Hello my friends. Welcome back to Passive Real Estate Investing where we dive into the world of real estate investing among other related topics. To help you with your real estate investing journey, today we’re doing something a little different. We’re going to take a trip down memory lane and showcase an important episode from the past on what we call our throwback Thursday episode. Now, whether you’ve been with us since the beginning, which goes back to 2015, or you’re tuning in for the first time, this episode is a must listen, we are revisiting one of our more popular episodes from the past, and believe me, what we discussed back then, whether it’s six months ago or six years ago, is just as relevant today. So sit back, relax, and let’s rewind the clock for this great episode. Enjoy.
Today’s question comes from Cornelius and he says, hello Marco. My name is Cornelius excellent podcast. I’m currently just dissecting real estate investment tips and information in an effort to someday soon begin my investing journey. I’ve been listening to your podcast and have found it to be extremely informative and helpful. Well, thank you Cornelius.
In episode two zero five you were mentioning the different types of real estate investment strategies. My question is, is there a difference between buy and hold and buy and hold turnkey properties? Thanks for all your insight, Cornelius.
– – – – – – – – – – – – – –
Throwback Thursday Episode (The episode originally took place in the year 2020)
Get your FREE copy of The Ultimate Guide to Passive Real Estate Investing.
If you missed our last episode, be sure to listen to TBT: Ask Marco – 6 Tips for New Real Estate Investors
Give us a Rating & Review
Thanks for the question. I will give you a a good but broad answer to this question because I’m actually thinking about doing a full episode on the different types of real estate investing strategies, which we’ll go into more detail than what I’ll cover here today.
But it also encompasses many other types of quote unquote strategies because some people confuse strategies with tactics and sometimes they confuse strategies with things that are really not investing, which I’ll explain here in a minute. So generally speaking, there are two broad camps, if you will. There’s the active and the passive side, and I’ve titled this podcast passive real estate investing because we focus on buy and hold strategies to create wealth. So the way to look at this is like having two buckets, the active strategies, if you will, our business strategies with emphasis on the word business. The passive side of this is the wealth building strategies with emphasis on the word wealth building. So here’s what that looks like on the active side of real estate investing. Those strategies are typically your fix and flip. You’re fixing hold and you’re wholesaling. So what those mean are essentially fix and flip.
That is a business. You are in the business of finding properties that need work, doing those repairs, getting involved, in other words, rolling up your sleeves and you’re doing the work where you’re managing people that will be doing the work and then ultimately reselling them for a profit. In other words, you’re buying low and selling high. That’s the whole idea of buying, fixing and flipping property. But that’s a business activity. It’s not exactly investing because you’re not generating cashflow or streams of cash. You’re building chunks of cash. And there’s nothing wrong with that if you put that chunk of cash to work, but that’s a fix and flip business. Now, if you are doing that and you’re buying, fixing, and holding, well now you’re converting an active activity, a business strategy, into a passive investment, which is a wealth building strategy. And there’s nothing wrong with that.
Many people do that. If you’ve got the ambition, the knowledge, the understanding, the time, the resources to do that and get involved on the active side of it and turn it into passive investments. Great. Uh, the goal there is to build additional equity because you’re forcing equity and that’s what you know the whole buy, fix and hold process is all about. So you’ve got buy, fix and flip, buy, fix and hold. Now the third category under the business strategy side of it, which is the active real estate investing is wholesaling. And this again is a business and this is where you go out and you’re finding good deals on investment properties or for any property for that matter. And then you’re reselling that property for a quick profit and you’re going to put a markup on it and you’re going to sell it. Technically speaking, you’re actually not selling the property, you’re selling the contract on the property.
So you will often lock up a property under contract, Mark it up and then sell it to another investor. You’re making a small profit and you’re moving that paper over to the other person and they take it over from there, close on the deal and do whatever they want to do with the property, which is usually the same thing as what I just mentioned before. Buy, fix and flip it or they buy fix and hold it. So those three things are business strategies. They’re the active approach to real estate investing, but the real real estate investing related strategies come in the form of wealth building strategies and those are the short term buy and hold rentals. The longer term buy and hold rentals and then something that is ultimately the most passive form of real estate investing. And those are syndications and reets real estate investment trusts.
And I’ll just talk about those right now. The main difference between investing your capital in a syndication or a real estate investment trust is that you are not a direct owner and you have no direct control in the underlying real estate within those investments. The those investments are essentially pools or mutual fund like type investments that are investing in one or more properties. Often their commercial properties, sometimes their multiunit residential properties, but essentially you are investing in paper assets. You have shares or stock or units of interest in a group or partnership that owns the underlying real estate. So you are far removed and it is ultimately the most passive form of investment in real estate. But again, remember you have no control, no direct ownership and you carry paper. So essentially you’re holding a security, an equity and uh, relying on the management of other people on those underlying management assets.
I think I said that right. So let’s take a look at short term and longterm buying hold rentals because this is really at the core of the passive real estate investing strategy that I talk about all the time. These are the wealth building strategies when it comes to short term buy and hold rentals, you’re essentially buying and holding rental properties in different markets around the U S for relatively short periods of time. And this is often anywhere from two to maybe five years plus or minus. The whole idea here with this strategy is to force property appreciation. So what that means is that you’ll often buy a property that is not necessarily turnkey, but there is an opportunity to increase the value, whether by raising the rents over time remodeling. So you can raise the rents, decreasing the expenses because you just can, maybe it was mismanaged or combination of all these things, but ultimately what you’re doing is you’re increasing the value of that property.
