Hold: How to Find, Buy, and Keep Real Estate Properties to Grow Wealth

USA TODAY BESTSELLER Take HOLD of your financial future! Learn how to obtain financial freedom through real estate. The final book in Gary Keller’s national best-selling Millionaire Real Estate Investor trilogy teaches the proven, reliable real estate investing process to achieve financial wealth: 1. Find – the right property for the right terms and at the right price. 2. Analyze – an offer to make sure the numbers and terms make sense. 3. Buy – an investment property where you make money going in. 4. Manage – a property until it’s paid for or you have a large amount of equity to leverage. 5. Grow – your way to wealth and financial freedom.

Excerpt

CHAPTER 1

CREATE YOUR PERSONAL INVESTMENT CRITERIA

After reading this chapter, you will know how to:

* Define your HOLD mission and vision.

* Determine your preferred time frame, rate of return, and risk tolerance.

* Understand the importance of a wealth adviser.

FOCUS YOUR MISSION FOR A CLEAR VISION

You are the head of your investment portfolio. And, as any good leader must do, it's up to you to define the mission—"where are we going?"—and vision—"how will we know when we get there?"—for your investment team. In other words, before you decide what to buy, you need to understand why you are investing in real estate. The HOLD strategy focuses on two primary financial drivers to determine investors' property criteria: cash flow and net worth.

Depending on where you are in your financial journey, your criteria may be very different. If you are a twenty-eight-year-old single female aiming to purchase your first home as an investment property, your personal investment criteria probably looks nothing like a couple in their fifties looking for a property portfolio that will afford them retirement in ten years.

For example, let's go back to the $170,000 single-family home you bought at a 10 percent discount in the previous section. In that scenario, you purchased on a 30-year note and in year one enjoyed total financial returns of about $9,859—a rate of return more than 25 percent of your initial investment—and cash flow of $1,200 from the get-go. What happens when you HOLD that property for thirty years and pay it off completely? In year thirty, your property would be cash flowing $17,908 annually, and would have cash flowed nearly a quarter of a million dollars over its lifetime. Your accumulated financial return would be $812,387, and you'd be turning the corner toward $1 million.

Now, if you rewind again, and buy the same property on a 15-year note, what do you think those same numbers look like? It may be surprising that your investment would have negative cash flow until year six. The same rent that generated $100 in monthly cash flow on a 30-year note won't initially cover the higher monthly note on a 15-year mortgage. But, at the thirty-year mark, the property would have been paid off for fifteen years, cash flowing $27,014 annually and would have produced an accumulated cash flow of more than $340,000. Your property's accumulated financial return on investment in year thirty would be $905,065.

As you can see in figure 1-1, both scenarios prove large financial returns, but each has its own path to get there. The 30-year model immediately cash flows and can be used as a reliable source of income year over year. The 15-year model, on the other hand, has apparent up-front risk, as it does not cash flow until year six. However, if you can afford to put money in for five years with no cash flow, you will reap higher financial returns more quickly as you rapidly pay down the mortgage principal and increase equity.

Of course, it is important to remember this is a hypothetical scenario. The main purpose of showing you the side-by-side comparison on this property is to illustrate how different approaches play out. For the record, we do not advise buying an investment property that does not cash flow—and definitely not one that isn't cash flowing until year six.

Let's take a look at some real-life scenarios.

Increase Your Cash Flow

Again, cash flow is money you get from a real estate investment when the rental income you receive is more than the costs you incur, including maintenance, taxes, mortgage payments, and vacancy. When you buy a property right, finance it correctly, and control your expenses, you will achieve a positive net cash flow from the start. And, as rents increase over time, your cash flow can continue to grow.

Jim and Linda McKissack were already in their 40 s and had four children when they began investing in real estate. Significance? They were looking for the fast-cash chance to rebuild their livelihood and eventually secure their financial future.

