Can you hold forever? Yes, should you is another question!
Residential properties change, neighborhoods change, homes become dysfunctional, market changes can take values down as well as up.
There are very few 100 year old homes in my area that remain desirable today.
Commercial can suffer similar issues.
Always have an exit, there are aspects beyond your control that can effect a property, the trick can be when to bail out before negative influences arrive.
There are several trusts that can be beneficial in holding good properties long term, just make sure there is flexibility built in to dump a property and move on to something else. :)
My usual buy and hold's were at about 7 years, this took depreciation into consideration as the benefits begin to fall off, appreciation market increases made the opportune time to sell. This kept major maintenance to a minimum and some properties weren't touched for any repairs at all. One multi went out to 12 years and a tri over 15, paid off and in great shape. Landlording gave my wife something to do and manage (while I did any heavy lifting, LOL).
My comments above were to Filipe's posts.
IMO, the use of equity is fine in the build up period of a rental business, almost necessary for most. But those early inventory properties will hit maturity issues, so plan on them.
Several mistakes indicated that I see on BP or with landlords. Economic trends of an area seems to be missed. In my area and probably most areas, there are small communities and neighborhoods move through a cycle just as any business model, start up, growth, maturity, stagnant and decline. Most buy during growth or in maturity, newbies often buy at the end of maturity or when rents become stagnant. Assuming rents will increase in all areas isn't really true if there are alternative choices for tenants. Maintenance seems to be assumed to remain constant, but over time the expense increases with inflation for everything. Inflation and rent increases are not necessarily at an equal rate. Leveraging properties can get expensive, loans are not free to obtain and if you know what interest rates will be in 3 to 5 years, you're in the wrong business! These aspects are covered in basic RE business considerations, often missed as investors don't start out understanding the bigger picture of social and economic factors that effect properties or areas.
Biggest thing is to keep marketability in mind at all times. Allowing a property to sit without paying attention to your surroundings can be a mistake. To a landlord of residential properties holding a house is simply holding inventory and inventory should be able to be moved and replaced to grow any business.
An airport can change flight paths, bus routes can be changed, traffic patterns can change that increase traffic or make access more difficult, nearby zoning changes effect surrounding properties, there is an endless list of obsolescence factors that effect a residential property that can not be controlled. Your best defense is to identify issues as or before they occur and be in a position to dispose of that inventory and replace it, hopefully with an early growth phase property.
Market rents can significantly change in 5 years. A mature property may command increasing market rents for 20 years or more as well. You really need to know the area, population movements and other factors in buying, determining the hold period and expenses, disposition and expected future price points. Don't assume a house purchased by a 35 year old will hold similar income potential when that buyer retires at 65, most likely it won't be. :)
I would love to hold properties in perpetuity, but given my grandparents and their parents, are no longer here, the prospect is doubtful.
I'm one of these numbers driven geeks - 2.5 decades in software development and design may play a part - and, as such, all our properties were modelled prior to acquisition. As a result, we purchased each property with a minimum and maximum hold duration in mind (usually 10 - 15 years, a couple with a maximum of 20 years). We also model the profitability and hold period of each property based solely on cashflow - we assume no appreciation in value (which, when you consider inflation, actually works out to depreciation) and that the property will be disposed at the same price (or perhaps 5% less) than its capital cost.
While this approach seems to be far too conservative in the eyes of other local investors, I would rather treat any gain on disposition as a windfall and retain the ability to profitably sell properties below future FMV if we need to dispose at an in-opportune time in the cycle. Of course, if an opportunity to dispose of one of our properties, for a profit, arises out of plan, we would avail ourselves of the situation if it makes sense to so do ... there's always another property.
We have taken measures to setup our property holdings such that they could be passed along to the next generation, while not irrevocably committing ourselves to that path. Though my son, as a three year old, is fascinated by real estate (walking properties, watching construction, etc.), the bloom may be well off by the time he's an adult.
We've owned buy and hold for longer period up to 30+ years. We've had tenants for 10, 15, 21 and even 29 years. No reason to sell when the tenants stay that long.
We evaluate every property every year as to its performance and sell a few of the properties that don't mean our goals. so not every property is kept forever. But there are some properties that I can foresee will be held for a long time to come. Almost all SFH are sold to owner occupants.
Met with an investor recently who said that he's selling everything when he retires shortly as his kids have not interest in real estate.
Kids, they love to play around a construction site, lots to do.
Just thinking about the LL's I've known, past away or retired, nursing home party animals, they thought they were passing on a cash flowing business to the kids. I'll bet fewer than 25% keep the business. Most will sell out, they want the money now, not the headaches to get more later and many realize pop's old rentals aren't going to appreciate.
