a thing that's going to get you from. The house that you loved and lived in a lot of times and you're emotionally connected to. Now this is a way for you to make make money. You know,

Jonathan Cook: It's a business now. It is.

Christine Bennett: It absolutely is a business and and that's the hardest. I think both both of us will agree. That's the hardest conversation to have with an owner who has just moved out. Maybe they're either upsizing downsizing.

Jonathan Cook: And what's what's really funny is, I mean, both of us have been through pre licensed courses a long time ago, which is not not to say that we're old people,

Christine Bennett: But speak for yourself.

Jonathan Cook: Ok, yeah, whatever. But my point is, like most real estate agents, this is something that we talk about in pre licensed. I mean, it is the most base term of real estate investing. It's buy low, sell high. I mean, it's that to the nth degree, it is. It is the greatest version of this. And it's, you know, you're trying to buy something in an area that is a safe investment, typically meaning it is an area that you see a lot of growth potential in. It is a nice area. It's good school systems, it's a beautiful house. It has some upgrades into it because you lived in it. It is a creature comfort type of home. It is something that you see the value in an area you recognize. This area is going to be, you know, such a beautiful area in the future. Like Sonya, like Sonya, Georgia, this is a really good area for a long term buy and hold strategy. It has been for years. I mean, if you bought in this NOIA 10, 15 years ago, I mean, you've doubled and tripled your investment in several areas here. And that's great. This is a good plan for your retirement because not only are you collecting rent and rent, probably on on most of these properties. Actual true net cash flow probably isn't going to happen in the first couple of years. It really, really usually doesn't. But as you pay down that principal collecting that rent, you are paying that principal down. You can refinance to get a lower rate. Whatever you're paying that principal down to where in 20 years when we say long term, I mean, long term, it's not one or two years, it's 10, 15, 20.

Christine Bennett: That's the beauty I think of. The buy and hold strategy is that sometimes you don't have an expectation that it's going to have a profit right away. Sometimes you're you're just using it as tax shelter. You are banking on the appreciation you you don't really want this huge payout right away. You don't want to, you know, have all these capital gains. So that's the beauty of it, is that you can set yourself up with buy and holds to have cash flow immediately. Or you can set it up to where, Hey, I'm choosing this, this type of property or this neighborhood, and I don't expect it to be profitable right away. This is a long term business decision that I'm making, and that's the beauty of it.

Jonathan Cook: I think that's a really good kind of transition into what are the benefits of a long term buy and hold tax shelter. You said it. I mean, my lord, what a good like. There are so many tax benefits to owning real estate in general, which is I mean, that's why this is the probably the most actual popular strategy, because it's it's almost unintentional. It in a lot of cases, maybe not in most, but, but in a lot of cases, it's this is the American dream, right? Like this is the actual white picket fence American dream. This this is it. It is. I own a property. The home that you live in. It's a long term buy and hold strategy, even if you plan to live there forever. Guess what? It's a long term buy and hold strategy. That's what it is. You are. You've invested in an area, you've invested in yourself and your children, and whatever it is or your family, whatever, whatever your situation is you've invested in. I bought this house. Even if you're living in it, you've bought this house and it is a long term buy and hold strategy. I'm going to live in it. I'm going to hold on to this strategy. I'm going to hold onto this house for some number of years, a long term, and you're going to get benefits from it.

Jonathan Cook: Tax benefits is one of the big, big shelters right there because you look at your depreciation schedule, it's why it's important to have a CPA. You can take that down from a twenty seven and a half year schedule. If you can focus on this drop down to 15 for certain systems, you can separate things out, but you need to plan for that. Fifteen years is a long time, but that's about how long major systems last your roof, your HVAC, you know, water heater, plumbing, electrical, things like that. Those have a very long shelf life. You're not having to replace those every couple of years, every three to four years, replacing them every 15. And if you're depreciating right, you can actually use that, that that loss, that major loss of I had to replace my roof and it was $20000 that. And be good for you in a tax shelter because it can lower your annual income. You can use that as a loss, which is a good thing to several people, like the benefits of this, it's so safe, like it's really hard to mess up a long term buy and hold strategy.

Christine Bennett: So I would agree with that. And like I said earlier, it's universal. You can if you if you want to cut your time down on how long, how quickly you pay it off, if it if it's financed, then you can set yourself up for that. So you already know that you're taking a strategic loss over a period of time, like you said, the other thing that's really and I don't think most people think about it, but we deal with tenants all the time. And at the end of the day, that's where the money is coming from, is the person who is living in the home. And I've I've come across this quite often where a tenant of prospective qualified tenant goes. So what? What does the owner want to do with this property? They're looking for people and investors who specifically want to do long term buy and hold because it gives them security. And we have tenants who are in properties for three five years. They want to know that there are investors who plan ahead and plan to hold on to the property.

