Investors: Sorry, But Buy & Hold Doesn’t Work. Unless You Do This…

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Most investors are dumb!

Notice, I didn’t say stupid — I said dumb. The difference is that while stupid people don’t know how to think, the dumb — while quite capable of rationale thought — indeed lack a certain perspective on their thoughts. Does this sound like you, by chance?

Don’t feel bad; after all, what sets you apart from the masses is that you are here at BiggerPockets, which means you are acutely aware of your “dumbness” and are trying to do something about it!

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Let’s Talk About You

One fine morning at the ripe old age of somewhere between 23 and 33, you rolled out of bed with a bit of a headache from the night before, peed, and washed your hands (I hope). You then walked over to the sink and splashed your face, looked in the mirror, and it suddenly hit you that the guy staring at you will never be able to retire unless he does something drastic, and soon!

You finally began to internalize the meaning of that Jimmy Buffett verse from “Holiday”:

Disregard confession,

Stop trying to make impressions on your corporate climb;

It might come as quite a shock,

But you can’t really own that rock,

It’s just a waste of time…

Yep, you say to yourself, and you mean it — time to do something. But what..?! You’ve just not seen anything good happen to anyone in your family, whose retirement planning involves working for as long as possible, while “investing” in index funds. You want faster. You want better. And you want certain guarantees…


But What?

Faced with needing to make a plan that has a chance of working better for you than your parent’s plan worked for them, you did what any reasonable 23-year-old would do: You Googled it.

Related: The Investor’s Guide to Financing Options for Buy & Hold Rental Property

Enter BiggerPockets, where it’s all about real estate and everyone seems to be making money hand over fist. By attending Brandon Turner’s webinars and reading Ben Leybovich’s articles, you quickly formulated a strategy involving acquisition of passive cash flow via income-producing property, which will eventually replace your W2 income. It’s worked for other people; why can’t it work for you?

I’ll Be Nice to You Today…

I don’t even know why, seeing as “nice” is not necessarily in my nature. Quite inexplicably, seeing you go through the mental, emotional, and financial contortions involved with trying to figure this game out gives me strange satisfaction. But alas, I have a soft spot in my heart for people who are trying, and now that you are here, you are indeed trying. So I am going to save you some heartache today…

Note: I am not in business of spelling things out. As a teacher, whether it be violin or real estate, I see my job as saying enough to get you to think. Your job is to read between the lines and find your own truth.

The Myth & The Big Picture

The myth of passive cash flow through income-producing real estate is by and large just that – a myth. Ninety-nine times out of 100, it doesn’t work!

We buy income property for two reasons:

  1. To generate stable income with which to replace earned income and thus retire.
  2. To generate value — and with it, wealth.

The key component to the income is “stable.” Income that’s here today and gone tomorrow is no good for us; we can’t rely on it. How are you supposed to use this cash flow to substitute for your W2 income if it’s not predictable like clockwork?

The reason I say that 99 times out of 100 long-term hold strategy doesn’t work is because 99 out of 100 buildings out there aren’t capable of producing stable cash flow. More on this in a sec.

And as far as putting zeros on your balance sheet, unless you are in a high growth market, this is a function of something called value-add, whereby YOU pull the zeros out of thin air. And let me tell you something; while you have one chance in 100 to stumble on some cash flow that is truly stable, your chances of finding real value-add are about one in 1,000.

What all this means is that while you may be on the right track thinking that cash flow can replace your W2 income and appreciation can make you rich, finding property that will actually accommodate is a matter of much knowledge and perspective.

How Most Investors Analyze Income Property

The model used by most investors to analyze income-producing property is based on false premise that the income and loss statement is static. In other words, to perform analysis, folks enter all of the income in the left-hand column and all of the expenses in the right-hand column, and then reconcile into a cash flow number. This cash flow number is what defines the value of the investment opportunity to most and serves as the trigger for a buy decision.


What’s Wrong With That?

