Real Estate Buy And Hold Case Study

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Today’s blog is a follow-up to last week’s post (The Return Of The Real Estate Buy And Hold Strategy) in which I promised to show a case-study of this principle. I have chosen to do this in two-parts. This week will show a real-world “already done” investment where a property was purchased during a buy cycle, held for 16 years and sold during a sell cycle.

One important point about this property is that it was my first purchase and I had no idea of what I was doing. I paid full price to a builder for 1 side of a brand-new duplex and then proceeded to lease it out from 1992 until I sold it in 2008. The reason that I chose this property is that it truly demonstrates the power of “time” in making a real estate investor look smart.

Purchase Price $59,900. Initial Investment: $2,921 Condition: Brand New Initial Rent: $500 / month GRM: 9.98 Sales Price: $120,000

Calculating ROI For A Real Estate Buy And Hold Investment

In order to truly assess the return for any investment, the prudent investor considers the inflows and outflows of money at all times. In the real world, it is rare that money is placed into an investment at the beginning, and then money is returned at the end, without any flows in the middle. In the case of a leveraged real estate investor, this certainly is the case.

In the investment above, the total cash “out of pocket” at inception was $2,921 (roughly 5%), so the leverage exceed 95%. The following are the real cash flows during the entire ownership of the property:

The operating cash flows (including the investment as the proceeds from the sale) present a clear picture of the lesson one should learn from the real estate buy and hold strategy….

The bulk of the return is in the sale. Note that on a “no money down deal” it is highly likely that an investor will experience negative cash flows for quite some time. I was able to finance this property (at much higher interest rates than today) with very little down and therefore I was able to experience an annualized rate of return of 27%.

Considering I was 26 years old and a total novice when I purchased this property, I think I did OK. I wonder how many people realized an annualized return of  27% in their retirement portfolio during this same period of time. Remember, this was a fairly passive investment, with a property manager handling the management service after the first few years.

Buy And Hold Real Estate Strategy Requires Time And Patience

This investment reveals the simplicity of a successful buy and hold strategy for real estate investment. It also shows the non-importance of “stealing” a property. I purchased this townhouse at market value and held it until the real estate cycle was in a sell-mode. I actually held the property for two years too long and my ROI would have been quite a bit higher had I sold in 2006.

The next post in this series will include a property that I “grab” from the MLS and do a forward-looking proforma on the property. We will use some analytical prowess to select this property as well as some market experience too. I am confident that we can find a property that will yield greater than 30% ROI for a long-term buy and hold real estate investor.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.