Value add buy & hold or buy & sell

26 Replies

My thought about multifamily buy&hold is mostly from the podcast “lifetime cashflow through real estate investing”. I recently read this book “the complete guild to buying and selling apartment building”. This book favorites buy&sell over hold. 

Both of them put a lot of emphasis on value add. I am just about to close my first 5 units apartment deal. For those who has longer investment experiences, what is your take on this.

Assume that We purchase the same propert for both approach, for buy&hold the plan is to refinance out for the next purchase. What do you think would turn out better in 8 - 15 years period? Buy&hold, buy&sell or the mixed of both case by case?

My totally biased, but correct opinion, is if it meets your cash flow criteria, you keep them indefinitely. I very rarely sell because I'd much rather reap the long term rewards later than the short term reward now. Would I rather have $30k today or $1500 every month for the rest of my life (and my kids' lives) starting in 20 years? I'll wait the 20 years if the cash flow now allows me to. I truly believe that willingness and ability to delay gratification is the number one trait for the average person to make it in RE.

I agree with Corby.

if it is cash flowing well, why get rid of it.

I am growing my portfolio by adding rentals with occasional flips on properties I don't think are well located or have some good cash return on them for funding additional rentals.

Generally buy and hold but if you want to maximize the IRR and you happen to have the resources (time and people), you can flip or trade up some of them and speed up the velocity of money. Adding value is where the big profits are made in real estate.

@Calvin Liang I was at  Real Estate Guys Syndication training event in 2016 and someone asked Brad Sumrok that exact question. Brad Sumrok is a multi-family syndicator in Dallas and is very prolific there and does his own multi-family training events. His answer was you have to sell in 5 years because if you don't you're potentially looking at higher cap-ex expenses for which you would have to find the money somewhere. I found that really interesting because  I thought all those syndicators were saving up money to cover those costs.

But, keep in mind that is syndicators and they are looking to maximize the returns to their investors. If that is what you are looking to do, maximize short-term profits, you can't do much better than to buy a distressed asset, fix it up and maximize its NOI and then sell it in 3-5 years.

If instead you are thinking more long-term, wealth-building then buy and hold can be a better approach. But generally I think you're looking at lower returns in the mid-term.

If we get lots of inflation though, the buy and holders will likely win out. Also, I would point out that construction costs keep going up and regardless of what happens with inflation I don't see that changing.

I am a buy and holder and every single property I sell, I regret even the ones I bought specifically to flip. So that will tell you how I feel about it.

Buy and hold usually. Transaction costs, taxes, refinance fees eat your lunch transacting often. Commercial appraisals alone are $3500 on up. I just pay mine off and hold. Saves me 10s of thousands per year vs a bunch of jumping around.

1st rule of investing is Don't Lose Money. Short term trading and refinancing RE is Expensive on multiple levels.  

 By the time the realtors and uncle Sam leave your closing table, you'll wish you'd kept over the long run is my guess.

Another factor to keep in mind is whether your properties are in a high appreciation area, or if property values are stagnant/only keeping up with inflation. If the long term prospects for your location are weak, you might want to take your profit when you can, and redirect it to a better location. If the area keeps appreciating, you could refinance and reinvest that cash in another property, then repeat several years later after you've built up more equity.

If you can take the proceeds of a sale and put it toward a better property, then it makes sense to sell. The 1031 exchange is one of the most powerful tools that a real estate investor has to build substantial wealth over the long term.

Originally posted by @Jeff Kehl :

@Calvin Liang I was at  Real Estate Guys Syndication training event in 2016 and someone asked Brad Sumrok that exact question. Brad Sumrok is a multi-family syndicator in Dallas and is very prolific there and does his own multi-family training events. His answer was you have to sell in 5 years because if you don't you're potentially looking at higher cap-ex expenses for which you would have to find the money somewhere. I found that really interesting because  I thought all those syndicators were saving up money to cover those costs.