Jonathan Cook: Years ago, one of the first time that I ever ran into a. Homeowner, as a property manager that had a single tenant in their property for 17 years, it was shocking. The management agreement that they were on was unrecognisable from what you're seeing at the time. It was like because their tenant moved out because they moved, they had a job transfer and moved out. And at that point in my career, like part of my role was to make sure that we got the the new management documents in place so that we could renew it, remarket this thing. And I was doing a lot of those those steps, and I called her and sent her the new management agreement. She's like, Jonathan, I don't understand this management agreement and I got these rates are so different everything. And I'm like, Well, hang on, let me let me pull up your and it was like the original management agreement that our company had built, like they were one of our very first clients and they had only had one tenant in that entire time period. She owed like nothing on the house anymore, and it was making her so much money and it was it had appreciated over one hundred percent from what she had bought it to. And I was like, OK, you have a great investment here. Let me tell you how we handle things now because you bought this property when I was in high school,

Christine Bennett: But it's powerful. I mean, that kind of that she, she or he may not have planned that initially, but it's kind of one of those things that, you know, the passive approach.

Jonathan Cook: It's really cool to see what it is.

Christine Bennett: It's very cool. You know, over time, this thing has that they maybe didn't mean to do or didn't really want has turned into this really cool additional income that they weren't really expecting.

Jonathan Cook: Oh my god. Yeah, it was. It was. It was a house that she had lived in. She had lived in it and moved out.

Christine Bennett: So to add to that, though, had she understood what she had, oh my god. She could have duplicated it, she could have leveraged it, I mean, that's that's kind of the other part of building a good team.

Jonathan Cook: Having resources and luckily she was with a really good property management company that entire time. So it was as maximized as that investment could have been. The rent increases were annual. It was a really well maintained property. It had an excellent tenant in there. That was when we came up with tenant scoring, by the way. And 17 years worth of residency, and they were still like an eight point five out of 10, which is that's a shorthand scoring system that we use here revolution to determine the quality of a tenant overall while they're

Christine Bennett: In the world. Don't worry, everyone, we are going to do an entire episode on that. Absolutely.

Jonathan Cook: We just want to. It's a really there's a lot of math to it, but the point is that tenant was a great tenant. They had a really good team in place accidentally. Very clearly, it was an accidental landlord situation. They had no idea what they had had, but it was a great investment overall. At the end of it, after 17 years, man, it was. It was fantastic. Now could that have been a much quicker, stronger, better return? Of course it could have been. Of course it could have been if it would have been intentionally purchased as a different type of strategy, and maybe that would have been the house to do it in. Oddly enough, it would have worked in several different strategies just because of where she happened to have bought. The Southeast is rife with properties that can be used in a lot of different strategies, so the long term buy and hold the purpose of what I'm trying to get across with what that long term buy and hold strategy looks like is it is super, super safe. It is. I mean, it's like the seed of real estate investing. It's like, you know, that return is going to be pretty steady. You know, your maintenance is going to be relatively low. And if you plan it out properly,

Christine Bennett: Well, let me just go ahead. I just want to interject with planning and having proper expectations. That's the that's the thing. We we deal with this all the time. You get an owner, they call, they need property management or they call, they want to sell their investment property because they didn't have the right expectation. They're like, you know, maintenance is so expensive. My tenant didn't pay for a period of time or, oh my gosh, I've had to do an eviction last year. I've had the property for 10 years. You have to look at it like a a business like we said. I mean, you have to have proper expectations. Yeah.

Jonathan Cook: And this is a slight tangent. So stop me in a second. But one of the things that I always find fun about those kind of homeowners is when they're like, Oh, I've been spending so much money and then I'll open up their ledger and like their ownership ledger. And I'm looking at that going, Oh my God, you've made, you know, $12000 a year for the past six or seven years

Christine Bennett: And spent less than

Jonathan Cook: Five percent. And this is the first time that you've had a major maintenance item. It's a roof. Yes, roofs are expensive. Congratulations, you've had this property for a long time. You've just now had to put a roof on it. You're not spending all kinds of money. This is the thing that you were going to have to spend eventually anyways if you plan to keep the property. And but that's where it comes to that planning session, which why we have those planning sessions with our owners, we want them to understand well within your strategy. Here's how we need to plan for this. Your roof is x amount of years old. That means in this many years, we need to go ahead and plan. This is how much a roof generally will cost replace in this many years. You're going to have this maintenance expense, so plan for it. Set aside a reserve HVAC water heater. There's certain items that we know are going to have a shelf life, right? Paint flooring, of course those do, but painting is way less expensive than replacing a roof, right? So that is why that is such a safe strategy because it lasts so long. It's very passive. It doesn't take a lot of effort to do really well because I mean, people do it on accident all the time. And so it's a pretty good overview of that, and we'll actually talk way more in depth in how to maximize those returns. In a later episode where we dive specifically into just this, we're going to talk for an hour about long term buy and hold strategy. So but let's let's move on a little bit from that. So mind,

Christine Bennett: Oh no, I'm here for it. So let's let's break down a really fancy buzzword cash flow. Oh yeah. So what is cash flow

Jonathan Cook: Money that you're making outside of all of your expenses? The cash that you make

Christine Bennett: Said we just like, did we just break the. We just break the internet with

Jonathan Cook: Like the investing revolution, Christine?

