Buy & Hold Exit Strategy

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Buy & Hold Exit Strategy

Johnson H.Pro Member
Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes

As someone who dabbles in day trading once in awhile, I always set my exit strategy before going into a position, taking gains or losses at predetermined prices without (much) emotion in order to profit or cut my losses early.

As a young real estate investor with a full time job, I have been acquiring SFH rentals at 60% to 70% discounts from 2006 highs in the Phoenix market. I continue to save, look for further deals and even jumped into having private lenders to fund future deals.

However, I am having trouble determining my exit strategy and a situation popped up into my head. Let's say its now 20 years into the future. Each home worth $300k in 2006, I purchased for $100k in 2011. Now the price of each home is worth $200k. So the homes have appreciated for double but still 33% off it's highs so I don't think its unrealistic for this to happen. After all costs, let's also say I can profit $80k for each home if I sell or I can continue to to reap $300 to $400 a month in cash flow. Taking the high end number, that is $4,800 a year.

After some thought, I would sell them all, try to get into a 1031 exchange for a large distressed apartment building. If I can't find one, I'll just eat the taxes and save my money for another downturn and buy up real estate again during that time.

What would you do? Would you just keep all of the rentals? Or sell it all? Or do something different?

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Steve L.
Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
14y

The two main factors I will take into consideration on when to sell:

1. What the experts think the market is going to do appreciation wise. There are a couple sources I trust but I don't want to hold on right to the top. Too risky.

2. My return on equity. Since I already buy properties at a pretty big discount my return on equity is already low. I can likely 1031 exchange my portfolio into some pretty conservative investments and be better off.

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  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    14y

    I would "sell" when you think you have made enough cash and move the money to an apartment complex with better current yields.

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  • Jason S.
    Investor · Diamond Bar, CA · Member since 2009 · 446 posts · 233 votes
    14y

    You have to look at the ROI/ROA numbers at any given time and make that determination from there. It is also wise to diversify and take into consideration the markets where your assets are held, even diversify markets.

    An apartment vs. a handful of SFR's in Vegas or are we talking trading a handful of Vegas SFRS's for an apartment in Pasadena or Walnut Creek? So many factors to consider.

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  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    14y

    The two main factors I will take into consideration on when to sell:

    1. What the experts think the market is going to do appreciation wise. There are a couple sources I trust but I don't want to hold on right to the top. Too risky.

    2. My return on equity. Since I already buy properties at a pretty big discount my return on equity is already low. I can likely 1031 exchange my portfolio into some pretty conservative investments and be better off.

    1Reply
  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    Johnson – I believe I read an article a while back that was discussing Las Vegas and also the Phoenix market. They were projecting that the properties would not reach their previous high until the year 2030 and 2031 so you are pretty close in your assumption of 20 years into the future. I think that is a safe thought, so based on that you determine what your process is going to be. I do have a difference of opinion with regards to taxes and refuse to just eat them and allow them to reduce my investment pool by 20 to 40% at the present time. We don't know what changes will be made but my guess is it will never become better in regards to taxes so that is an item that needs to be taken into account as you try to create wealth. I like your idea of doing a 1031 exchange but I don't like the idea of all or nothing. It seems like your question is selling at all or keeping all of the rentals and I think somewhere in the middle would be a better choice. I can assure you that's exactly what I did. I won't bore everyone with what I have posted many times before as far as what the retirement asset ratio should look like in my opinion.

    Jason – I also agree with your comment with regards to diversification and I would look at that as not only diversifying your areas but also diversifying the types of properties that you own. You may want some high cash flow type properties that you would probably also want some properties that are relatively new and in better condition to last you till your retirement. Remember that something that looks good to you today will definitely look different 20 years down the road. I'm speaking from experience, as I'm not sure I would want to own anything that I purchased when I originally got into real estate. I know for a fact much of those are no longer standing!

