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The Hardest Part of Buy-and-Hold Real Estate Investing: Delayed Gratification

by Michael Zuber on August 28, 2012 · 16 comments

  

Let me start this post by saying I love “buy-and-hold” real estate investing.  I just wish it was easier.

Flipping real estate or wholesaling deals is appealing, as cash is quick and you know in a short time frame if you have made a good deal.  Unfortunately, buy-and-hold real estate can take a long time to generate a meaningful amount of cash flow.

This leads me to today’s topic, as I want to highlight what I believe to be the hardest part of buy-and-hold real estate investing. If I asked 100 people what they thought the hardest part of buy-and-hold real estate investing was, these are the answers I would expect:

  • Finding a deal
  • Securing the down payment
  • Finding a good tenant
  • Managing tenants
  • Handling evictions

In my opinion, all of these answers would be incorrect.I strongly believe the biggest issue with successful buy-and-hold real estate investing is:

Delayed Gratification

Lets explore an example that walks through some hypothetical numbers. Buy-and-hold real estate starts with the purchase of the first property that may produce $100-$400 positive cash flow in most months.  While this is a great start, it will not take you to the finish line.

Therefore, you start plowing all of your extra cash flow, bonuses from work, and any extra cash you can generate into the second property.  Now you have $200-$800 in cash flow most months, depending on the properties you purchased.

Why only most months?  Stuff breaks unexpectedly, tenants leave without paying, and you may have an eviction to handle. Please realize right now that even the best cash flow estimate is just that– an estimate– so budget for surprises.

Now, back to the topic and hand: Delayed Gratification

Buy-and-hold real estate investing is hard because it frankly takes so long for to produce a meaningful pile of monthly proceeds. I have been doing this for 10+ years now, and I managed to ride one buy-and-hold real estate cycle almost perfectly, meaning I sold the houses at the peak and moved the equity into apartment buildings (delayed gratification again).

I took maximum advantage of this down cycle by buying 20+ properties before the Wall Street money woke up and changed the market overnight.

You see, it is ONLY after all this time (since 2001), nearly perfect timing on repositioning equity during a significant turn in the market (2006-2007) and taking maximum advantage of a once-in-a-lifetime buying opportunities (2008-2010) I can finally see the end in sight.

Ask yourself these questions:
Could you delay gratification for 10+ years? Could you plow every single dollar back into real estate? Could you take the negative surprises and keep moving forward?  Would your partner be willing to sacrifice this long, or would they want to stop half-way and buy a bigger house?

What about the mistakes? No one goes through 10 years of real estate investing without making mistakes. Would you acknowledge them and move on? Would your partner hold them against you? Would you be turned off on real estate investing forever, only to be brought back in after the market turns and adds 20% to current prices?

Buy-and-hold real estate investing has worked for generations, and it will work for generations to come. Unfortunately, most people and couples are not wired to delay gratification for one week, let alone 1 year, 5 years or 10 years!  If you are, congratulations, but without your partner on board, you have no shot, as they will spend it as soon as the extra money comes in.

I want to thank my wife for sticking with this 10 year run.  It was never easy, never boring, but boy was it worth it.

Good Investing

Photo: Keoni Cabral

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{ 16 comments… read them below or add one }

Karen Rittenhouse August 28, 2012 at 10:28 am

Michael:
CONGRATULATIONS!

And you described buy-and-hold perfectly.
The hardest part for my husband at the beginning of our long-term-hold business was making me understand “good debt”. I was one of those who wanted to put down more (we didn’t), pay off quickly (we didn’t), never borrow from anyone (we did). Eight years later – Am I Glad We Did it His Way!
Ahhhhhh, music to any husband’s ears.

;-)

Reply

Mike Z August 28, 2012 at 11:27 am

Karen

Nice work and if I knew your husband I would send him your comment as we (Husbands) never tire of hearing we were correct (It happpens so infrequently – at least in my house)

Good Investing

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Jim Williams August 31, 2012 at 10:26 am

Redemption is oh soo sweet! Thanks Babe!

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Mike Z September 1, 2012 at 11:28 am

Jim

Congrats – Nice work.