Now this is often done with multiunit properties like apartments because it works well and it’s easier to do. Um, because it really comes down to the management of that property and what value you can create to increase the rents. Doesn’t work really well on residential properties, one to four unit. Why? Because the value on a one to four unit residential properties is determined by appraisals. So it goes by comparable properties in the area or the neighborhood the property is located in. It is not based on the net operating income. So if you increase the net operating income on a multiunit property, you’re increasing the value. It’ll just appraise for more. You can’t do the same thing on residential properties. One to four unit. If I take my house that I rent for $1,000 a month and I bumped that rent up to $1,200 a month, it doesn’t change the market value of the property because it’s based on the comparable properties in the neighborhood.
So short term buy and hold rentals are typically done with larger than four units. They’re on multiunit properties. It also happens to work well on single family homes. When you are buying in a strong growth market, a highly appreciating market, and you’re not so much focused on cash flow, but you know that the property will appreciate because of what is going on in that market and in that neighborhood and you just know that you’re going to ride the wave for however long you can in an appreciating market. So these are often more of the higher price properties, not the luxury homes, but they’re typically in a class neighborhoods. So again, the strategy there is a wealth building growth plan. In other words, people who are focused on acquisition and growing their portfolio for the sake of appreciation, like equity growth as opposed to cashflow. This is the type of strategy a lot of those people will use.
It’s a shorter term. It could be anywhere from three to five to seven to maybe 10 years, but really what you’re doing is you’re focused on the appreciation in that market more so than the cash flow, so that is what is referred to as a short term buy and hold strategy. Now compare that to the long term buy and hold strategy. This is where you are from day one coming in with the intention of keeping that property or those properties for the long term. And really this is just the true slow and steady boring way to create wealth. It works very well. It’s a very successful strategy, but it’s all about rental income, the tax benefits from the depreciation on the property, the amortization of the loan over time, building more equity and price appreciation. The combination of those things is what builds true wealth very reliably.
And I wouldn’t say that it takes a long time because it actually starts happening right away, but this is the slow and steady boring method of creating wealth and a solid portfolio. And obviously cashflow, so longterm is all about the intention to buy and hold and keep a property in a market for an indefinite period of time and sometimes that’s forever because you will just put it in your estate and you will pass that along to your heirs. Now often with a longer term buy and hold strategy, you will stay focused on markets or neighborhoods or areas that attract good tenants. They are typically hassle free or a very low hassle demographic of people that are going to stay in your properties and they still have strong appreciation potential. I like to oversimplify this by just calling these areas your B plus and a minus neighborhoods, so you want to stay out of the C class neighborhoods because they’re good on paper in terms of cashflow and looking at a cash on cash return, but they typically do not do well in terms of appreciation.
A class neighborhoods are typically what I’ll refer to as like blue chip type investments. They’re strong in terms of holding their value and they do appreciate, well especially in a growth market, but they don’t have great cash on cash returns. Their cap rates are low, so sometimes the cashflow is not all that exciting or attractive on them. You just have to think about the type of strategy you are going after. Are you focused heavily on the cashflow right now or are you focused on growth and appreciation more so right now and then you can rebalance and reposition your portfolio as you go, but those are basically the different types of strategies when it comes to real estate investing. You’ve got your business strategies and your wealth building strategies, so I hope this is helpful for you. Cornelius, I’m going to go into more detail in another episode about this, but this should kind of set things straight for you.
One last thing, there’s no difference between buy and hold and buy and hold turnkey properties. To your question, they’re really the same thing. The strategy is the same. It’s just what are you buying as a buy and hold property? Is it a turnkey property? Is it something off the MLS that is simply a rent ready property that may have some deferred maintenance, hasn’t had worked onto it for a long time. Maybe there’s mechanical problems. Maybe the roof will need to be replaced in five years. I’m not going to call that a turnkey rental, but it still can be an investment property that you buy and hold and is part of your portfolio and part of your strategy. So buy and hold is buy and hold. It doesn’t matter whether it’s turnkey or not, it’s just if you can get a turnkey property and the values there and the numbers are there, that’s probably the better way to go. All right. I hope that helps. I appreciate the question. If you have any other questions about real estate investing or finance that you would like me to answer on the show, simply go to passiverealestateinvesting.com and click on the Ask Marco link at the top.
I hope you enjoyed this week’s throwback Thursday episode. If you haven’t already, remember to subscribe so you don’t miss out on a single episode. We’re releasing one every week, sometimes two, and I would not like it if you missed an episode. There’s just a lot of great nuggets and good content sprinkled throughout this show. If you have a question about real estate investing or finance, simply go to passiverealestateinvesting.com and click the Ask Marco button. I read all of them, I reply to many of them, and sometimes I cover them on the show, and I’m gonna try and do more of that. So, I am going to encourage you to go to passiverealestateinvesting.com and submit your question for Ask Marco. Lastly, help us share the show with other like-minded people that you know who can benefit from it as well. Just visit us on your platform. Most of you are on iTunes and leave us a rating and review. I would greatly appreciate it. I read them all and I will thank you in advance. And that is it for today. Thanks for listening. I will see you on our next episode.
———————–
Are you having a hard time finding great investment properties? Unfortunately, the best deals are rarely found locally successful investing begins with the right properties in the right markets. Norada real estate provides everything you need to invest in the best deals across the US. Our simple proven system will help you create real wealth and passive monthly cash flow. Get your free copy of the ultimate guide to passive real estate investing at www.NoradaRealEstate.com/guide.