Buy and Hold
Buy and Hold is a real estate technique used for passive income. Passive income according to Wikipedia "Is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it.". Put into layman terms this translates to "You receive steady income by working very little or not at all.". Now that we have defined passive income lets show you how.
Typical investments for the Buy and Hold investor include:
- Single Family Homes
- Duplex to Four-plex
Single Family Homes
Single family homes offer more privacy, land, and storage for the renter. They have less assets (appliances, HVAC, etc.) to have to maintain.
Duplex to Four-plex
A duplex is 2 units and a Four-plex (Quad) is 4 units. This allows you to have more income streams which results in more Cash Flow. For every good there is a bad. With more units comes more responsibility for the increased number of assets. Each unit will have electrical, plumbing, HVAC, and appliances. Therefore you have to figure into your Operating Expenses how much to allow for repair/replacement. Actually HVAC and appliances are considered Cap Ex (Capital Expenditures). We will get into that another time.
You also will need to think about advertising and maintenance. Advertising will help keep your units occupied. Each time someone moves out you will need to have the unit cleaned and possibly repaired.
Duplex's and Four-plex's are still considered residential and qualify for FHA. The only stipulation to the FHA loan is you must occupy it for at least one year. This is called House Hacking. The idea is you get the 3.5% low interest rate live in it for one or more years letting the other units pay your mortgage which in turn directly reduces your living expense. During this time you could be putting that additional savings in the bank to acquire another property and do it again.
If you live in one of the units insurance companies will usually write your policy as single family homeowner. In the event you do not live in one of the units you will not qualify for FHA and you will have to have a landlord insurance policy.
Multi-family is on a bigger scale like apartment complexes. The value of the property is not figured by Comps but rather NOI (Net Operating Income). NOI is what you have left after expenses. Expenses, there is no short of when it comes to multi-family. You have an increased number of assets to be repaired/replaced, advertising, move out cleanup, yard maintenance, parking lot, utilities, facilities (laundromat, etc), property management, legal fees, etc. Definitely leave no stone unturned when figuring Operating Expenses.
An apartment complex throws you into the commercial property category which will affect your insurance and taxes. Consult your local CPA.
I hope this helped clear up what Buy and Hold means and what type of investments are at your disposal. If you would like to know how to analyze these different properties in detail look at our "In Depth Deal Analysis" page.
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