I would write this day down as you will want to remember this feeling for years to come

Good Investing

Michael Stanphill August 28, 2012 at 10:32 am

Great points made here. I’m just starting off and don’t even own a property yet but thankfully me and my two partners are extremely patient people. I just forwarded them this article and they agreed we need to keep our eyes on the prize 10 years down the road.

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Mike Z August 28, 2012 at 12:36 pm

Michael

Nice work.. Keep focused on daily execution with a ten year plan and you will enjoy a lot of success

Good Investing

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Nathan August 28, 2012 at 10:42 am

Man, you ain’t kidding! The only saving grace is I’ve convinced myself I can’t retire until I’m 55 anyhow (last kid finishes college)… having that 22 year time frame allows me to focus on all of this as “retirement income”.

The plus size to this is I can take less risk. My goal at 55 isn’t to be a Billionaire and therefore I don’t need to take the risks or make the sacrifices that would maybe make that possible if I were the 1 in 1,000 to hit it big… instead I can focus on repeated, safe, sound, good decisions that will lead to a VERY comfortable retirement. That long term approach, that forced patience helps in the decision process and (this may be a bit of an overstatement) almost guarantees a comfortable future for my wife and I.

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Mike Z August 28, 2012 at 11:28 am

Nathan

SLow and steady wins the race. But don’t be afraid to change strategies if the market goes agaisnt you. We would be a lot worse shape if we just kept on buying into the peak instead of selling/exchanging when we did

Good Investing

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Sharon Vornholt August 28, 2012 at 4:02 pm

Michael-

Buy and hold real estate is definitely a get rich slow business, but like you said, it is so worth it if you can only take a good look down the road and envision the future. The trick is to see the big picture. When you ask yourself how many paid off buy and hold houses would make you happy, answering this question helps you to set your goal.

10 houses at $800-$1000 per month rent? Maybe your number is more or less. If this is your strategy, pick an number and go for it.

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Bilgefisher August 29, 2012 at 9:25 am

You summed up exactly what i was thinking. The best investors have theirs goals in mind. They have the Why of real estate. Sure makes it easier to keep on trudging through those muddy patches.

Jason

Trina August 29, 2012 at 4:37 am

Thanks so much for the inspiration! We are planning our strategy and looking for our first deal now. It’s great to hear from a seasoned investor.

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Mike Z August 30, 2012 at 9:43 am

Trina,

Just so you know. The first deal is the hardest. It will get easier

Good Investing

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Melisa August 29, 2012 at 8:00 am

Mike this article is great, as a new buy and holder I am always looking for the best strategies to use and to learn from my seasoned buy and holders. I started investing in November 2011 and have acquired 4 properties since then and I am very much so enjoying the ride. The hardest part for me is continuing to stay motivated with so much competition out there I become stressed about making the best deal at the right price, etc.

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Mike Z August 30, 2012 at 9:45 am

Melisa

Stay close to your investing numbers as markets will change and you will need to adjust. When this market turns I will be a happy seller and move my equity into larger buildings. SO keep buying properties until they don’t make since any more. But always stay in the market because you never know when a deal will pop up

Good Investing

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Dennis September 2, 2012 at 4:59 pm

Looking back, I think we have a toss up. Buy and hold for an eventual payout or buy low and sell high.

I have done both, I will admit I am enjoying a continuous monthly and relatively easy cash flow is nice in this economy. Then again I think wouldn’t it have been nice to have sold close to the top of the bubble and be able to pick the bones of the REI market now that there is blood in the streets?

My only regret is buying multi unit properties in the City of Philadelphia, where the governing body is at present picking the bones of landlords as we are stationary targets ripe for the picking.

Renting single family homes is still the safest bet, raiding the landlords pockets with fees and fines will not happen here as the fees and fines are so easily passed to the voters/tenants.

I am glad that I included a few single family house in my REI portfolio.

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Lille Low May 1, 2013 at 10:01 pm

In the midst of so much hype by property gurus about how you can double your money in years by flipping properties, there’s this nagging fear at the back of my mind that this is not the sustainable way to grow my money. I’m glad that this post confirms it!

But having conquered whatever fears we have, it still boils down to getting out of our comfort zones to start the investment process.

Reply

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