The Buy ‘n Hold and NEVER Sell Strategy: A Case Study

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Last week’s post talked about various strategies that didn’t work as advertised when it comes to real estate investing.

Now, to be clear, the “tried and true” strategy of acquiring rental homes ’til one has 10 homes, then eliminating all debt by retirement, will defeat most-non real estate approaches, hands down. That’s true and has been for quite some time.

Let’s talk about the side-by-side comparison of the above-mentioned strategy B&H (Buy ‘n Hold) versus selling/exchanging or refinancing to acquire more property, while also takin’ advantage of other related vehicles. In others words, we’ll just add flexibility to the mix.

Sometimes analyses tells us it’s better to refinance to buy more than selling/exchanging. It’s different virtually every time, especially considering all the surrounding factors existing for each individual investor.

We’re gonna use a 35 year period from history — 1975-2010. This allows everyone to check the numbers in their particular market to see how it woulda turned out where they live. I’ll be using San Diego’s market cuz that’s where I’ve lived since I was 15.

Related: 10 Real Estate Markets Where The “Buy and Hold” Strategy Actually Made Sense

Here’s how the comparison will go:

1. I’ll assume the B&H and “never ever sell” approach will benefit by the overall rise in values/rents of the time, just as everyone else’s properties did.

2. Ultimate retirement cash flow for the two approaches won’t be computed equally. The 10 homes will calculate cash flow by taking the GSI (gross scheduled income) and taking 100% of it as before tax cash flow. Yep, we’re gonna make these rental homes magical to make the point crystal clear. 🙂

3. The ultimate retirement cash flow for my “client” will be computed on two levels: a) Real estate, which will be subject to Murphy’s Spreadsheet math. That is, we’ll simply take the total GSI and divide it by 2 to arrive at before-tax retirement cash flow, and b) Since my clients will be movin’ n’ grovin’ whenever opportunity and the market allows, they’ll have more income sources than will their buy ‘n hold forever competition. Two of those sources will not be real estate.

4. However, fear not, as their ultimate before tax cash flow from real estate will annihilate the other investor’s strategy.

5. Both investors begin with the same household income, get the same raises/bonuses, and have the same lifestyle expenses. The only thing different will be the investment strategy(s) used to generate retirement income.

1975-2010 — Buy ‘n Hold

B&H sets their plan in motion by acquiring a rental property sometime in 1975.

It took ’em five years to save the down payment. By today’s standards, it’s laughably cheap, under $30,000. As was their plan, they continued buyin’ home after home. The acquisition period ended some time in the mid to late 1980s. At that point, they’d acquired the 10 houses set out in their plan. The next part was to pay ’em all off by retirement, which they did.

Both of these investors were born in 1945, so planned on retiring at 65, which is 2010.

They benefitted by three incredible periods of appreciation, 1976-’80; 1986-’90; and 2001-’06. ‘Course, their strategy dictated they both remain calm through the downturns and also not alter their strategy during the wild upturns. They remained admirably disciplined. B&H’s 10 homes in 2010 on the day they retired were worth roughly $3-3.5 million. Today, they’re likely worth $4-4.5 million.

What Was Their Before-Tax Cash Flow at Retirement?

The average rent is about $2,000. That’s GSI of $240,000 a year.

When we apply the aforementioned expense factor… um, wait, never mind. We said they’d retire with 10 magical rental homes with no vacancies or expenses. Therefore, their gross rents would be their before-tax cash flow. Voila! They retired at age 65 with $20,000 of monthly before tax cash flow.

Great job, guys!!

How Did Our More Flexible Investor Do With Their Strategies?

They began with the same exact house their buddies bought, for the same price/terms, on the same day in 1975, with the same exact floor plan, across the street. That start equal enough? 🙂

By sometime in ’77, nearly three years later, that home was worth roughly $50,000. Their equity at that point was around $26k, net of loan/sales costs. Those doing the math will come up with a slightly lower net equity figure. This investor, following my advice, added an extra $100 a month to the loan payment, which goosed the net equity. Pretty boring stuff.