What’s wrong with this is two-fold:

  1. Neither income nor expenses are static and will vary over time. Relative to income, there will be times of high growth, resulting in low economic losses and therefore higher income, and there will be the opposite. And as to expenses – those will just keep going up.
  2. The value of cash flow is not static and will decrease over time due to macro-economic forces and other opportunities available to you.

Related: The Beginner’s Guide to Buy & Hold Real Estate Investing

Therefore, in order to gain a meaningful perspective on the worth of an investment, you have to project cash flows for each year of the presumed hold period, taking into consideration the following:

  1. Fluctuations of income that are likely to take place relative to both the market conditions and your management strategy. This is that “perspective” piece I was talking about earlier. In other words, are you buying something that is likely to be stable, and if not, how do you discount the instability, for how long, and by how much?
  2. Increases in costs, which are a guaranteed reality.
  3. Depreciating value of cash flow.

As part of this process, you need to get a handle on your exit. The exit will hopefully be the biggest positive cash flow event in the life of this investment (or not). If it’s not, the investment is worthless, since I’m telling you right now, you’ll never be able to drive returns strictly on organic cash flow. You need appreciation!

Additionally, if the strategy involves a refinance at any point, it’s your job to underwrite what it might look like. The sooner, the better, since value of cash depreciates each year, and the sooner you take it off the table and make available for re-investment, the better…


The numbers are a sword that cuts both ways. If you know how to read them, they can tell an invaluable story. But if you don’t, they can and will lie to you all day long… and twice on Sunday!

I hope to have saved you some heartache today.

[Editor’s Note: We are republishing this article to encourage those newer to BiggerPockets to get in on the discussion!]

Investors: How do YOU analyze income property? Do you agree with my assessment?

Leave your opinions below!

About Author

Ben Leybovich

Ben Leybovich has been investing in multifamily real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben the author of the Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.


  1. Angel Rosado

    I think that the three items that must be considered are essential. For the latter two depreciation and expenses, one can use assumptions based on historical information but how does one handle the unpredictability of what the market will do? I sure no one predicted 2008.

    I agree with you Ben, one must have a forward looking mind when investing,being be to forecast and budget are essential to growth, simply utilizing historical P&Ls is not enough.

      • Oleg Kio

        Hindsight is 20/20 as they say. There is always someone predicting something and most of those things don’t happen in the timeframe predicted and we just ignore those people. At some point a prediction does come to pass and suddenly that person becomes the “wise man that foresaw The Event”.

        Good observers can see when we are getting into a bubble but there is no telling when that bubble will burst. It could be 2 months or 2 years. One of my favorite quotes, “Market can stay irrational longer than you can stay liquid.” 🙂

    • William McGowen

      I predicted the real estate crash. I didn’t have a specific time frame, just knew it was coming. (It was freakn’ obvious when you see people investing in real estate the way they did with Beanie Babies years ago.) But I did not predict how bad the hit on the economy would be.

      If we invest right, it shouldn’t matter. We should be able to wait out the downturn, if not buy more at fire sale prices.

      You have to be careful of fear. Fear makes all times bad for investing. The market’s dropping, so you don’t invest. It’s going up, so you didn’t get in in time. The market could crash, I know because they predicted it every year for the past 50, and they were right a couple times.

  2. David Roberts

    So u guys are a big believer of cashing out of houses as soon as possible to stay l iquid at all times, correct?

    This is what i believe. It only takes being burned in the stock market once or twice to realize equity is fictional until u use it

    • matt hearn

      I would seriously consider the tax impact of this. Many buy and hold investors realize the cashflow + tax benefits. Appreciation is icing on the cake, but it isn’t the whole cake. Selling large assets just to cash them out is going to cost you alot of money. From our experience speculating isn’t good in the stock market nor in the real-estate industry.

      • Richard Flanders

        That is where a (IRS) 1031 Exchange comes in. I won’t go into all the details now, but you plow the proceeds (profit) from the sale into a new house(s). I can explain later, but have a meeting in a few minutes across town. It is like trading in your old car for a new one and not being taxed on the profit on the old car when it is sold.