Another issue, properties in a trust can be expensive to administer since trust accounting can require market value assessments for accounting purposes, meaning appraisals, not book value or guesstimates. Most administrators will dump RE converting to securities for better asset management. :)
Another issue, properties in a trust can be expensive to administer since trust accounting can require market value assessments for accounting purposes, meaning appraisals, not book value or guesstimates. Most administrators will dump RE converting to securities for better asset management. :)
Bill,
Is that better asset management, or just easier management. ;-)
In trust administration, easier is better, LOL.
A bond portfolio sits there collecting dust, managing the dust of RE is expensive, time consuming, requires unusual expertise of a trust company and isn't cost effective. While RE may yield a better return, it usually won't after being fee'd to death by trust management on top of the property managers. :)
We've owned buy and hold for longer period up to 30+ years. We've had tenants for 10, 15, 21 and even 29 years. No reason to sell when the tenants stay that long.
We evaluate every property every year as to its performance and sell a few of the properties that don't mean our goals. so not every property is kept forever. But there are some properties that I can foresee will be held for a long time to come. Almost all SFH are sold to owner occupants.
Met with an investor recently who said that he's selling everything when he retires shortly as his kids have not interest in real estate.
Had no idea you were that seasoned (LOL) you should feel guilty letting the same person buy your property :)
While that's great I wouldn't set up my business thinking I'd have such long term tenants, that's pretty rare but happens. You can have exceptions to any rule or line or reasoning. :)
Start up
Growth
Maturity
Stagnate
Decline
Do they teach the possible next stage "rebirth" ?
There are many areas that experience a re-investment. Usually, they are centered around downtowns or declined locations that are geographically favored for commuting, jobs, culture, retirement etc..
Thanks,
Matt
They are special kinds of trusts. You can't do GRITs any more. Congress closed that loophole in 1990 and opened up the one allowing GRATs and GRUTs.
Here is a write up on them from actual attorneys...
http://corporate.findlaw.com/law-library/grits-grats-gruts-what-estate-planning-beyond-the-basics.html
As for the obsolescence issue there are ways around it.
For example, a few years ago I placed some SFHs, duplexes and other small multifamily properties in a GRAT for my kids. Once the transfer was complete and the dust settled, the trust administrator (not me, by the way) coordinated a 1031 exchange of all but one of those properties into a 10 story office building in Overland Park, KS which was later fully rented by Sprint.
With 1031 exchanges, 'keeping forever' takes on a whole new meaning.
Growth
Maturity
Stagnate
Decline
Do they teach the possible next stage "rebirth" ?
There are many areas that experience a re-investment. Usually, they are centered around downtowns or declined locations that are geographically favored for commuting, jobs, culture, retirement etc..
Thanks,
Matt
Business cycles go to decline and then salvage or the cycle begins over through change, addressing a new utility, function, market and usually through change in management goals. At that point you are back to the start up.
Economic development includes redevelopment of existing inventories, this is generally associated with commercial development not residential with the exception of low-moderate income housing projects.
Springfield had a community development plan years ago called the Vision 2020 Plan. I chaired the redevelopment committee as part of the overall assessment. Plans run out 20 years and we are now looking to 2030/40.
Such redevelopment begins by looking at the highest and best use, zoning, growth corridors, traffic and modes of transportation expected, population and social demands, infrastructure and services.
Residential properties that are in decline or in distress are prime targets of redevelopment.
Having a property in a trust has no effect on the impact on determinations or planned outcome of an area.
Economic stimulus is generally offered or provided, funds to lower costs of improving properties in line with planned development. If an owner fails to improve or redevelop the property, at some point other action may be taken to adopt the property in the public good, eminent domain may be used. In the end, slum lords don't win.
As to an administrator of a trust, the administrator is a regulated corporate entity, never an individual as it must be perpetual in the administration of a trust, you may have a co-administrator, but that is really more in a title than having the ultimate authority to carry out the terms of a trust for the beneficiary. RE in a trust, any trust, is a pain to administer due to accounting requirements and trust filings. Not impossible to have RE in trust, but not just any trust administrator is set up to manage RE and it will cost more than other marketable assets.
Lastly, trust ownership has no effect on the different factors of obsolescence, external obsolescence generally can not be controlled by any owner, the factors are beyond the property and usually the influence of the owner. A water tower erected 400 feet away may be an eyesore from a backyard. A factory 1,000 feet away may become noise pollution, have odor issues or traffic and parking can be an issue. You have very little control over what happens nearby.
Internal obsolescence can be controlled or modified, such as a floor plan requiring traffic to go through a bed room to enter a or the only bathroom, or having a bedroom off a living area requiring traffic to go through a living area to get to a bathroom.
Social aspects, popularity of an area, shift over time and may change the market aspects of any residence.
It's rather naïve to walk up to any property and declare that the property will be purchased and kept forever if it is influenced by community factors. Now, buying a hundred acres 20 miles out of town, you might make that assumption, but not a residential lot in a city.
My comments prior and more so still are directed at residential, not commercial, but even an office building has similar issues, nothing holds to be the same forever. :)