    Steve- there is one thing that will never go out of vogue in my opinion. That is the sunshine! As people get older, like me, snow does not have a tremendous draw potential. You'll notice from previous posts of mine that I have property located in South Florida, South Texas, and South Utah. Before you think Southern Utah has ski slopes down to my home, I'm only 100 miles from Las Vegas. Do you see a trend in all of those properties? Remember that people are living longer which will cause larger growth to the warm weather areas if trends continue as they have been going for the last 50 years. I'm not as concerned about what someone will say is a top appreciation area since those will change from time to time.

    At 1031 exchange is definitely required somewhere along the line to increase your depreciable basis for the amount of investment that you have. I truly believe that going all in or all out is not the best choice and I try to practice what I preach. Rich

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  • Johnson H.Pro Member
    OP
    Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
    14y

    Thanks for your responses everyone. I feel that with the cash flow provided, it will take at least 16 years for the annual cash flow of the rental to match the $80k profit if the home was sold. Wouldn't you rather just go into cash and not have the hassle of a rental and just wait it out over 16 years for another housing downturn to reinvest your money?

    Rich Weese - What happens if you feel that we are close to a housing bubble burst again and you own property that has appreciated substantially, how would you avoid taxes then? Wouldn't you rather take the profits and pay on average, 30% in taxes then to risk losing 50% of your profits in a downturn? Wouldn't you rather be holding onto cash then to reinvest into real estate that keeps declining in value?

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  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    Johnson – I have never been one to try and time a bubble. I'd rather be in position to benefit from any sort of change in a particular market. I also don't feel anyone is good enough in any type of market to be successful timing it over and over again. I have selected various areas that I felt very comfortable in acquiring properties but I'm also comfortable holding on to those. All are in warm weather areas. I've mentioned before that I have parallel investment systems that I feel protect me both against inflation or a bubble bursting. At all times I maintain assets in high LTV properties, free and clear properties, and adequate cash to take advantage of situations beneficial to that. Rich

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  • Johnson H.Pro Member
    OP
    Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
    14y

    Rich Weese - Rich, when do you sell a good rental property then? When you feel that it has hit its limit in terms of appreciation, when a better investment comes along and you 1031 into it, or what?

    Do you ever see yourself exiting out of real estate completely one day, cashing out, and just play with your grandkids everyday without worrying financially about the ups and downs in the economy?

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  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    Hi Johnson – those are some very good questions. You are fairly new to BP but I have answered this same type of question quite a few times in the past and many on here probably sick of hearing me say the same thing so I would urge you to go do some research on some of my previous posts and threads. I have always been very concerned about the tax consequences from selling real estate and also making sure that I have as much real estate as possible to pay as little in the way of income taxes is possible. A few years ago I did have some money in the stock market and mutual funds and got killed like everyone else. I also felt there were some problems coming in real estate so sold quite a bit of it to be able to use the losses due to the stock market fall.

    I'll keep this short, but I basically have trust set up that bypass my children and go directly to my grandkids. I am no longer in this for the short term and I really don't buy while thinking I'm going to make a killing on the purchase and sale of a piece of real estate. I would much rather at this stage by or build good properties that I might add to my portfolio and receive maximum depreciation and some cash flow. I also try to buy as much property with high LTV's of which the majority are owner financed properties. I'm comfortable with those two I don't ever foresee me completely selling out my real estate since it is basically on autopilot currently. There is adequate income coming in on a monthly basis in the way of passive income to allow my wife and I to live very comfortably and travel where we want.

    We did actually move back to southern Utah because three of my six children are close by and seven a my 11 grandchildren. Two grandchildren are already grown and on their own in college but I do miss my youngest to which are in Missoula Montana I do try to play with them as much as possible and I'm actually going to the birthday party of one grandchild this evening and I have organized a Super Bowl party for family only tomorrow for my kids and grandkids. As I've posted before and as I stated in my book, I wish I would've taken more time in nearly years with my six small children. The only expense would've been taking a little bit longer to become self-sufficient, but I certainly would suggest that to all the young investor starting out now.

    I feel that I have done everything I can to be prepared financially for the ups and downs in the economy and if you research previous posts and threads that I have entered into you will understand my thought process and hopefully the methods to my madness! Rich

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  • Johnson H.Pro Member
    OP
    Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
    14y

    Thanks Rich! I'll be sure to do a search of your old posts. Looking forward to hearing you speak at the conference and reading your book soon!