But, keep in mind that is syndicators and they are looking to maximize the returns to their investors. If that is what you are looking to do, maximize short-term profits, you can't do much better than to buy a distressed asset, fix it up and maximize its NOI and then sell it in 3-5 years.

If instead you are thinking more long-term, wealth-building then buy and hold can be a better approach. But generally I think you're looking at lower returns in the mid-term.

 Syndicators usually have a significant rehab budget up front when they buy, but then only keep some reserves for capital expenditures after that, say $300/unit/year. It is enough to keep the property in a state of good repair, but probably not enough to upgrade the property to the next level (and raise rents), if there is a market for that. In fact, it's standard to "leave meat on the bone" for the next buyer, so they deliberately will not complete every possible improvement to the property, and then the property can be marketed as such to the next buyer, along the lines of "25 units have been upgraded and the rents are $50 higher. You could upgrade 50 more and increase your income by $2500/month." A property with no room for improvement might actually be less attractive to a buyer, because there is no upside.

Also, with a syndication, you'll have investors who trust you with their money for 5-7 years, but not for 20 or 30. I am invested in a few multi-family syndications myself. In one case the sponsors are in their 50s. They are doing a great job, but who knows where they will be 30 years from now. So I would expect a sale sometime in the next several years. If you don't syndicate, then you won't have that problem.

Yes, no, maybe so. As always, it depends. Depends on your goals and the market. The goal of a MF sponsor/syndicator (typically) is to return their investor's money within 5 years and deliver IRRs in the north teens or low 20's if you're lucky. The only way they're accomplishing that is to dispose of the asset after a big value add component is implemented. Additionally, the syndicator is not getting high returns for themselves through a buy and hold forever strategy. They get higher returns by selling the building and raising money for a new deal where they can implement the same value add strategy, more fees and higher IRR. Wash, rinse, repeat every 3-5 years.

Personally, I think the best thing you can do is to be open minded and ensure that you have options. You may want to sell in 3-5 years because your goals or life has changed. You may want to sell in 5 years but the market is down and you can't. What if you sell the property but don't have a new investment to park it in? You may love the property and want to hold it forever. You just never know. If you underwrite the property well now and it is cash flowing from day 1 you give yourself options for the future. 

@Calvin Liang The only reason syndicators (full disclosure: I am one) are selling in 3-5 years is to be able to share in the promote i.e. disproportionate share of the profits due to the syndicator putting together the deal. 

Real, long-term wealth in real estate is created from long-term buy and hold and opportunistic acquisitions (with a few dispositions). 

If you are buying for your personal portfolio and a property is hitting it's return metrics, then you should buy and hold forever. As @Mike Dymski has mentioned you can speed up the velocity of money using flips but that is more of a short-term strategy. 

@Steve Vaughan raised a very good point. If you include all fees and taxes, you end up leaving a lot of money on the table by constantly flipping properties (multifamily syndication is essentially flipping).

Originally posted by @Omar Khan :

@Calvin Liang The only reason syndicators (full disclosure: I am one) are selling in 3-5 years is to be able to share in the promote i.e. disproportionate share of the profits due to the syndicator putting together the deal. 

Real, long-term wealth in real estate is created from long-term buy and hold and opportunistic acquisitions (with a few dispositions). 

If you are buying for your personal portfolio and a property is hitting it's return metrics, then you should buy and hold forever. As @Mike Dymski has mentioned you can speed up the velocity of money using flips but that is more of a short-term strategy. 

@Steve Vaughan raised a very good point. If you include all fees and taxes, you end up leaving a lot of money on the table by constantly flipping properties (multifamily syndication is essentially flipping).

 Thank you for being an honest syndicator, Omar.  I know the refi and disposition fees when broken up between all participants seems small, but it is large dollars for sure. Syndicating for most is slow flipping.

If we can delay gratification for a while, we will be able to perpetually play with house money and deploy different strategies than buy and hold for gravy & spice. 