NOTE: We’re definitely NOT gonna go through the painful minutia of numbers details for every transaction over 30 years. I’m doin’ it for the first property to show how I arrived at net equity, which was to apply sales costs of 8%. From here on out, it’s nothin’ but broad brushstrokes. Those who prefer all the numbers ad nauseum? I suggest an HP 12C. 🙂

To Continue…

They were advised at the time of sale to examine whether or not it was better to sell and pay the taxes or to defer taxes in an exchange. They chose to pay the taxes, which amounted to around $4,000, some of which came outta their Levi’s, but well worth it. They then took the after tax cash, approximately $25,000 and acquired a local fourplex for $110,000.

Update: They now own four doors instead of one, and it’s barely three years.

They make another move in the spring of ’79. They acquire a couple duplexes and a triplex on separate but contiguous lots from one owner. They got rid of the fourplex to do so.

Update: It’s now summer of 1979, and they own seven doors broken up into three properties.

As it happens, Grandma passes away during the early winter of late ’79. She didn’t have much to pass on, but both our investors received around a $20,000 inheritance. Our B&H investor put a huge smile on his wife’s face by giving their kitchen a complete makeover.

Our more flexible investor spent all $20,000 on a 2nd position note sportin’ a loan balance of $29,000. The payments were monthly, totaling $2,900 annually. A modest start in the note arena, but a start nonetheless. It was at 10%, interest only payments, all due and payable in five years. He used the after-tax monthly payments to add even more velocity to debt elimination.

The note paid off as agreed in January of 1985 — $29,000.

At that point, they rinsed ‘n repeated the process, using the after-tax payoff cash of around $27,000. Found a $42,000 note for sale that made sense. Another 2nd position note secured by a local triplex. This one was a 10% loan, which had started out as a 10 year loan back in 1980. Payments were interest-only monthly, all due and payable in early 1990. The payments added to $4,200 yearly, which netted out to around $3,000 or so after tax. As usual, the monthly amount was dutifully added to the targeted loan of one of his properties.

From that summer ’til around spring of 1984, they don’t do squat. They begin to wonder if “normal” would ever return to real estate investing. I know at that time I sure did. 🙂 By then, the median house price in the San Diego home market, even post recession, is over $100,000. They poke their heads up, but decide to stand put a while longer. They’re not enamored with interest rates.


Both investors have been doin’ well at work, getting promotions and raises.

During the downturn, the “flexible” investor was advised by his RE investment broker to apply more money to the pay down of his loans. So, for the almost six years since the last move in 1979, they’d been applying around $400/mo to one of the duplex loans PLUS the newly acquired note payment. Doesn’t sound like much these days, but that much back then could make a real dent.

What with much pay down on one of the duplexes and normal debt attrition on the other two properties, they happily jump into the 1985 market. Well, happily except for the never-ending hangover of high rates. They opt for the newly available adjustable rate loans, which don’t have any negative ammo. For the record, that was a pretty salient call, as the index used, the 11th District Cost of Funds, went steadily down for many consecutive years.

Related: Top 10 Reasons to Buy and Hold Real Estate

They acquired three fourplexes in 1985. Again, they used adjustable rate loans. Both times they began with precious little cash flow, though that quickly gave way to ever increasing cash flow due to the rents tracking the demand-created rents (inflation at its best), which never seemed to stop headin’ northward. This wasn’t unique to SoCal, just more pronounced than most markets around the country.

Update: They now own 12 doors 2 (20%) more than their investor counter parts ever will.

Let’s Skip to the Last Inning

From 1986, at which time they’d gone from a lonely rental home to 12 doors in three fourplexes, they made a large move in 1989 that allowed them to end up the proud owners of 22 doors. This was made possible by the use of the then very much increased net equity of the three fourplexes they’d acquired in 1985. Inflation and value appreciation is a fine thing, isn’t it? Crashing those loan balances downward didn’t hurt either. 😉

In early 1990, the note bought in 1985 paid off with a check for $42,000. They just kept the ball rolling by acquiring junior position notes each time, which they did ’95, 2000, and ’05. In ’10, they changed their note approach slightly, buying only 1st position notes. ‘Course, they’ll actually never stop that part of their plan, even after retirement, right? Who doesn’t want raises after retirement?