The couple came up with a plan to acquire 20 houses, financed on 15-year notes, and rent them at $1,000 a month. Since hitting this target, the McKissacks' plans, like most investors', have changed. With all properties performing, the couple's net worth has continued to grow, at the same time they keep collecting extra green each month. Over the years, they've leveraged the equity to acquire more properties—residential and commercial. Funny thing is, with so much financial security rolled up in their real estate portfolio today, they realized both stakes—cash flow and net worth—and retirement is something they no longer worry about.

Cash flow is king regardless of your personal criteria. If you make sure your property cash flows even $1/month from the get-go, you can hedge your bets on having made a good investment decision. But $1 is obviously not the end goal, so here are a few ways to achieve increased cash flow fast:

1. Put more cash down up front.

2. Amortize your mortgage on a 30-year note, for lower monthly payments.

3. Look at duplexes and small multifamily properties for multiple income streams.

4. Buy properties that are steeply discounted (foreclosures).

Increase Your Net Worth

Net worth, on the other hand, is the sum total of your assets and liabilities—what you own minus what you owe. It's the best and truest yardstick for calculating and keeping track of your financial success, and most wealthy people understand this. When you build your net worth, you increase your financial security over the long haul. With the HOLD strategy, you do this by paying down your mortgages and increasing your equity as quickly as possible. The question to ask here is: Where do you want to be in five years, in ten years, at age sixty-five? And, is building your net worth the best way to get there?

Steve Chader's son Matt bought his first investment property before he was twenty years old. With the luxury of time on his side, Matt pursued the HOLD strategy thinking in the long term. However, he still kept cash flow top of mind to guarantee each property a win. He did this by buying at the right price—meaning below market value—so that he made money going in. He financed his first property for thirty years to keep his monthly payments low, and he earned "sweat equity" by doing many home improvements himself. This not only allowed Matt to command higher rents, but ultimately to increase the value of his property—to add to his net worth.

Today, twenty years later, Matt has far exceeded his original net worth and cash flow goals and continues revisiting his plan to aim at hitting new targets. When it comes to upping your net worth, time is an amazing thing to have on your side. But, it's not the only way to increase your overall wealth using HOLD. You can also do the following:

1. Make sure to purchase on shorter amortization notes (e.g., a 15-year vs. a 30-year mortgage).

2. Be willing and able to make improvements to your HOLD properties for hidden added value, or buy "fixer-uppers" with the intent to add value.

3. Invest in single-family homes, which generally have higher appreciation rates than multifamily properties.

4. Accelerate your debt pay down—regardless of your mortgage length.

Stick to the Standards

The takeaway from both Matt and the McKissacks' stories is regardless of your original reason for investing—cash flow or net worth—there are always the bread-and-butter standards to help you make a wise investment in either capacity:

1. You must not violate cash flow. By this, we mean every property you invest in needs to cash flow at least $1 a month—we suggest closer to $100 a month—from the day you buy it.

2. Your net worth will increase on most any real estate investment through debt pay down, regardless of appreciation.

3. An ideal property might look something like this in year one—cash flows $150 to $200 per month; located in a decent enough neighborhood so that the property is not depreciating and has a reasonable expectation of average appreciation.

CHAPTER 2

CREATE YOUR PROPERTY CRITERIA

After reading this chapter, you will know how to:

* Define the investment neighborhoods to target.

* Determine the price and type of properties to target.

* Build the property criteria that's right for your HOLD investment strategy.

Now that you've established your personal investment criteria and determined why you buy, it's time to take the next step and pin down where and what you buy. With so many properties to choose from, how do you identify the best deals for you?

Your property investment criteria act as a litmus test against which you will weigh every property that comes your way; these standards remove the emotion from the process and ensure that each real estate transaction makes good cents! If the real estate "opportunity" involves numbers or factors that fall short of your criteria, you walk away and keep searching. It's that simple.

