Is a bad buy and hold deal possible?

Buying & Selling Real Estate
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Is a bad buy and hold deal possible?

Jordan SutherlandBusiness Member
Realtor · Lubbock, TX · Member since 2016 · 86 posts · 119 votes

Hey guys, i'm pretty new to REI, and I had an intetesting conversion with my grandfather the other day. My grandpa has a pretty impressive portfolio of SFR and small multifamilies worth about $5,000,000.... and it's all paid off! He started from scratch 40 years ago and steadily accumulated his wealth starting from nothing. We were analyzing a propery i was interested in and he told me something interesting. We were talking about what price i should offer for this property and he told me this: "Don't worry too much about the price, just make sure it's the right property. I have never bought a property that didn't make me a ton of money, as long as I held on to it for 10 years." I'm 23 years old and my goals are in buy and hold investing, so I thought maybe this was absolutely true, or maybe at least a little bit. What do yall think?

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y

@Ben Leybovich  I think I am in the minority on this thought process.. I am not a buy and hold investor and I only buy for appreciation..   I am too impatient to buy and hold. I want to make $ now not in 10 years.. :)  drip income is drip income.. appreciation and big dollars on turns FAST is were its at..

I don't really see anyone talk about this .. but then again this is a appreciation is icing on the cake crowd.. LOL... 

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  • Mark Douglas
    Investor · Nashville, TN · Member since 2015 · 429 posts · 143 votes
    10y

    @Jordan Sutherland  Disclaimer: I don't have a $5M portfolio lol, but here are my two cents: in the long run, when you're looking at the principle pay down and rent growth, it makes sense.  I'm not sure what he meant by "the right property", but if he meant that he made additional money/equity from the appreciation, then there's nothing wrong with that.  I'd still caution against overpaying for the deal though.  He definitely knows a thing or two about investing though, I'd ask him as many questions as you can!  

    Best, 

    Mark

    2Reply
  • Brandon Booth
    San Diego, CA · Member since 2016 · 42 posts · 5 votes
    10y
    Jordan Sutherland If you are holding property for 10+ years it makes a little sense. As long as that particular market doesn't take a big hit it should in theory make you money. The problem I see is do you want to wait 10 years to see good money out of a property? Why not buy cash flowing right now so you can get the ball rolling a buy more? Disclaimer: officially closing our first property at the end of the month. This should be a 2+% producer for us.
    2Reply
  • Amy KendallBusiness Member
    Real Estate Broker · Lehi, UT · Member since 2016 · 397 posts · 318 votes
    10y

    He sounds like a smart man! It's awesome that you have such a great resource! I have to say I can see why he said that, I have had some of my properties for 10 years and they payoff is huge after that long! I also think it is important to pay attention to the numbers, you need to decide what numbers you are going to concentrate on. When I first started, I only paid attention to cash flow, you don't want to invest in something that you are only breaking even on or even just making $100/ month on. Especially if it is an older property (Maintenance costs, & cap ex, alone can through you into the red pretty fast if you don't have the cash flow and savings to cover things) I think the loan pay down, tax benefits and appreciation are all great things, but cash flow is going to contribute some of the money for your next investment. There are a lot of places even now that you can find decent CAP rates and cash flow well on. Best of Luck, I am sure you will do well, he sounds like an anchor!

    0Reply
  • Taylor Remington
    Canton, MI · Member since 2016 · 10 posts · 5 votes
    10y
    It sounds to me that he has been very successful and probably has some great pointers. I would definitely listen to everything he says and learn from him. Now, to be an even better investor I would supplement his advice by using modern computer devices to analyze deals. You can analyze deals in a way that your grandfather could only dream about when he was growing up. Taking your grandfathers understanding and gut instinct on what a good property is and a good model to determine return on investment and you will have a competitive advantage over many other real estate investors. Any advantage will turn you into a more successful investor. Good luck.
    2Reply
  • Account Closed
    Accountant · South Windsor, CT · Member since 2015 · 58 posts · 20 votes
    10y
    Make sure the property cash flows. Economies of scale dictates the more units under the same roof the better. Make sure you screen your tenants; a bad tenant will bust a lot of deals. Good luck.
    0Reply
  • Account Closed
    Investor · Mt. Laurel, NJ · Member since 2016 · 35 posts · 7 votes
    10y

    See, when I hear advice like "Make sure it's the right property", I think your grandfather really trying to say look at the whole picture and not just the numbers. Cash flow is wonderful but we all know there's more to this investing thing than strictly cash flow. 

    1Reply
  • Kyle Ingram
    Brooklyn, NY · Member since 2016 · 8 posts · 1 vote
    10y

    @Jordan Sutherland I'm brand new to REI, but some words from:

    "The Book on Rental Property Investing" by Brandon Turner (Published by BiggerPockets).

    pp.13

    "Investing in locations where appreciation is likely is a wise move, but I don't recommend investing in a bad or marginal deal in hopes that appreciation will bail you out."