Real estate-wise, they went fishin’ again from their last move in ’89 until about 1998. Why? The whole S&L Crisis thingamajig put a crick in pretty much everyone’s neck. 🙂 On the silver lining side, using all their cash flow, spendable cash from their family budget, and after tax note payments, they literally paid off one of their fourplexes. They then set out with serious intent to move up once more.

NOTE: Here’s where massive appreciation for consecutive years makes the avoidance of 1031 exchanges more difficult. Cost segregation up to that point was still a rather contentious topic with the IRS. That precluded any real planning for future cap gains/recapture tax reductions. I’m a lotta things, but a bleeding edge pioneer ain’t one of ’em. 🙂

By early 1999 the smoke had cleared on the turnover of their entire real estate portfolio. This took many months to accomplish. Duh. The result was they ended up with a buncha duplexes, triplexes, and fourplexes, totaling 47 doors. Total value of the acquired property was just over $4.4 million.

Meanwhile, Back at NoteRanch…

By 2010, their note portfolio had grown to just over $200,000.

This was helped along by having one of their notes pay off way early, which happens every now ‘n then. The payments on these notes were, as usual, interest only. The interest rate had declined slightly to an average “note rate” of 8.5%, resulting in an annual before-tax income of $17,000.

Much of their ability to make trades sooner than some investors in the same market came directly from their ability to enter that market with more relative equity to trade. Even if they didn’t jump sooner than most, they were able to acquire one or two more properties due to the impressive debt reduction they’d created. Over the long haul, it can make a stunning difference in both end game capital growth and cash flow.

They continued the assault on their overall investment property debt. By then, they had 47 doors, so the cash flow, though measurably smaller per door than most other markets around the country, was still high. When combined with the four figure extra principal pay down each month, the impact on their growing equity was magnificent, to say the least.

And Then the Mother of All Bubbles Was Born

From 1999 to 2003, the overall value of their real estate investment portfolio went from around $4.4 million to roughly $5.7 million! They almost didn’t know how to act. Even though they’d moved into a new home, their payments barely rose ‘cuz the interest rates had gone down so much. Ah, the blind luck of timing sometimes.

For the record, our B&H investor was grinnin’ ear to ear, too, as he saw his 10 homes rise to almost $6 million by the end of 2006. ‘Course that smile adjusted itself by the time he retired in 2010, though considering his humble start, it was still bright.

To continue with our more flexible investor’s saga, the huge amounts they’d been adding to each month’s payments on successive loan payoffs had mounted up, and happily so. By late spring of 2003, they began to believe their real estate investment broker’s advice about gettin’ outta Dodge. So, they began the process, which took longer than they thought. They moved their whole portfolio, lock, stock ‘n barrel to a couple major markets in Texas. (Yeah, I know. Who knew, right?)

Here’s How it Played Out, More or Less

The total debt on their portfolio at that time was just under $1.5 million. The net equity using 8% for sales costs was approximately $3.5 million, being conservative. They acquired 50 Texas doors in a combination of brand new duplexes and fourplexes. Remember, no loan limit per investor back then. 🙂 That allowed for a monthly cash flow of around $13,000.

Add to that cash flow the $2,000 monthly from their family budget, and another $1,000 from notes. That means they were adding $16,000 monthly to the notes for seven years. Uh, oh. That means if they wanted to retire with all of ’em completely debt free, they’d hafta give a bit of a boost each month. Don’t ya just love these sorta logistical glitches? They decided to find the extra $258/mo. to end up debt free by 12/31/10.

So, What Was Their Retirement Income From Real Estate?

Bottom line, using Murphy’s Spreadsheet — divide GSI in half — their cash flow ended up being about $29,500 a month. In reality, the properties in Texas more likely cash flowed at about $35,000 monthly.