The price of the property is important, but it's only one of the factors to consider when establishing your investment criteria. The truth is not all houses are created equal. Some have a greater likelihood of appreciating more than others; some will produce greater cash flow. Others will be a maintenance nightmare and a drain on your profits.

Remember the tale of Goldilocks wandering into the home of the three bears? She tried out each chair, each bowl of porridge, and each bed until she found the one that was just right for her. By establishing your property investment criteria, doing your research, and sticking to your plan, you greatly increase your chances of finding the property that is just right for you.

THE RIGHT PROPERTY IN THE RIGHT PLACE

Not too long ago, an out-of-town investor came to Dallas, Texas, to buy an investment property. She had attended a seminar that touted the great deals to be had in the "Big D," and she was eager to stake her claim. Unfortunately, she ignored a cardinal rule: Know your market.

The investor didn't bother to research average rental rates in the area, nor did she research how the market differed from her own. Prices were so much lower in the Big D that she felt as if she were scooping up goodies from the bargain bin at a discount store. As you can imagine, the story did not have a happy ending—except for the seller and listing agent who sold her a property at retail price. The investor's willingness to skip due diligence led her to invest in properties that looked good on the surface but ended up costing her money in the end.

Moral of the story: It is not enough to hear that a particular area is "hot." As an investor, you need to be an expert or seek expert advice on your neighborhoods and the properties available in them. Property values can change from one block to the next and from builder to builder. Your goal as a new investor is to consciously start to make a habit of looking at your market and the properties available in it. Or again, rely on your agent or other investors. They are already able to recognize great opportunities and are there to help you spot deals.

Remember too that the goal of the HOLD strategy is to minimize your risk as much as possible while maximizing your returns. The so-called "hot" market—where prices can be inflated—might not represent the greatest long-term value for an investor.

There are five factors you should consider when you define your property criteria:

1. Location

2. Property Type

3. Economics

4. Condition

5. Features and Amenities

Let's consider these one at a time.

1. Location

The process of finding a great location is called "zeroing in" on your target market. In FLIP: How to Find, Fix, and Sell Houses for Profit, Rick Villani and Clay Davis shared a mapping exercise to zero in on neighborhoods that meet your target criteria. We are going to walk you through that exercise to help determine your hypothetical target neighborhoods in Springfield, a fictitious city in a nonspecified state.

First, find a map of your target city—similar to figure 2-1—that divides the region into neighborhoods, zip codes, or MLS-sectioned areas. Hint: Use the Internet so you don't have to zone the map yourself. If you can't find an image that works online, contact your real estate agent, who typically has access to presegmented area maps through the local Board of Realtors.

Second, using a pen or pencil, mark the areas where you live and work, and decide how far you're willing to travel to handle your investment properties. A 2012 survey of investors revealed that 79 percent purchase within thirty miles of home. Keep in mind, you may be doing the maintenance and repairs on your first few properties, so having them in or near your neighborhood or where you work is not a bad option. Time is money, and you don't want to spend all your time on a commute.

Let's say you decide you are willing to drive a maximum of thirty minutes from home or work to get to your investment property. Since most of your property visits will take place outside of work hours, start by drawing a circle with a roughly thirty-mile circumference around your house. Then do the same around your office. Finally, connect the tops and bottoms of each circle—or look where they overlap—to highlight neighborhoods you already travel through on a daily basis.

Next, look for any and all areas that are not within your two circles or the path between them. Cross these out, as they do not fit your proximity criteria—see figure 2-2.

Now look at each neighborhood within your prescribed boundaries. These neighborhoods will be your preliminary target areas—Area 3N, Area 3S, Area 6, Area 7, and Area 8E. You'll want to purposefully start spending time in each neighborhood within your circles—specifically the overlap—to get a better feel for the areas and collect more information on each. Remember Ms. Dallas' mistakes, and plan to devote some time to this part of the exercise. Tips to help you with this are:

• Talk to your agent, other local investors, and residents to get a firm grasp on the area (demographics, selling prices, average rents, historical property appreciation rates, rental vacancy ratios, and the percentage of rentals in the neighborhood).