    "Appreciation will make millionaires (and billionaires)out of certain people reading this book, but your deal analysis should not assume it.  Treat appreciation for what it is:  a possible reward for an investment done right."

    Great read by the way!  Check it out if you haven't already.

    -Kyle

    1Reply
  • Logan Chierotti
    Investor · Boulder, CO · Member since 2016 · 19 posts · 23 votes
    10y

    Your grandfather is smart investor. With any type of investing the real money is made in the long game. 


    Cash flow is important, but it's not as important as many make it out to be. Properties I purchased 10 years ago were making just enough to cover the mortgage, now i'm cash flowing over $1000 a month on those properties. Buy and hold my friend, buy and hold.

    2Reply
  • Marquis Harris
    Real Estate Investor · Pawtucket, RI · Member since 2016 · 19 posts · 4 votes
    10y

    Hey Jordan good luck with your REI. Its a blessing to have a family member who has done well in RE to help you out. As everyone has mentioned he's definitely wise and he's someone you should listen to. Im still setting myself up to purchase my first property, and one of my main concerns is if it will cash flow well after doing the analysis on it. As @Kyle Ingram mentioned, you dont want to buy a property and focus solely on appreciation. Appreciation should be the "icing on the cake" so to speak when purchasing. Also, I agree that "The book on Rental Property Investing" is a great read since you want to get into Buy and Hold Investing. Im almost done with the book myself. Again best of luck to you.

    Marquis

    0Reply
  • Ray DipasupilPro Member
    Investor · Los Angeles, CA · Member since 2016 · 149 posts · 51 votes
    10y

    Focusing solely on appreciation is highly speculative. Not necessarily a bad thing if you're into that kind of stuff. Appreciation is just one aspect, albeit an important one.

    0Reply
  • Mark Douglas
    Investor · Nashville, TN · Member since 2015 · 429 posts · 143 votes
    10y

    @Brandon Booth   Congrats on the upcoming closing!  Just curious, are you investing in San Diego?

    0Reply
  • Brandon Booth
    San Diego, CA · Member since 2016 · 42 posts · 5 votes
    10y

    @Mark Douglas Oh god no!!  Lol. We bought in Indy. This will be our test property. If everything goes well we will get more. 

    0Reply
  • Luke Grogan
    Investor · Cocoa Beach, FL · Member since 2015 · 132 posts · 59 votes
    10y
    Great that you have a good mentor and someone that you can continually pick his brain. Here's my take on one element of his advice: I've lost out on some great properties because I held fast to my number, which may have been less than $10k off of the number they wanted. Recently I lost one that my offer was $4k off. I expected the owner would negotiate, because I made a cash offer, but that didn't matter and I lost it. Maybe what your grandfather was telling us is that we should offer the number that makes sense for us to get he deal done and not worry so much about the purchase price that we lose a great deal over what is a relatively insignificant amount when we hold long term, which I do. There is no hard and fast rule or way to make money, except buying the right assets! What right is varies tremendously for each of us. Best wishes on your offers!
    1Reply
  • Mark Douglas
    Investor · Nashville, TN · Member since 2015 · 429 posts · 143 votes
    10y

    @Brandon Booth  lol gotcha.  well here's to your success! 

    0Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    10y

    Your grandpa understands something that very few investors understand. What he is talking about is the delta...

    Let's say you know that over a period of 10 years, the property will appreciate by 50%. Does it matter if you pay for it $50,000 - $100,000 - $500,000? No, right? Either way you are making money.

    Let's say you over-pay for property by 20% when you buy. If this property appreciates by 50% are you making money? Yes, less, but yes.

    Now - the trick is to know that the property will appreciate.  But, apparently, where he invests his experience is exactly that. Will it always be the case - who knows. But for now, he is comfortable offering this advice.

    3Reply
  • Jessica Riley
    Real Estate Agent · Encinitas, CA · Member since 2016 · 28 posts · 16 votes
    10y

    This is the most interesting thread I have read so far on this site. Thank you @Jordan Sutherland for the wisdom. 

    2Reply
  • Jordan SutherlandBusiness Member
    OP
    Realtor · Lubbock, TX · Member since 2016 · 86 posts · 119 votes
    10y

    Thanks for all of the input guys. I really appreciate it! It's an interesting topic and I agree with what most of Ya'll are saying. For the record, the property will be cash flowing a few hundred dollars a month ( I would never purchase a non cash flowing property).   I got it under contract for  5% what the seller was asking for, and the asking price wasn't a steal, but was very reasonable. Not quite as low as I was hoping for, but I think it's gunna be a great investment! 

    0Reply
  • Jason V.
    Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes
    10y

    Maybe I'm the first person to say this because it's so obvious to everyone else: make sure you can survive 10 years in a property - getting foreclosed on in year 4/5 wouldn't constitute a good deal in my book. Ask "investors" who bought $400,000 properties that rented for $1500 back in 2007. 

    That said: I absolutely agree with your grandfather's advice.

    2Reply
  • Jeff G.
    Investor · West Bend, WI · Member since 2014 · 214 posts · 149 votes
    10y

    Its all about cash flow which you already know.  I look for properties that cash flow as much as possible from day 1 because that lets me buy more properties sooner.

