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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  • Ana Marie B.
    Rental Property Investor · SF Bay Area, CA · Member since 2015 · 206 posts · 156 votes
    10y

    @Jordan Sutherland - I think your grandfather is a very smart man (I mean obviously he is given his impressive portfolio!).  I believe the key to his advice is his mention of buying the "right property" -- which includes a whole lot of factors like location, size, etc.  

    If you buy the right property, then chances are great that you'll see a good profit in 10 years.  I may be wrong here, but it sounds like he leans more on the "appreciation" side of the things.  And what I'm referring to is the longstanding debate on appreciation vs. cash flow.  I personally invest for appreciation because finding properties that cash flow a good deal right after purchase is quite challenging, especially in the SF Bay Area and Seattle where I prefer to invest.

    Anyway, I'd listen to your grandfather if I were you :)

    1Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    10y

    @Jordan Sutherland  @Ben Leybovich @Jay Hinrichs  I have been on BP for a couple years now. Both Ben And Jay are very successful very well respected investors. They both have earned my respect through the many posts and Bens blogs. There is no better advice anywhere.  Ben convinced me about equity quite a while back with one of his blogs.  It takes a while to change a portfolio around and get it right. I have done so and am now sitting in a position far superior to the one I was headed for. Listen to these guys. RR

    1Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    10y

    Thank you, @Ralph R. Though, I have to say, Jay is the real deal. I am only learning...

    0Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    10y

    @Ben Leybovich  yeah I know Jay's a hard act to follow. congrats on your retirement. I hope you are doing well and enjoying time with family. RR

    1Reply
  • Becky Spivey
    Real Estate Agent · Abilene, TX · Member since 2016 · 17 posts · 12 votes
    10y

    Wonderful words from your grandpa!  I would cherish those words of wisdom.  The right property must have to do with location, location, location and you're in Lubbock, TX you should be fine with that big university! 

    1Reply
  • Matt Mason
    Investor · Los Angeles, CA · Member since 2013 · 231 posts · 260 votes
    10y

    I think Grandpa was talking about having the right property just as much in terms of tenant quality and location as much as appreciation vs. cash flow.  A property in a crime ridden neighborhood with low quality tenants may have more problems as far as evictions, tenant damage, theft, tenants arguing with each other, etc... I know that would burn me out a lot quicker than a property without those issues.

    0Reply
  • Arlen Chou
    Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
    10y

    @Jordan Sutherland you are getting some great advice from your grandfather and people on BP.  But real estate, investment style is very personal.  In the end we are all looking to make our lives better.  That may mean different things for different people.  So if slow growth is what made your grandfather happy and he thinks his investments gave him a good life, then he is 100% right.

    Does that mean it should be a strategy you should apply? It depends on how hands on or off you want to be with your business: how much money you want to generate, in what length of time you want to accumulate that wealth , etc. There are so many things you can do in REI that the opportunities are endless.

    Others have touched on the fact that the gem in his advice is to "find the right property".  That is the one universal constant in real estate investing.  No matter how good your strategy is, if you get the "wrong property" for that strategy you will more then likely get into trouble.  Keep in mind that same property might be the right property for some other strategy.

    Good luck to you!

    -Arlen

    3Reply
  • Alejandro M.
    Plymouth, MI · Member since 2014 · 12 posts · 5 votes
    10y

    @Jordan Sutherland While this may be true for your grandfather, I think that when you are first starting out it is important to get good deals so that you can maximize your rate of return and grow your portfolio at a faster rate. Once you get to a certain point where you have accumulated a large amount of wealth and you are just looking for an income stream then the rate of return becomes less important.  