B&H will always be my bread and butter or meat and potatoes if you will, but as long as the geese keep laying those golden eggs and my loans keep dropping like flies I can branch out to steeply discounted cash buys I lease option to handy people that improve my properties for me at insane returns.  It's fun and rewarding and worth skipping a nap for. Same with wholetailing in the higher end space.  Needed in the market and fun.  Cheers!

Buy and hold forever will build wealth slowly. Buy and hold for 5-10 years and sell to exchange can build massive wealth much quicker, to the point where eventually you can hold on forever. 

I prefer the 5-10 year strategy for a few reasons: 

1. When you renovate a building, if you sell in less than 10 years, everything looks and is perceived at being new. Your expenses are also at their lowest point. This allows you to maximize your value

2. You can 1031 exchange into a larger property or a few properties and in turn drastically growing your portfolio

3. You avoid round 2 and 3 of capital expenses. 

Love your answer. I always have the impression that syndication is a job/business. Buy & hold is actual investments. 

Originally posted by @Omar Khan :

@Calvin Liang The only reason syndicators (full disclosure: I am one) are selling in 3-5 years is to be able to share in the promote i.e. disproportionate share of the profits due to the syndicator putting together the deal. 

Real, long-term wealth in real estate is created from long-term buy and hold and opportunistic acquisitions (with a few dispositions). 

If you are buying for your personal portfolio and a property is hitting it's return metrics, then you should buy and hold forever. As @Mike Dymski has mentioned you can speed up the velocity of money using flips but that is more of a short-term strategy. 

@Steve Vaughan raised a very good point. If you include all fees and taxes, you end up leaving a lot of money on the table by constantly flipping properties (multifamily syndication is essentially flipping).

Originally posted by @Todd Dexheimer :

Buy and hold forever will build wealth slowly. Buy and hold for 5-10 years and sell to exchange can build massive wealth much quicker, to the point where eventually you can hold on forever. 

I prefer the 5-10 year strategy for a few reasons: 

1. When you renovate a building, if you sell in less than 10 years, everything looks and is perceived at being new. Your expenses are also at their lowest point. This allows you to maximize your value

2. You can 1031 exchange into a larger property or a few properties and in turn drastically growing your portfolio

3. You avoid round 2 and 3 of capital expenses. 

Sometimes it makes sense to have a liquidity event, I agree.  There is a point when depreciation and cap ex is optimized or we see a shift in the  area or market cycle.

But to be fair, I would love to see syndicators disclose their acquisition and disposition fees.  As a syndicator, it makes sense to hold for only 3-5-10 years because of these factors or indicators... PLUS I make 2% on the buy and 1% on the sell, and we're talking about 10s of millions. Wink, wink, pass the brandy and cigar.

Sometimes what I see when a syndicator recommends trading for 'massive wealth'.  Yeah- THEIRS!

@Calvin Liang   I can see the buy and sell strategy if you are trying to move up to larger properties, but if your goal is to own a bunch of smaller multi-family, then why sell? As @Steve Vaughan pointed out, there are acquisition and sales costs. Let's do some simple math. Let's say those costs work out to 10% of the property price. If you hold it 5 years, that is 2% per year, 10 years is 1% per year, 20 years is 0.5% per year. 

The other factor is why did you buy the property? If you purchased in a good location, why would you want to sell it? I can see if you purchased in a questionable location and maybe the day one strategy is to hold short term. Or maybe after a few years you decide one or two are just your "problem child" and you want to sell them to reduce your headaches by trimming the fat. 

The point is if the property is in a good location and performing well, it probably doesn't make sense to sell it unless you need the cash for another deal.

Originally posted by @Steve Vaughan :

But to be fair, I would love to see syndicators disclose their acquisition and disposition fees.  As a syndicator, it makes sense to hold for only 3-5-10 years because of these factors or indicators... PLUS I make 2% on the buy and 1% on the sell, and we're talking about 10s of millions. Wink, wink, pass the brandy and cigar.

Sometimes what I see when a syndicator recommends trading for 'massive wealth'.  Yeah- THEIRS!