You’ll recall I agreed to compare the two strategies side by side, but with radically unfair methods to arrive at cash flow. Our B&H investor ended up with a retirement cash flow — at least in Fantasy Land — of $20,000 a month. This was based on having no vacancies or operating expenses once retired. 🙂

In other words, they have less gross collect rents per month than does Flexible Man, who had nearly 50% more cash flow while using half of his collected rents — on brand freakin’ new properties, mind you — to pay for vacancies and operating expenses.

Add the note income at retirement. Since the note paid off in late 2010 at $200,000, he decided to let it ride into more notes. Not a difficult decision. 😉 He pulled in his horns risk wise, opting for 1st position discounted notes. His first investments provided a 13% cash on cash yield of about $26,000 a year. So, as he entered into his first year of retirement on New Year’s Day, 2001, his investment generated income for that year was $380,000.

Let’s Revisit Our B&H True Believer

On his first day of retirement, the actual annual income was approximately $120-156,000, or $10-13,000 monthly. Woulda loved to hear those two’s first post retirement conversation, wouldn’t you? 🙂

B&H: “You’re makin’ how much?!!!” 

If Flexible Dude wished to put a blanket 30 year fixed rate (portfolio) loan on all his units for roughly 70% LTV, then buy notes with the cash, his income would easily rocket up to well over $500,000 a year. Though I’m sure his good friend B&H would want in on that, I’m almost as sure the lenders in California wouldn’t give him a loan on 10 geographically spread out single family homes, especially since their ages range from 30-60 years old. He would be able to possibly refi 3-4 of ’em.

This is another example of why experienced investors don’t follow formulaic retirement plans.

The Takeaway

Grab what the market gives us, when it gives it to us, and how it gives it to us. The rest is nothin’ but HappyTalk.

What do you think of this case study?

Leave me a comment below!

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.


    • Thanks Jeff !! Definately thought provoking. Being a newbie, I will take the main lesson of this article….grab what the market gives you, when it gives you and how it gives it to you!!!

  1. Jerry W.

    I am a buy and hold guy. My strength and weakness is leveraging into more houses. In your scenario what if the buy and hold guy when he hit 50% equity took a 2nd on the place to use as a down payment on a new property? Sometimes the bank just let us take a 2nd note to secure the 20% down, later we had to refinance both properties together. Either way a new rental is added fairly often. We also buy on 15 year loans with 5 year ARMs, so note paydown is fast but cash flow is almost nothing. At 15 years before retirement go to paydown mode with no new acquisitions unless they are cash.

    • Jeff Brown

      Hey Jerry — My first question is always, “Did the cat get skinned?” If it did, then we can talk about the how. I prefer not to continue adding to debt, and/or assuming far more risk with higher payment loans, even if only slightly higher. The seconds make it more than slightly, right? Also, when things go south periodically, I much prefer the option of not having negative cash flow, which would sometimes be unavoidable with 2 loans. But again, if the cat skin is on the wall at the end of the day, good job.

      The added risk to your proposed method isn’t for me. Still, it’s an approach used by many.

  2. You make my brain hurt with these articles! I can actually feel myself learning! Amazing and informative. Does “flexible man” have any relation to you by any chance?

  3. Great article! You mentioned in your case study that the “flexible” investor didn’t use exchanges. Is there some benefit to NOT using a 1031 for example(I’m not aware of any others). Or did you just determine that for the sake of the example?

    • Jeff Brown

      Hey Jared — He didn’t exchange the first time, though it’s highly possible, if not likely he did after that. The huge run-ups of the 70s and 80s, not to mention the first few years at the turn of the century made it hard to avoid trading.

      The benefits when NOT exchanging are many, but the main rewards are more depreciation and less capital gain on the next transaction over time. The investor can actually plan how to offset capital gains and depreciation recapture, but only in circumstances where using cost segregation makes sense — which is another post entirely. 🙂

      Often times it makes sense to incur taxes on a sale of real estate when the investor has experienced significant losses in the stock market or even other real estate.