  3. Jiri Vetyska

    I don’t know, but in my opinion, you don’t start investing in something unless you see underlying fundamentals, like growing demand, rising rents, scarce land, etc. So then you know, that yes, expenses are rising, but at the same time, rents will be increasing and thus your income getting greater over time.
    It is already by it’s definition, buy and hold, that you will be investing over time, so you don’t really worry too much about current condition, you focus on the trend and possible situation over your investment timeframe.

  4. Chad Cressley

    As usual, the internet creates a sensational headline that is kind of false. The headline shouldn’t be that buy’n hold doesn’t work. The headline should be always run the numbers. This rule doesn’t just apply to buy’n hold or just to real estate, but to any type of investment in anything.

    • Don Nelson

      Chad, I couldn’t agree more. Let’s call things what they are and leave the marketing hype for stupid (not dumb) people. As a side, I’m big on systems. So it would be very “nice” of Ben to actually provide a method to his madness and not leave it to us struggling folks to figure out what he means – that would add a lot of value in my mind.

      • Chris Emick

        I’m with you Don. I’ve listened to Ben’s podcast episodes and read his blog articles, and you’d think the guy basically wants everyone to think that only the tiny, select few will every make this real estate thing work for them.
        I know he know he has a winning strategy for him, but I’m still struggling to find out what real advice he has for buy and hold folks other than equity and appreciation seem to be really important, in his view. So just in case there are any impressionable folks (like I was back in the day) who think that cash flow can’t be steady and predictable, that’s just flat wrong for a lot of investments in many parts of the US, but you should very much do your homework and run them numbers :+1:

  5. Tyler Cruz

    I must admit, that I never considered “Increases in costs, which are a guaranteed reality.”

    In my complex analysis spreadsheet, I’ve accounted for nearly everything including appreciated rents over time, but I didn’t factor in increases in fixed expenses such as property taxes and utilities. Will add that to the “todo” list. I wonder what % increase to put for them…

  6. Brandon Turner

    I think it’s a good post Ben, but I would disagree on one point, in particular: “you’ll never be able to drive returns strictly on organic cash flow. You need appreciation!” I think there are lots of investors getting solid cash flow returns without appreciation. Appreciation is only 1 of 4 wealth generators with real estate. 1.) Cash Flow 2.) Amortization (loan pay down) 3.) Tax benefits 4.) Appreciation. So even in a terrible market that will never appreciate, an investor can achieve decent returns if they rock the other 3 correct. Thoughts?

    • Chris Mills

      I agree. I run my initial numbers (SFH, not an apartment) without appreciation factored in because that’s speculation, not investing. In a SFH I can’t control appreciation. I only invest for cash flow. Everything else, though probable, is just a bonus.

    • Ben Leybovich

      Brandon – let’s go over this again. Take a piece of paer and do the following exercise:

      In the left column write the benefits: numbers 1,2, and 3 on your list
      In the right column right: physical depreciation, discount on cash flows over time

      What you need to understand is that those two will cancel each other out if you hold long enough. The MIRR in real terms over 20 years will be 5%-7% in most parts of the country – might as well do stocks and bonds….less pain in the ass.

      You need appreciation to make the difference in RE.

      I might do a video on this…or I might teach you and then let you do it 🙂

      • serge s.

        Hate to admit it and wish it was not true but Leybovich is right. Real returns on this asset class over time (comparative to today’s purchase prices) are not as high as people think they are. It is unfortunate that people do not analyze an investment return through exit.

        There are times in a cycle where this is absolutely incorrect though. Many homes purchased 2009-2012 can and are great investments on the cash flow alone irrespective of the capital appreciation. This is exactly why residential real estate is a CYCLE play NOT a cash flow play. Buy low sell high right.

        Today in most markets the appreciate isn’t just the icing on the cake, it is the cake. We have had a nice run up in rent prices which lead us to believe our future cash flow will continue to grow indefinitely. Unfortunately the results of the last 2 years cannot be all too indicative of what is to come. What I do know is that expenses will continue to rise and my homes will continue to get older. To me if there is not a VERY high likelihood of appreciation (or if I can force appreciation/buy at discount) then there is no deal. Beware evaluating a deal solely on cash flow as many preach. This is very rarely the way substantive wealth is built.