    1Reply
  • Alex Hobbs
    Middletown, DE · Member since 2015 · 52 posts · 11 votes
    10y

    I do not have a portfolio of 5MM and I am not as experienced as @Ben Leybovich or @Jay Hinrichs so take this with a grain of salt. I also would not follow this idea(yet lol). Your grandfather might of meant:let's just say.....you purchase a house for 150k...30 years at 4.5% your payment is $760. Let's say another $240 for taxes and insurance. Total PITI = $1,000. Let's go 10% PM, 10% cap ex, 10% vacancy, 10% maintenance. Total = $1,400 all said and done. Let's say rents are $1,300 per month and your expenses are $1,400(all said and done). You are paying $100/mo for that property out of pocket. Assuming your reserve funds plus an additional 10k out of pocket covers all major expenses/vacancy/updates over the 30 years, you only spent $60,400 on a $150,000 house. You still made $89,600 in year 31 when you sold for 150k. This is extremely speculative and risky but it proves that no deal is a "bad" deal. I typed this quickly on my phone and could of fudged some stuff. Please correct me if I am wrong. Equity appreciation over time. Paying into a buy and hold is in theory similar to paying into a 401k or savings account.

    0Reply
  • John P.
    Investor · Vacaville, CA · Member since 2016 · 433 posts · 249 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- That sounds a lot like a job. Some of us are not looking for another job (even part-time) so  long holds make more sense for some of us.  

    1Reply
  • Kim Bayless
    Investor · Florence, AL · Member since 2016 · 65 posts · 20 votes
    10y

    Sounds like a very smart man.  A fellow investor recently explained to me about expensive houses on cheap land.....something we have a LOT of around Atlanta.  It changed my thinking on what to flip vs keep.  Pay the most attention to WHERE the properties worth keeping are, and the price is usually in line.  Of course a great deal on those properties is a bonus!  Good luck!

    0Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    10y

    @Alex Hobbs  I don't even see the 60k profit in your scenario. You added 100 dollars a month for 30 years. Plus another 10 k for maintenance that's $46000 dollars of your own money how is that profit??  My 401 k has averaged 7% interest over the last 10 years. If I can't beat that in real estate there's not much point in buying real estate is there?  A $100 cash flow per month still  takes many years to get your down payment back. RR

    0Reply
  • Andy N.
    Investor · Hopkinsville, KY · Member since 2012 · 111 posts · 40 votes
    10y
    Jordan Sutherland are you related to curt southerland?
    0Reply
  • Alex Hobbs
    Middletown, DE · Member since 2015 · 52 posts · 11 votes
    10y

    Yes, @Ralph R. you are right, that is my mistake... $46,000 in to a $150,000 property. 

    0Reply
  • Tom V.
    IA · Member since 2015 · 304 posts · 152 votes
    10y
    Originally posted by @Jordan Sutherland:

    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?

    I would dive deeper into what your Grandfather would define as "the right property". That's where the details make all the difference. I would ask him to elaborate on that, so you could learn what "the right property" is in your market.

    That's awesome you have a successful investor in your family to learn from, and that's an impressive portfolio he has accumulated. Ask more questions, and definitely let us know what you learn from his experience and wisdom! :)

    0Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    10y

    No @Alex Hobbs you miss the point. What if you refinanced at the point where you could take out enough equity to by another house. The first house continues to do the same thing but now you have another one growing too. Soon 2 houses refinanced leads to more and bigger purchases. You also forgot that you had to pay a commission when you sold 6-8% and closing cost when you bought. And how are you going to pay the 271/2 years of  depreciation buy back on your income taxes? It would be financial suicide to sell the house in your scenario like you described, after owning for 30 years.   Do you think that the buying power of those dollars may have fallen any?  I bet you won't buy anything 30 years from now for the same price it is today.   For instance  I paid less than a dollar per gallon for gas 30 years ago.  36 years ago I paid 0.33 a gallon for gas.  I'll take the appreciation and extra houses please. RR

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

    Yes, it's possible to have a bad buy-&-hold deal. The 3 top reasons are: area, quality of tenant, & personal/owner's financial liquidity 

    2Reply
  • Shital Thakkar
    Specialist · Dallas, TX · Member since 2010 · 511 posts · 252 votes
    10y

    @Jordan Sutherland, can you please provide some more information about his investment. His expierence is like gold mine..your grandfather bought...

    • Singe family homes/ multi family homes
    • all investment in same city / Multiple cities or states
    • Class A, B, C or D properties
    • 15/30 year mortgage
    • any Equity re-investment
    1Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    10y

    So the leverage on the property has a lot to do with your survival in this business.  If you have 20 properties and you catch a bad run where 5 or more go vacant, your leverage will dictate how much you are floating for a period of time.  Can you afford to be 80% of value on those and writing checks for 5k per month plus repairs, legal fees etc?  It really comes down to how you can personally offset the bad times.  Low leverage provides more cash flow and puts you in a position to be able to ride the rough patches out.