• Plot new routes to and from work through a different neighborhood each week. Stop for coffee or meet a friend for dinner at local eateries, or do your weekly grocery shopping at a different supermarket. Being present in each neighborhood at various times throughout the day will help you grasp who lives there and what the scene in each area is like.

• Plan Sunday drives with the family and play "Eye Spy" looking for "For Sale" signs. Start to get an idea of what's on the market and for what price in each neighborhood.

• Ask questions. Don't be afraid to talk to locals. Some things you may want to know include: Do people want to live here? Is the neighborhood close to retail, office, and recreational areas? Are there nearby schools with good reputations? Is the neighborhood clean and well kept? Do the neighbors take pride in their homes? If a neighborhood mainly consists of single-family brick homes with 3 bedrooms and 2 baths, will a 2-1 with siding sell or rent for less? Do most of the houses in the neighborhood have garages or carports? What about washer-dryer connections? Are carpeting or wood floors standard? You'll need to understand the comparative pricing of properties in a target area to estimate the values of the houses there. This will also build your confidence when it's time to make an offer.

As you get more familiar with an area, jot down some neighborhood basics on your map. This may include the average list price for a single-family home and a duplex, neighborhood schools, the scene, and local activities/attractions. Look to figure 2-3 to see Springfield's varying MLS area characteristics.

Once you've collected sufficient information on each prospective neighborhood, compare notes and look to your personal criteria to zero in on your final target areas. For instance, Area 6 is mostly single-family homes, so it's out since you want to keep your options open to small multifamily properties at this point. Similarly, Area 3N is comprised of mostly large multifamily and commercial spaces, so it's off the list as well. And Area 3S, though varying in property type, seems a bit pricey as it is in the heart of downtown. Let's cross it off too.

On the other hand, the two neighborhoods left on your map in figure 2- 4—Area 7 and Area 8E—are what we will refer to as your target areas. These will be the locations you will focus on throughout the rest of your HOLD journey. Area 7 is a college neighborhood with both single and multifamily properties that seem to remain steady in pricing, rents, and business. They also have easy access to downtown and more outdoor activities. Area 8E, though a transitional neighborhood, offers both single and multifamily housing, and has had a rush of new businesses and families move in over the past two years, making it "up-and-coming." You may be able to find some good deals here.

Remember, you may have to revisit this exercise and your map as you continue to identify your property criteria in the rest of this section. And, as you become more familiar with the process and develop a reliable model, you may look for other areas to invest—perhaps a more outlying neighborhood or even another town. But proceed with caution. What looks like a good deal in one market may not be a good deal in another. At least in the beginning, it's much easier to stay on top of market changes, manage your portfolio, and monitor progress when the property is close at hand.

You're looking for desirable neighborhoods that maintain value and attract great tenants. That being said, it can be difficult for an investor to find opportunities in the most desirable neighborhoods. Because everyone wants to live there, prices tend to be higher. In that case, you should look on the fringes of the best areas or in transitional neighborhoods that are close to essential public services and systems but for various reasons are overlooked and undervalued.
(Continues...) Excerpted from HOLD by STEVE CHADER, JENNICE DOTY, JIM MCKISSACK, LINDA MCKISSACK, JAY PAPASAN, GARY KELLER. Copyright © 2013 by Rellek Publishing Partners, Ltd.. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site. __USA TODAY__**Take HOLD of your financial future!** Learn how to obtain financial freedom through real estate. The final book in Gary Keller's national best-selling Millionaire Real Estate Investor trilogy teaches the proven, reliable real estate investing process to achieve financial wealth: 1. Find – the right property for the right terms and at the right price. 2. Analyze – an offer to make sure the numbers and terms make sense. 3. Buy – an investment property where you make money going in. 4. Manage – a property until it's paid for or you have a large amount of equity to leverage. 5. Grow – your way to wealth and financial freedom.