      • Amit Patel

        Ben, I agree with you on most of these points. However, in this MIRR of 5-7%, are you counting the Equity that is being built through paying off the Mortgage ?

        In my analysis, I feel like if I’m doing a 20 year analysis, I know that by year 20 , I know that I’ve paid off about 50% of the loan.

        All this being said, I think it is a powerful idea to grasp that you are since you are leveraging 4 to 1, if you are buying in areas with a strong chance for appreciation, you can build significant wealth over time.

      • Sonia Spangenberg on

        Ben, I believe I see your point demonstrated when you run the BP analyzer. It shows approximately when the property should be sold if the plugged in numbers hold true. But when I took my Creative Finance class my instructor advised that he does analysis on all his properties on a quarterly basis to monitor trends for the specific property in the specific market. Long term buy and hold may very well work on some properties in some areas, but you shouldn’t rely on that blindly. You should redo your numbers on a regular basis is my understanding. I think that is a balanced compromise of all the arguments I’ve read so far.

    • Pavel Sakurets

      Forget tax benefits and depreciation, it’s all temporary, when you sell your rentals, you get depreciation recapture.

      1031 is OK, but only for deals over 1m (otherwise to much work and too little time to find another property that would qualify). And people are forced to jump on subpar deals because they have time limits.

      If a property doesn’t have a cash flow of $400/month after all expenses and debt service are paid, I don’t buy it!
      I don’t care about appreciation, funny money. What happens if prices go down? Equity is gone, but if you still have cash flow, you should not care.
      I made a lot of mistakes buying for appreciation in 2004-2007, now these properties still cost less than I paid for them.

    • Glenn Mayo

      Brandon, you forgot the fifth wealth generator in real estate, equity capture. When you buy correctly, you make instant money. Of course, this goes back to the idea of equity being fictional money, but I don’t think of it that way. I think of it as money in the bank, subject to all the same economic forces.

  7. Donald Tepper

    Ben makes a few good points. However, beyond the sensationalistic headline, he’s wrong on a number of key points. (Note: Next month I’ll have fully paid off a buy-and-hold property I bought 30 years ago. Yes, it does work, and success doesn’t have to be as rare as the blog suggests.) Let’s deconstruct the blog:

    “Relative to income, there will be times of high growth, resulting in low economic losses and therefore higher income, and there will be the opposite.” On a buy-and-hold property, the month-to-month, year-to-year concern is cash flow. Basically: What are rents doing? High growth can be fueled by a strong overall local economy. And that’s good for both landlords and other investors. But here’s the catch: A weak economy can be great for landlords. People who aren’t able to buy still need a place to live, so they look for rentals. Same with high interest rates: People who can’t afford to buy (or can’t qualify) still need a place to live, so they rent. Landlords are most threatened when it’s cheaper and easier for people to buy than to rent. I got burned in 2007 with a lease-option; no one wanted a lease-option when it was cheaper (banks would pay YOU–remember negative amortization loans?) to buy than to rent.

    “The model used by most investors to analyze income-producing property is based on false premise that the income and loss statement is static.” You’re kidding, right? Maybe I know a different class of investors, but none of them believes (nor do I) that either income and expenses is static. It’s always fun, of course, to plug in anticipated rent increases into a spreadsheet to see what can happen with income. And anyone who’s been around investing for more than a few months knows enough to plug in anticipated expense increases.

    But here’s the thing: With most properties, the income should far outpace expenses. Take my investment property described above. The biggest expense is the mortgage–principle and interest. On a fixed rate, those will remain flat. (You want REAL irony here? Thirty years ago, my wife and I opted for an ARM at 8%. It went up in some years–maybe to 11%–and down. It’s been bottomed out at 4% for the past four years. We’ve been paying less interest on the loan, percentage-wise, than when we got it!) But, really, the mortgage is going to be your biggest expense and that won’t change. Property taxes? Yes, those are likely to go up. Where I live, property taxes are about 1% of the assessed value of the property. On a $500,000 property, if values rise 5%, then the value of the property goes up by $25,000. The taxes, which were $5,000, go up $250. And maybe I can increase the rent on that property by $20 a month.