Christine Bennett: Oh my gosh. Like, that's really how simple it is. I mean, like, I mean, that's really how simple it is.

Jonathan Cook: Ok, so like what? What shocks me because you set it right? It's a buzz word, and it's a buzz word that people don't understand. People want cash flow. And they don't know what cash flow is, they say, well, my mortgage is $1000, my rent is fifteen hundred, so I've got five hundred dollars cash flow and I'm like, You are missing so many items.

Christine Bennett: More items,

Jonathan Cook: Bit taxes, insurance management. We got to factor those in. Well, how do we factor that it? It's math, man. It's math.

Christine Bennett: So the reason I said it like that earlier is because it shouldn't be intimidating. It shouldn't be one of these things that is like, Oh, you know, only an expert can do this, you know, only only the elite can do this. Not necessarily. Whoa.

Jonathan Cook: Whoa, whoa. No. Well. You have to understand what you're talking about.

Christine Bennett: Yes, of course, or align yourself or align yourself with people who do.

Jonathan Cook: If you if you listen to the episode two and we talked about team building, yeah, you're right, it shouldn't be difficult because you should have built a team beforehand. You're right, Christine. This should be super, super easy. You shouldn't have to go find a new expert because you should have built your team properly to begin with before you bought cash flow property. Right? Yeah, exactly. So when we're talking about cash flow here, let's talk about what does a typical cash flowing property look like? Do long term buy and hold properties usually look like a cash flowing property, sometimes sometimes, but usually not really. Yeah, sometimes if I'm targeting a cash flowing property, where am I going to maximize my cash flow? If my intent is, I want as much cash flow as I can get out of a rental property? I'm not buying the same type of investment that I'm buying in a long term buying home. Absolutely not. No, I am buying a C class property like this, and C class is a separate buzz term that we probably need to define. But a classification of a property is relatively difficult to to actually define because a C class will be different in every area that you're looking.

Christine Bennett: It's a little subjective. I agree it is. I agree. I think so.

Jonathan Cook: Could you actually define what what you look at? Let's say let's look at Orlando. Let's look at Daytona. What does I see? Class property rent for in that metro?

Christine Bennett: Ok, so Orlando is going to be separate from Daytona. Separate them out. So let's say a C class property today is probably going to lease around $1000 or something like that. Give or take a I would say a one one. Yeah, that's about

Jonathan Cook: What a C class property rents for here in Atlanta, even in the south Atlanta area. And there's there's different parts, of course, but I mean, I typically see a C class property in an older community. Usually it's a it's an existing area. It's it's an older area. Oftentimes those properties are not exactly, I wouldn't say, always distressed, but they're in areas where maybe it's just because their age you see some distressed properties occasionally on a few blocks, but the rent value is typically, you know, around a thousand dollars a month. I think you nailed it. That's that's and there's some range. Yeah, there's definitely some buffer up and down even a little bit, but that's what your typical C class property is. These are and not to pigeonhole tenants, but but these tenants are typically, you know, blue collar workers. I mean, these are your everyday people. This is this is, you know, these aren't business owners renting these houses. Some of them might be, of course, and you can never generalize everything. But these are these are not the most expensive areas. I mean, these are areas where it is likely inexpensive to buy. You know, relatively strong rent, so if I'm picking a cash fund property, I am intentionally trying to find a cash flowing property.

Christine Bennett: The one thing I want to add to this and this is something that I feel really strongly about C-Class properties don't necessarily mean dilapidated. They shouldn't mean that they are not taken care of. It just means that a lot of times we're looking at, you know. These more basic carpeting or just

Jonathan Cook: A lower income area exactly than your higher income area, it's an income bracket. That's the idea that we're looking for here. Exactly. And typically speaking in America, your C class areas are going to have the largest pool of tenants because the the majority of everywhere in America is going to be lower income than that because there's a larger percentage of people with lower income than with super high income. That's just the numbers that we're talking about here. And real estate investing, especially in a cash flow strategy, is a numbers game. This whole thing is a numbers game. When I sell properties and Christine, it's been a long time since I've actually intentionally gone out there trying to sell properties, but occasionally I will if I'm selling. A cash flow investment, the likelihood that the. Investor goes out there and sees the property, or I go and I actually like, look at the property and tour it like you would like a is like nil. I am selling that property on a spreadsheet. We are opening it, opening up an Excel spreadsheet, diving through the cash on cash return, looking at the cap rates, trying to estimate the ages of the roof and the HVAC system. Seeing what small due diligence period?

Christine Bennett: Absolutely.

Jonathan Cook: That's that's what that