 Wait, you have seen syndicators who don't disclose their fees? I get way too many opportunities sent my way for that sort of thing. I don't mind the fees, but I want to know what they are. I want transparency on how the deal is performing (or not), and we're not off to a good start if you can't tell me how the deal is being structured. 

If there is no acquisition fee, but there is a disposition fee, then I know that it's not a long term hold. No problem. Good to know what I am getting into before I invest.

I'll take a contrary view to your last sentence. As a passive investor, I know there is always another deal around the corner. I can re-deploy my capital within a week or two. So if you convince me that the property has reached its peak, then let's take our profit now. I'm not upset by how much you're making; you did all the work. I'll get my cash back and invest in another deal, likely with someone else unless you coincidentally have one ready for me. As the sponsor, you now have to look for another deal, which can take months or a year, if you're buying conservatively in a competitive market. The only reason I would want to hold a property is if there is more potential to be met in the future and the IRR won't decline if we wait another year or more.

Originally posted by @Paul B. :
Originally posted by @Steve Vaughan:

But to be fair, I would love to see syndicators disclose their acquisition and disposition fees.  As a syndicator, it makes sense to hold for only 3-5-10 years because of these factors or indicators... PLUS I make 2% on the buy and 1% on the sell, and we're talking about 10s of millions. Wink, wink, pass the brandy and cigar.

Sometimes what I see when a syndicator recommends trading for 'massive wealth'.  Yeah- THEIRS!

 Wait, you have seen syndicators who don't disclose their fees? I get way too many opportunities sent my way for that sort of thing. I don't mind the fees, but I want to know what they are. I want transparency on how the deal is performing (or not), and we're not off to a good start if you can't tell me how the deal is being structured. 

If there is no acquisition fee, but there is a disposition fee, then I know that it's not a long term hold. No problem. Good to know what I am getting into before I invest.

I'll take a contrary view to your last sentence. As a passive investor, I know there is always another deal around the corner. I can re-deploy my capital within a week or two. So if you convince me that the property has reached its peak, then let's take our profit now. I'm not upset by how much you're making; you did all the work. I'll get my cash back and invest in another deal, likely with someone else unless you coincidentally have one ready for me. As the sponsor, you now have to look for another deal, which can take months or a year, if you're buying conservatively in a competitive market. The only reason I would want to hold a property is if there is more potential to be met in the future and the IRR won't decline if we wait another year or more.

 I'm just saying when Todd (for example) posts his reasons (as a syndicator) for shorter hold times there should be a "by the way, I earn 2% on the front end and 1% on the back."

Not saying it's unfair or un-earned, just disclose it.

Originally posted by @Steve Vaughan :

 I'm just saying when Todd (for example) posts his reasons (as a syndicator) for shorter hold times there should be a "by the way, I earn 2% on the front end and 1% on the back."

Not saying it's unfair or un-earned, just disclose it.

 Oh, I thought you meant they weren't disclosing it in their offerings. Fair enough. 

Originally posted by @Steve Vaughan :
Originally posted by @Todd Dexheimer:

Buy and hold forever will build wealth slowly. Buy and hold for 5-10 years and sell to exchange can build massive wealth much quicker, to the point where eventually you can hold on forever. 

I prefer the 5-10 year strategy for a few reasons: 

1. When you renovate a building, if you sell in less than 10 years, everything looks and is perceived at being new. Your expenses are also at their lowest point. This allows you to maximize your value

2. You can 1031 exchange into a larger property or a few properties and in turn drastically growing your portfolio

3. You avoid round 2 and 3 of capital expenses. 

Sometimes it makes sense to have a liquidity event, I agree.  There is a point when depreciation and cap ex is optimized or we see a shift in the  area or market cycle.

But to be fair, I would love to see syndicators disclose their acquisition and disposition fees.  As a syndicator, it makes sense to hold for only 3-5-10 years because of these factors or indicators... PLUS I make 2% on the buy and 1% on the sell, and we're talking about 10s of millions. Wink, wink, pass the brandy and cigar.