  4. I agree it’s hard to follow, and I think that’s at least as much because it’s essentially written in slang English as it is because it doesn’t have a spreadsheet.

    I love what you guys are doing with Bigger Pockets, but it would be 1000% better if you could just have someone copyedit the posts! They’re so hard to read I’m quite sure you’ve lost other readers

      • Mike McKinzie

        So using cuz instead of because or woulda instead of would of makes it hard to read? If Jeff were teaching English Grammar instead of how to retire on a six figure income, I could understand the complaint. But seriously, the issue should be the information and not the delivery. There are homeless guys who use perfect English and Billionaires who can barely read. Who would YOU listen to?
        But Jeff, if you ever want a FREE proofreader, I would be happy to provide that service to you. All you have to do is ask.

  5. jeffrey gordon on

    I get the confusion some folks have following this article. As abig leagues number cruncher I am usually more comfortable seeing all the details–a bad habit that can be tough to give up!

    The thing about Jeff Brown is that he can do things with a HP12c in minutes that would take me hours to duplicate in excel. So early on in my being mentored by him here on BIgger Pockets I learned to control myself and pay more attention to the concepts he is teaching!

    Every time I have double checked his work it has been well within the acceptable margins of errors, so I save myself the wasted time and focus on the big picture lessons he is providing for free to everyone here.

    But hey, knock yourself out and take his article and convert it into a spreadsheet if that will help you come to a clear understanding of the treasure he is sharing here!

    Because after all, it should be obvious, even giving twice the realistic monthly net income return on the buy and hold strategy, that his alternative “flexible investing” strategy kicks some serious butt!

    just saying!


  6. Paul Doherty

    I’d love to say I understood this article but really got lost with the terms being used in the flexible strategy. I’ve been a buy, hold and rent guy up,to this point, but now have one of my three rentals fully paid off and am considering a 1031 to split it into 2 or 3 new properties. But if there is something else I should be doing, I want to know about it.

    Can someone point me to a source so I can understand the second flexible strategy? All this talk of “taking notes” and first/second this/that without reference to what/which property (or even if he’s simply taking loans) makes it hard to determine the actual steps and what property is owned, which loans are out and owed, being paid down, etc.

  7. Hi, good analysis but obv a lot of assumptions on the leveraged guy. 2nd position notes have high default risk in crashes, even first position had a lot of risk post crash. Note interest taxed at ordinary income as well.. Also, no analysis of required capex. You can’t get market rent for a non-updated thirty year old property. But bottom is is that leverage and trading is better..

    • Jeff Brown

      Hey Dustin — Every one of those properties and notes were taken from either my own or clients’ real life experience. None were made up. Your point on junior position notes is well taken. Since Ford was in office I’ve owned nothing but 2nd-4h position notes and have yet to lose a buck. I’ve broken even a couple times though. 🙂 It’s about experience, expertise, and knowledge.

      I also love your point about old properties, which is very well made. However, in San Diego, a 30 year old triplex is considered ‘broken in’. 🙂

  8. Steve Vaughan

    I very much enjoyed the article. The note buying strategy came out of left field for me, especially when his broker recommended it. Brokers are most always optimistic and always want you to be transacting RE, no? To be real, I’d say our note buyer must have bought at least 1 loser, maybe 2. They had 2nd position notes during tough economic times. That said, I am not trying to nit-pick the strategy or be a defeatist. I like the idea. Not something I have really considered and after all, I am here to learn as well as offer. Thanks, Jeff!

  9. Brant Richardson

    Interesting comparison for sure. I would like to see what would happen if the buy and hold forever investor was a little more flexible. With out ever selling a property he still could have accessed his equity and used it for more acquisitions beyond 10 doors. He could have invested in some multi’s as well. Another thing to factor in is that the flexible investor had to spend a heck of a lot more of his free time on making all those transactions occur. Good stuff, thanks for the article.