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  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    14y

    If your payback is over 3 years the capital probably isn't working very hard. If your property is worth a lot more than the debt you have on it you are likely better served from a ROE standpoint to either refinance and deploy the cash elsewhere or exchange to a larger property.

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  • Doug Fath
    Real Estate Investor · Bala Cynwyd, PA · Member since 2012 · 4 posts · 1 vote
    14y

    As some have already replied it depends what the market like is at that time and where you can get the best return on your money. Something to keep in mind though in 20 years, your mortgages should be almost paid off or perhaps already paid off depending on your amortization schedule. Therefore that should significantly increase your cashflow at that time. The biggest thing though is understanding NOW, how these properties play into your longer term goals. Of course you can always change and update those goals, but it's good to have a clear plan now.

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  • Thomas Handy
    Investor · El Paso, TX · Member since 2009 · 163 posts · 20 votes
    14y

    Johnson,
    I would sell or exchange the homes when the price of the homes has doubled. That's 100% return on your investment. I think a lot of people got greedy in the past couple of years and then the market dropped in stocks and real estate. It's hard to predict when the next bubble to appear so get out before you get slaughtered (as Jim Cramer would say) and have no returns to show for it. It's better to come out ahead. If the market continued to go past the 100% retrun you may look back and say if I would have only stayed in a little longer you could make a couple more thousand. But if you stay in too long, you could end up in a bubble and then lose a couple of thousand.

    Tom

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    I think it was Warren Buffet who said when asked about his losses and responded with something like "it's only on paper". The real problem with lower values is refinancing them if the loan matures at a low point, otherwise.....so what! So long as your rental market is good your income should remain unharmed. I had one property refinanced three years ago paying off my seller financed note (owed to me) all the others are humming along. I have been uneffected really from this bubble burst except for paper losses and none of it will be sold anyway, not for another 5 to 7 years and I'll carry the notes!

    Your carrying expenses really don't go down over twenty years, they almost double. Your mortgage will remain constant but taxes and insurance increase and labor rates, materials and supplies will probably double. Rents increase and in current dollars you could well be about the same or worse off! Holding 20 years you'll probably get a new roof, appliances and how many paint jobs.....

    The neighborhood will be 20 years older,that 100k ranch style could be nearing 40/50 years old. It's less desireable compared to newer homes and neighborhoods. There can be external factors that also lessen demand and therefore rents. As Rich pointed out, things change and it's rare that an area actually improves over time if it was a mature area...but there are some, they usually decline.

    Most who hold SFD rentals I know flip the inventory 7 to 10/12 years staying away from many of these issues. I can count on one hand properties I have held over 15 years and only one was a rental.

    If you go with the school of thought of keeping high LTVs you're betting that interest rates won't change much (what went down will go up). If you have a 30 yr fixed, lucky you. ARMs will adjust. Payments don't change much as when you get deeper into the amortization and at a lower principal amount lenders refi with shorter amortizations keeping payment at an amount worth fooling with. Keep in mind that while it's tough to get loans under 50k today, in 20 years that could be 100k or 125k!

    Having a property that is paid off will be a cash cow. The thought of comparing real estate to a stock portfolio is apples and oranges, in RE that "equity" is preceived to be higher but in reality it's at your cost less depreciation and the only way to get money out of the walls is to refinance it or sell it. Otherwise, it's only on paper!

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  • Jason Kosowan
    Investor · Virginia Beach, VA · Member since 2011 · 68 posts · 12 votes
    14y

    Lots of really good advice here. Thanks to everyone who contributed.

    One thing I'd like to know about the 1031: If I have a F&C property, can I "1031" into several leveraged properties, or does it have to be an exchange into another F&C property? In other words, can the equity coming out of a 1031 property be leveraged? It seems like this would be a good strategy.

    Hope that makes sense.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Properties must be "like kind" in the eyes of the IRS, if you are asking can you have additional financing with the proceeds of your equity.....absolutely!

    You can also buy more than one property and split the proceeds.

    The purchase price must be at or above the equity deferred, so yes you can finance more to accomplish that.

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