The Return Of The Real Estate Buy And Hold Strategy

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There are cycles that occur in the real estate market that dictate methods and strategies that are most useful for growing wealth through real estate ownership. Now is one of those times where a prudent investor should take stock of the market conditions and consider an inclusion of a traditional methodology. Of course, I refer to the strategy of “Buy and Hold.”

Yea, though I walk through the valley of the shadow of death, I will fear no evil: for thou art with me; thy rod and thy staff they comfort me. [Psalm 23:4]

I had to borrow this quote from scripture, but not for a religious reason, but because I know that my writing here is in the very den of the home of real estate flipping, but I am about to preach the religion of long term real estate holdings. Heaven help me.

The Real Estate Buy And Hold Strategy Is Back

Way back when (before 2002), you could monitor your local real estate market and occasionally find portfolio properties, the kind that you pick up a little below market, and that you plan on holding for a long period of time. Your primary ROI would be in the leveraged appreciation that you would attain over time, but the cash flows were a nice spiffer and they worked to build a reserve for rainy days.

But once the market boomed, finding the right gross rent multipliers were nearly impossible. Properties were trading at prices far above what a long-term hold investor wanted to pay. So we stopped buying. And the smart ones waited for their day to return.

I now see evidence that their day has returned. Indeed, we are now acquiring properties that will conservatively yield annualized ROI in excess of 25%. In order to demonstrate this, I will (over the next few blog posts) break down a specific property and show how the return is achieved. But before we look at returns, we need to look at the foundation of the real estate buy and hold strategy.

Buy Low, Sell High With Real Estate Buy And Hold

Real Estate Buy and Hold Strategy ImageSimply put, the real estate buy and hold strategy is no more difficult to understand than buy low, sell high. Unlike property flipping, the long-term hold investor believes in a competent market, and while purchases can occasionally be made slightly below market, only traders should enter the highly competitive market of property flipping. The buy and hold strategy is for true, fairly passive real estate investors.

For this strategy to work, the investor needs to understand long term cycles in the housing markets. By monitoring supply and demand, this investor knows that the time to buy is at the end of a buyer’s market, when the glut of supply is moving towards balance, but before the market has realized it and values are low. Conversely, the buy and hold real estate investor knows that the time to sell is at the opposite end of the far cycle, when supply is scarce and properties are trading higher than replacement cost values.

How To Identify A Good Buy And Hold Housing Market

There are three fundamental rules that must be true for the real estate buy and hold strategy to work. They are not difficult to understand, but they are mission critical:

Rule #1Long term population trends must be rising. For real estate values to rise over the long term, the law of scarcity must exist. Nothing ensures scarcity of homes better than a growing population. There will always be a correlation between population size and home sales (for example, Phoenix, Arizona will see more home sales every year than Two Egg, Florida).

Rule #2The cost of construction will continue to rise over time. Much like rule #1, we assume that all of the associated costs of building new homes will rise over time. Considering the large rise in minimum wage last year, you can bet that long term costs will be greatly affected, though not readily seen until a housing market recovery begins to appear.

Rule #3Normal rules for supply and demand will dictate value in the housing market. All free markets move this way, but socialism could put a large damper on this. The prudent buy and hold investor never takes his eye off of the political climate, but regionally and nationally.

If you believe these fundamental rules are sound, and you are in the type of market where these rules are readily applicable, then you might make a good candidate for a long term hold strategy. Look to my next post for a case study in the Real Estate Buy and Hold Strategy.

About Author

Joe Manausa, MBA is a 20+ year veteran of real estate brokerage in the State of Florida and has been investing in real estate since 1992. He is a daily blogger with content that focuses on real estate analytics and investing in the residential market.

17 Comments

    • I’m not so sure that I agree for most investors Jeff. For most people (with less than $10M to invest), I think they would be better off investing near their homes. It allows them to be passive, yet remain market area experts.

      For active investors who buy/trade/flip etc., then I agree with you. The world is their oyster…

  1. To each their own of course. I’ve found that many opt for 50-200% higher retirement income over the false comfort of being able to ‘drive by’ their portfolio or be an expert on local market. Your point is well taken though, as only a sizable minority of real estate investors leave their hometowns.

  2. Buy and Hold has always been my strategy. The properties I purchased years ago now provide a nice income for retirement. I have to say however that when I bought those properties they were barely at break-even. That still seems to be the case here in Ca. I talk to many Buy & Hold Investors who bought back in late 08-09 at 50-60% LTV who are now under water with no cash flow.

    • My company is taking the buy and hold concept and applying it to flipping. We take out the associated costs of holding real estate and have an end buyer already in place to sell it to in the end. Our program is a buy and hold for 4-12 months. The best part about it is that you are helping people that are facing foreclosure stay in their home and you are getting a high return on your investment.

    • Thanks MH. I tell my investor clients that we only buy “boring.” The flashy buys are the fads that come and go. Find out where people are moving… get there first…. buy the real estate … and lease/sell it to them. Pretty good formula.

  3. Great stuff – I think that what most people fail to understand is that many of these home buying principals are simple. Simple does not mean easy, however. Would you agree then that money is made in real estate in the buy rather than the sale?

    • Thank you “Anonymous.” I believe a well structured real estate transaction the money is made at all three points (Buy, Hold, and Sell). In a round-about way, that is a “yes” to your question. A properly structured “Buy” ensures success in the other two cycles.

  4. This strategy can become a nightmare if you accumulate too many single and duplex properties. The repairs, vacancies, upkeep, management can eat away at your time. By the time one realizes this they are in way too deep. I found that once I got to 25 units I wished I would have bought larger buildings instead.

  5. Mark, I can’t disagree with you there. Once I got into the 20’s, I purchased a 56 unit apartment, then several mobile home parks. I think management is key regardless how many units and how big you make it. Just like any other business, great people+great management=success.

  6. Hi Joe,

    I am a fan of the traditional buy and hold strategy and use other techniques as a way to raise capital to expand my buy and hold portfolio.

    Along with appreciation in property value, the tenants pay down your principal over time which builds equity as well. If you can find solid cash flowing properties this won’t hamper your current lifestyle and will fund your retirement down the road.

    Cheers,
    Andrew

  7. Hello Joe,

    Im 34 years old and I have an investment property in Rancho Cucamonga, Ca that I purchased in 2006 for $350k, but now its only worth $250-$260k. The monthly mortgage payment is $2000 but the rent is only $1600, which means I pay an extra $400/ month. At this rate, I will be spending about $48000 in ten years. Its an hybrid 5/1 ARM with a 4.6 margin and it is set to recast in a couple of months and the max cap is 9.95%. My lender does not know what my new interest or payments will be until it is that time and I am worried that it might increase too much. I really want to continue to hold on to it and follow your strategy, but my family and peers are telling me to just let it go…what do you think I should do?

  8. Pingback: Buy and hold Strategy | Frontier Properties USA

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