    Other expenses? Water, electricity, and gas may go up slightly. However, that’s not a concern if the tenants pay for their utilities.

    “The exit will hopefully be the biggest positive cash flow event in the life of this investment (or not). If it’s not, the investment is worthless, since I’m telling you right now, you’ll never be able to drive returns strictly on organic cash flow. You need appreciation!” That’s just plain wrong. No, you don’t. Not at all. Yes, appreciation is nice. And it can result in a big pay day. But if you’ve enjoyed nice cash flow–say a cap rate or equivalent of 10%–then you’ve done just fine if there isn’t a penny of appreciation. On my property (and I’m just guessing at this), let’s say I’ve had $300 a month positive cash flow for 28 years (my wife and I lived there for a few years before renting it out). If we sold it for what we paid for it, we’d still be $100,000 ahead. And with the mortgage paydown, there’s a big chunk of equity there even if the property hadn’t appreciated a penny. Worthless? I don’t think so!

    “while you have one chance in 100 to stumble on some cash flow that is truly stable, your chances of finding real value-add are about one in 1,000.” Huh? First, I question the 1-in-100 odds of finding stable cash flow. (And, heck, if it’s not stable, then you discount your purchase price to account for the instability. Duh!) But 1-in-1,000 to really add value? I hope not. That suggests that you’re buying a completely rehabbed building at the top of the rental income scale. In that case, you’d be paying top dollar. On my rental property, a few years ago we upgraded the kitchen and baths and were able to boost the rent by 50%. If you can’t figure out how to increase rental income except by surfing the waves of the economy, then why not play it really safe and buy an annuity?

  8. Richard Flanders

    First let me say, If I Understand the argument, and I may not, these are my thoughts. One, yes, expenses go up. Two reasons. Age of property, and inflation (there may be others). If you buy properties in smaller towns, and buy older houses, you may not get much, if any, Appreciation in price, or rent. That said, yes, expenses go up, and yes, rents (can, in the right locations) go up. Your expenses will reflect the age and condition of the property when you bought it (outside acts of God). Arguably, Roofs and kitchen cabinets are the biggest issues.

    Now to the point. Are you suggesting, we should sell properties where expenses are going up (but do not produce negative cash flow over time (one bad year does not a trend make))? If you assume, investors are investing on one location, so that the “expenses” are the same for all the properties in terms of hourly rates for repairs and cost of material, then, if they sold one property, and bought another, would they not soon be in the same boat?

    First, I have properties in 2 states, thousands of miles apart, and in 3 Counties. I looked at the expenses in all three Counties. In one County, I have 3 properties. One is costing me a fortune (there was a fire in the kitchen). Because of the hourly rates Handymen think they are worth in that County, I have been driving the 2100 miles, each way, to do most or all the repairs my self, since. Since I am retired, I can do that, some can’t. Doing that (which is off the subject) allows me to do more to make the house rentable than some might do. It also allows me to control costs as to how work is done and what work is done and with what materials. Doing most or all the labor myself keeps costs down.

    But what I have decided is, I like my PM. I like my Houses, But I don’t like the Handymen in that area. So, as leases expire, I am going to sell those, and buy in one of the two other counties where expenses are more reasonable. I tend to go overboard and fix houses between renters as if I was putting them on the market. Given the distances, that is wise for me, as I may want to sell them and would not have to return to sell them, necessarily.

    After saying all that, my argument is, why sell a positive cash flow? Would it not be hard to sell and replace with anther house with arguably the same expense cost (driven by inflation) that you had before? If the houses in that market have gone up, and you can make a handsome profit, wouldn’t a replacement take all the proceeds?