    You have an invaluable resource with your grand father.  If I were you I would start talking about succession planning for his rental empire and tell him you have a genuine interest in taking it over or a portion of it.

    With an estate as big as his tax implications can become a real problem if measures are not taken prior to his passing. My 2 cents.

    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Ben Leybovich  I think I am in the minority on this thought process.. I am not a buy and hold investor and I only buy for appreciation..   I am too impatient to buy and hold. I want to make $ now not in 10 years.. :)  drip income is drip income.. appreciation and big dollars on turns FAST is were its at..

    I don't really see anyone talk about this .. but then again this is a appreciation is icing on the cake crowd.. LOL... 

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    JLH Capital Partners51 Review
    WebsiteView Page
    6Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    Your grandfather is old school and has lost a load of potential income during his life. You buy with the intent to hold long term but there are no guarantees it will happen. Buy right with cash flow from day one and you will be secure. Do not take his advice on this point.

    Do not take his advice without a grain of salt. My guess with all his properties paid off his return is very low he just does not understand the value of having 5M in cash dead and buried in a property. Reality is that once you deduct the value return on the cash from the income all his properties are probably zero or negative cash flow.

    2Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    10y
    Originally posted by @Jay Hinrichs:

    @Ben Leybovich  I think I am in the minority on this thought process.. I am not a buy and hold investor and I only buy for appreciation..   I am too impatient to buy and hold. I want to make $ now not in 10 years.. :)  drip income is drip income.. appreciation and big dollars on turns FAST is were its at..

    I don't really see anyone talk about this .. but then again this is a appreciation is icing on the cake crowd.. LOL... 

    Jay - I think a few of us understand that appreciation is a must. It's not sexy, but this is why some of us underwrite IRR on our holds - we understand that profits are driven by equity. you are right. The only thing I'll mention here is that appreciation can happen organically and it can be forced. And in the case of forced appreciation, we can do it fast, as in an SFR flip, or slow, as in re-positioning of apartments. Either way, we are all aiming for the same thing, right?

    4Reply
  • Charles Worth
    Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
    10y

    @Jordan Sutherland

    I am going to be in the minority on this one but I heard the same thing about the stock market from people who bought in the best period to buy in history bar none.  Just because something went up historically doesn't mean it keeps going. There are lots of people on both sides of that equation and prices are up big in most markets. A lot depends on where and when you buy and what dates you hold it. For instance, much of the stock market returns occur in very specific time periods. Miss those and your returns die. 

    I am not saying he won't be right in 10 years if I knew that I would certainly have more money but what I am saying is I would think about your own temperament and think about a few things:

    1) You have to actually hold it those 10 years. This means no outside forces making you sell  so how you finance really matters. If you finance using a 5 to 10 year piece of paper you could lose the property because the price went down at the wrong time or didn't go up. Also, if a personal factor makes you sell you can take a blood bath. At the very least I would assume you won't be managing it in your numbers (i.e. if you move, get another job etc.)

    2) You need to slog through the time between now and 10 years. This means dealing with a lot of headace for very little return until 10 years from now. Easy to think about, hard to do.

    3) If would be advisable if you have money and access to money to cover items like expenses if the property doesn't cash flow well.  See comment above about keeping the property.

    0Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    10y
    Jordan Sutherland Greg S. Is a little rough about it but he is right. A .02% return on 5 million is $100 k a month. Is grand dad earning that much?? My family has been in real estate for 75 years or more and did the same thing. My grand parents bought and paid off every property, then they and my father held for 60 years. None of them ever made big money as all their funds were tied up as equity.. By the time it got to my sisters and I it was mostly gone. Did you ever stop to think that if granddad took 1/2 of his 5 million and leveraged it using 25% down payments he could buy 10 million in real estate?? What would the return on that be in cash flow?? Then compare that number to what it is if each property goes up in value 10 % and instead of holding he sells it. Honor him for who he is. Respect him for what he has done, but remember cash flow pays the bills only and that diminishes over time. Appreciation and forced value add builds true wealth. My grand parents and dad lived through the depression and world war 2. Survival in those times ment you had to save everything you had. Times have changed. Now you must make your plan and then work your plan. It's like a lake. If no water flows into it and it never rains it will eventually dry up. Everything in life is like that. Your job, your marriage, your investing. It's either filling up and making progress or its evaporating and will eventually die. There is no middle ground. RR.
    4Reply
  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
    10y

    @Jordan Sutherland It's (most likely) true in absolute terms that you'll make money on any property if you hold it long enough.  Thank you, inflation.

    BUT, that same forcethat will bails us out over a long enough period time is the one that turbo charges your returns in the long run  if you sweat the details now.

    In other words, if you save $10k today by paying less for a property, that $10k will turn into an extra $100k in returns after 20 years.

    The normal investor looks at the absolute numbers and is content. The sophisticated investor thinks in relative terms about value he didn't capture and what his opportunity costs were.

    2Reply
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