  10. Interesting post. I don’t understand some of the details.

    Can somebody please explain why the b&h couple care at all if the values of their properties go up or down? Wouldn’t higher property value just mean more property tax? What are the real advantages of appreciation if they’re just going to hold?

    • Exacta mundo, Diana. However, in CA, the rise in real estate taxes on residences are limited to 2% max per year, so not a problem.

      They could’ve done so much more. In fact, if they came to me now, I could likely double or triple their retirement income. 🙂

      • Thank you Jeff. I’m still confused.

        This was in the hypothetical case study: “For the record, our B&H investor was grinnin’ ear to ear, too, as he saw his 10 homes rise to almost $6 million by the end of 2006. ‘Course that smile adjusted itself by the time he retired in 2010, though considering his humble start, it was still bright .”

        Why was the b&h investor grinning from ear to ear if all this appreciation only results in higher property taxes and no other gains since they didn’t go to you for advice and stuck with their b&h strategy?

        • Jeff Brown

          Everything’s relative, right? Those not using real estate as at least a major factor in their retirement plan, will not come within shouting distance of our ‘never sell’ investor, when it comes to retirement cash flow. As I mentioned earlier, in CA real estate taxes only go up 2% a year, so it’s a complete non-factor. In fact, our guy now owns 10 rental homes in today’s market, which is at a $505k median. Yet, he’s paying taxes only around double what he started with, on average. Considering original total purchase prices were likely less than a million bucks, his real estate tax bill is literally a non-issue.

          But what if it was somewhere else, right? Diana, if real estate taxes are that big of an issue at retirement, the investor did a whole buncha things very wrong. Even in TX where some counties have neighborhoods paying in excess of 3% of value, smart investors are still buying for the long term, and buying many properties at a time. Real estate taxes are a false issue, period. Make sense?

        • Thank you! Ok I totally accept that taxes are a non-issue (even though I personally don’t like them going up no matter how nominal the amount). Yet I still don’t see why the b&h couple are “grinning ear to ear” because of appreciation. If anyone can explain this or refer me to articles or blog entries that would be great too. What have they gained through appreciation?

          To me, appreciation seems to be a non-issue for the b&h strategy but I’m very new at this. I’m asking mainly because the property I bought 2 years ago has allegedly increased in value by a few hundred thousand, and people expect me to be happy about this. I’m not unhappy, but I’m certainly not grinning ear to ear. Taxes, however irrelevant they may be, are resulting in me having less money in my pocket every month from my rental. I didn’t plan on selling this property now, so appreciation really doesn’t seem relevant. However, people far more experienced than I am insist it’s a great thing and I’m trying to understand why and hoping to learn more.

  11. Hey Diana — I see your point more clearly now. Buy ‘n Hold (& never sell) types smile so much at appreciation cuz they love to point to their ‘amazing’ net worth, regardless of their now empirically demonstrated inferior cash flow in retirement. If they listened to my advice at retirement, or even today, here’s what I’d tell them to do. Once we were finished, THEN they’d have a better reason to be grinning ear to ear. 🙂

    Let’s grant ’em a $4.5 million f/c equity today. Their actual MAXIMUM monthly cash flow is $12k/mo. If they pulled out roughly $1.9 million at 4.75% interest, fixed for 30 years, their monthly payment would we $10k/mo., leaving 24k/yr cash flow from the 10 homes. $1.9 million at a minimum 12% annual cash on cash yield = $228,000/yr or $19k/month. Add to that the $24k/yr cash flow from the now indebted homes, and they’re cash flowing at $21k/mo. and over $250k/yr. My math says they just DOUBLED their retirement cash flow by ending their stubborn insistence on using a strategy that failed miserably when compared to what I suggested in the post.

    Also, due to the embarrassingly bad rent/price ratio in San Diego they still only have an LTV on their portfolio of 42.2%. The legacy they’ll pass on to their kids will have been mightily improved. Make sense now? Shouldn’t they be grinning at the results of their appreciation? Still, your point was valid, Diana. ‘Til they took the bag off their heads their grinning was for something hey had (impressive net worth), but was as useless as wings on a chicken.

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