    0Reply
  • Alex Hobbs
    Middletown, DE · Member since 2015 · 52 posts · 11 votes
    10y

    Hey @Ralph R. I did not miss the point. I know what your saying. Leverage is key to building wealth, scaling a business, and creating a self sufficient rental portfolio. What I am talking about is a bad deal, one deal. If over the life of the deal you spent 80k out of pocket and you own a 150k asset free and clear, you made money. Everything has bubbles and prices go up and down...inflation, appreciation, and depreciation do play a big part. The value of a C-D class property should not move much, unless the neighborhood changes. There are a ton of variables that can be thrown into the mix. Yes, you could of made way more if you leveraged yourself and yes, the income from other properties could reduce your out of pocket expenses but, that is going back to building a self sufficient rental portfolio. We are talking about A bad deal.

    0Reply
  • Luka Milicevic
    Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
    10y

    RE is a long term game and I think your grandpa is right. I wouldn't really buy any property just because over a span of 10 years it will make money. If I buy a property it has to cashflow today. I wouldn't be able to sit on something and break even or lose money for 10 years. Can't tie up precious capital when there are better deals out there.

    Cash flow is important however a lot of people overlook IRR.

    0Reply
  • David Borden
    Vendor · Monument, CO · Member since 2012 · 11 posts · 7 votes
    10y

    Buy and hold is a pretty tough strategy to lose on IF one manages the property professionally. This doesn't mean that you have to hire a professional, but it does mean that you have to manage every aspect of the property, especially the tenants. The key to buy and hold is great tenants, as their rents fund everything. There are a lot of well intentioned investors that retire the second they get a difficult tenant. If you want to be a successful buy and hold investor, make sure you are prepared to handle the following elements of rental management:

    Advertising

    Tenant Screening

    Leasing

    Rent Collection

    Maintenance

    Accounting

    Taxes

    If you have a pretty good grasp on how to do all of the above you will be successful. Finally, if you do make a bad decision on a tenant, get them out as soon as the law allows!

    Best,

    Dave

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    As many have asked before, How many negative cash flow properties can you afford to own.

    Appreciation does not pay the bills or put food on your table. If you have a choice of buying good or buying bad I think I know on which side I would fall.

    1Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    10y

    @Thomas S.  I'm pretty conservative. I look at it this way. If you buy right the property will cash flow a little. Maybe not like a war zone property that may even go down in value Or a turnkey that's purchased at top market rate. Historically those CF better. My properties cash flow pretty good from day one.  The renter is just holding them for me. He's paying all the bills and Piti plus some.  If I bought right in the bottom of the cycle then I can hold like this for a while at no out of pocket save for the closing and DP. When the market goes up and sooner or later it will then I can refi and take some cash. Or I can wait some more. The choice is mine. The thing that gets pple in trouble is they take out too much at the refi. Then the property barley cash flows. I usually refi and leave 30% or at least enough to keep the payment about the same. I'm getting mostly the purchased equity out. If the market fall they start negative cash flow and overnite they are in trouble.   I do the cash out refi because I don't want to sell and 1031 because I don't want to buy in the higher market.  Rinse and repeat. Another thing people don't think about is the market is local so it's possible to have one area going up while another is "stuck" as my wife says.  That allows you to refi or sell in an up cycle and buy somewhere else that has a more friendly market.  Sooo  the renter is just a place holder.  somebody to pay the bills for you while the property does its thing.  RR

    0Reply
  • Wendell De Guzman
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    10y

    I don't agree completely with your grandfather.

    Not worrying about the price only works - IF YOU CAN HOLD onto the property.

    The price matters - why? It determines your cashflow. Pay too much and you'll end up in NEGATIVE cashflow territory. How long can you feed ALLIGATORS? Watch out - as they might bite your hand too :-)

    And of course if you buy in the war zones, you can lose money if you don't know what you're doing. Just listen to my podcast - http://Biggerpockets.com/show65 to see how one can mess up up and lose money on a buy-and-hold

    1Reply
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