How to Avoid the Common Pitfalls of Buy and Hold Investors
Buying and holding can be more difficult than novice investors anticipate. Serving as a landlord for homes in Kona Hawaii is essentially a full time job. Though you may not spend your standard forty hours a week managing a property, you are perpetually on call to address tenants’ needs and complaints. Unexpected repairs, lockouts, and tenant disputes are all to be expected. You will have to devote time to paying your own bills, hiring for repairs, and receiving payment from your tenants. Those who delve into buying and holding as a passive investment or a side-gig are always surprised at just how much work it can be.
Don’t let the commitment deter you, though. Buying and holding homes in Kona Hawaii and elsewhere can be an incredibly lucrative venture. It can also be rewarding—and even fun—if you are deliberate in your strategies. Carefully managing your finances and crafting a foolproof lease are absolutely essential, as they will comprise the foundation of your investment operation. But there are other steps you can take during both the buying and managing processes that will help you avoid the common pitfalls of buy and hold investors.
Don’t Settle
Both wholesalers and fix and flippers stress the essentialness of honing in on a good deal. The whole purpose is to purchase a property below market value and sell it at a higher value to generate profit, which simply isn’t possible if you’re deals are mediocre. Those buying and holding homes in Kona Hawaii, though, may not be as compelled to wait for the perfect deal. So long as your rental payments exceed your mortgage, you stand to profit from the venture, right?
Not necessarily. Consider the time and attention required to manage a property effectively. Imagine how much time during the week you devote to pleasing your tenants and managing your investments. Now consider the amount you stand to profit from a sub-par deal. Is it really worth the time and effort?
Buy and holders frequently make the mistake of settling for poor deals. They believe that any sort of profit is worth the investment because being a landlord is “passive” income. But it is just as critical for those buying and holding homes in Kona Hawaii and elsewhere to hold out for a lucrative deal. The extra time and work will be well worth it when your investment is consistently producing an impressive cash flow.
Add Value
Adding value to a home is also considered more integral to fixing and flipping than it is to buying and holding. But that couldn’t be further from the truth. In fact, landlords stand to profit even more from adding value to their homes. Whereas fix and flippers reap the benefits of their investment just once, buy and holders will continue to benefit from the value that they add to a home for years to come.
Now, that doesn’t mean you should purchase fixer upper homes in Kona Hawaii with the intention of renting it out. Massive repairs cost a lot of money and require a lot of your time. Fix and flippers are willing to take these financial risks because they are expecting an immediate and significant payoff. Buy and holders, on the other hand, may find themselves suffering from negative cash flow when their rental income fails to compensate for their repair ventures. But any small project that you can undertake to upgrade the value of your home is a good idea, so long as you can afford it. Even small efforts to improve your home will yield large cumulative payoffs if you are planning to hold the property for a long time.
Don’t Be the Good Guy
In cautioning against being the good guy, we are not encouraging you to be unkind or insensitive. Indeed, sensitivity, receptivity, and friendliness are crucial for maintaining positive relationships with your tenants. A sense of rapport between tenant and landlord will encourage you to work together for the sake of mutual benefit instead of bargaining for personal gain.
But becoming too closely involved in the lives of your tenants can backfire as well. A tenant is more likely to request a rent reduction if he or she considers you a close friend. Becoming close with tenants may also put you in a difficult place should a dispute arise between tenants. It is critical to maintain emotional distance and impartiality. While you can be friendly and understanding with your tenants, try to refrain from allowing them to enter your inner circle. And if you have a close friend that is interested in renting from you, be explicitly clear about your boundaries and expectations in your lease.
Don’t Rely on the Market
We’ve said it time and time again: an understanding of market dynamics is absolutely essential to successful investing. However, it is also important to understand that the nature of the market won’t compensate for the negative implications of a sub-optimal deal.
It is true that most properties will appreciate in value over time. Many investors make the mistake of investing in a bad deal that generates minimal cash flow. They do so because they are expecting it to appreciate in the future. But appreciation is not a given. Even if it was, it occurs slowly enough that it would take years to reap the rewards of appreciation. Furthermore, when you account for inflation, houses typically don’t increase drastically in value.
You would be far better off to take the extra time required to locate a good deal. You needn’t wait for a future payoff when, with just a little extra patience, you could be profiting immensely from your buy and hold investment in mere months.