Sometimes what I see when a syndicator recommends trading for 'massive wealth'.  Yeah- THEIRS!

I wasn't really talking about syndication when I was writing the post, but to respond to that, anyone doing a syndication should be disclosing the fees they are taking. We take an acquisition fee, but no disposition fee and we do disclose all fees. 

Originally posted by @Todd Dexheimer :

I wasn't really talking about syndication when I was writing the post, but to respond to that, anyone doing a syndication should be disclosing the fees they are taking. We take an acquisition fee, but no disposition fee and we do disclose all fees. 

More than fair not taking a disposition fee, Todd. Thank you for respoding! 

@Omar Khan The sponsors I invest with are selling (or refinancing and returning capital) in 3-10 years because (1) many of their investors want their capital back (2) it maximizes the IRR and (3) it maximizes the benefit of cost segregation.

I'm a buy and hold investor in my direct portfolio but I'm fine with sponsors flipping properties in 3-5 years in my passive portfolio.  It drives my returns up as they are constantly adding value to my capital rather than tying it up in a stabilized property...and I don't have to do any of the hard work sourcing and re-positioning the next one.

For me it's about velocity of money. If you're buying a stabilized institutional quality property that's in a good area and brings you some cash flow but doesn't have huge immediate upside then sure it makes sense to hold on to it. Overtime between the debt pay down and appreciation you will definitely grow your wealth. 

If you're wanting to do that quicker though you'll have to essentially do the slow MFH version of a house flip. Similar to single family residential, if you don't have a ton of money to keep on buying houses then you can grow your capital quicker by flipping. It's that initial period that you generally create the most value. After that it plateaus and cash flow is the majority of your wealth creation. So selling the property after that initial value bump and doing it again and again is how you create wealth quicker. 

The only reason I would see to not keep a perfectly performing cash flowing property would be drastic uncertain market conditions, need for funds, control more debt, or to lighten risk. 

There are many who believe you should have a minimum amount of units to spread the risk, which I strongly agree with. If it cash flows well and there are no other concerns the only reason I would see to move out would be to move up. Purchase more units and control more debt. 

Originally posted by @Mike Dymski :

@Omar Khan The sponsors I invest with are selling (or refinancing and returning capital) in 3-10 years because (1) many of their investors want their capital back (2) it maximizes the IRR and (3) it maximizes the benefit of cost segregation.

I'm a buy and hold investor in my direct portfolio but I'm fine with sponsors flipping properties in 3-5 years in my passive portfolio.  It drives my returns up as they are constantly adding value to my capital rather than tying it up in a stabilized property...and I don't have to do any of the hard work sourcing and re-positioning the next one.

You're preaching to the choir. I am sold on the business. My understanding of the question was that the poster wanted to know which was a better long-term option assuming (A) they did not have access to sponsors and (B) were investing from their direct investment account. 

Investing with experienced sponsors helps the average investor benefit from the Sponsor's time, effort and expertise. But that comes at a price. There is no free lunch.

Most folks assume they will get high teen returns going forward because of the experiences over the past 8-9 years. That might not be the case as even experienced Sponsor are having a hard time finding suitable deals.

Also, the true measure of wealth creation is the equity multiplier which has an inverse relationship with the IRR. On average, the higher the multiplier the lower the IRR (to account for time). Often times, Sponsor target the IRR (as opposed to equity multiple) because the promote is based off the IRR (not the equity multiple). Hence, the maniacal focus on IRR as opposed to equity multiple.

But you do raise good points and that's why I encourage people to do both - invest with the right Sponsor and invest directly from their personal account. 

@Calvin Liang , I think it a depends on what your goals are and how the market is. That's the beauty of real estate investing. You can change your strategy as needed accordingly to your goals. I personally buy and hold for cash flow. If the property appreciates, then as you mention, I plan to do a cash out refi and use that to re-invest into the next property. If the market changes or something, and it's best to sell, I would sell and 1031 into another property. Again, it all depends on what you wish to accomplish. Hope that helps! Good luck!

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