  9. David duCille

    I’m calling Ben out. This is just another one of his typical controversial posts to generate interest and obviously it’s worked again. this is right up there with the “don’t buy 30k pigs” post. It’s a big country we live in and perhaps what he says is true in his market but in my market of Tampa FL Buy and Hold is flat out amazing and it blows my mind how many people want to invest in flipping instead because our market is appreciating so strongly you may as well rent them out for a couple years and then turn them over. We are still way too early in the recovery for me to feel at risk of not being able to liquidate if need be.

    • Ben Leybovich

      David – read my posts above. Run a discounted cash flow analysis to get the the bottom of the argument in the title. There are places where you can buy SFR for $30,000 and rent for $1,200 – if that’s you, then fine. But, this is not most of the country. And in most places, MIRR analysis tells us that the returns based strictly on cash flow are highly in question, absent appreciation at the time of liquidation.

  10. Brenda A.

    I agree with Chris It depends on the property . I am a newbie and even I can see that! Each situation is different but if you do your numbers right and DON’T put all your eggs in one investing basket!

    • Ben Leybovich

      I completely agree with you, Brenda, regarding doing the numbers – very important indeed. But, if you are comfortable with those numbers, I think it was Warren Buffet who said (forgive me if I don’t have the quote quite right) Diversification is protection against ignorance…

      Focus, not diversification produces the highest yield in the long term 🙂

      Thanks so much for reading and commenting!

  11. Brenda A.

    I live in Southern California and to be honest with you the buy and hold formula even works beautifully well for buying and holding condos to rent out. People are making a fortune doing just that one thing. Chris Mills hit the nail on the head in my opinion . In some instances you have to go for cash flow if the deal is right for it.

  12. Darryl S.

    I think the Author of this thread is trying to stir up some opinions and looks like he has been successful so here is my 2 cents LOL. I see all these people doing the creative financing thing, with dollars being moved here and there at lightning speeds and just hoping that some dollars shake off into their personal account as it moves around. Seems actually a bit INSANE to me.
    I believe that PAID FOR rental real estate is the easiest and safest way to go. Check out Dave Ramsey at Financial Peace he has some good ideas to get you started called baby steps. IMHO if you take the right path the percentage goes from 1 in a 100 successful deals to around to 95 in a 100 successful deals when paying cash on a property on which you have done your due diligence. You will have to try very hard to actually lose money on one of these……. I am at 5 out of 5 successful right now and looking for another one to buy. All the Hyper activity is deadly to sustained passive profits, if you are doing that you are simply a gambler trying to get lucky.

    • Richard Flanders

      I agree. I attended one of those Do What Ever You Have To seminars but did not believe you could do what they said. I bought mine with cash, and that has worked for me. Now that I have 7 paying rentals (over 5 years now, most in year 1-3), I do want to try to leverage a new purchase and see how that goes. I would like to talk to someone that has done that, and get some percentages from them, as to what ratio to finance to make for Positive Cash Flow (obviously there is no guarantee, but has their purchases been positive on the Average).

  13. stephanie w.

    I own six single family and duplex properties in B+ to A- neighborhoods free and clear. I’ve owned them going on ten years. Rents didn’t go down during the economic armageddon of ’07, they went up. It’s my only income except for a teeny part time job at an airline that provides free airfare for me and my family. We travel to new and exotic places about every six weeks and live in a nice home. I don’t give one hoot about appreciation except for how that applies to the decency of the neighborhoods in which my homes sit. How are you going to tell me my investments aren’t sound ones?

    • Brenda A.

      Stephanie thanks for your comment about your SFHs that give you a fine cash flow for you because you own them free and clear. As a newbie it is important for me to see another way this investing business can be a positive experience.

    • Ben Leybovich

      Stephanie – appreciation applies directly to the “decency of the neighborhoods”, as you put it. You may not care about it, but I am rather sure that you are benefiting from appreciation. You cash flow is also inherently stable due to the A-/B+ locations – that’s the point 🙂

      I think that we agree!

  14. Mike McKinzie

    Once again Ben, you stir up great debate! The goal of a good writer is one who sparks constructive conversation on a complicated topic. Two investors can buy identical rentals on identical terms, yet one fails and one succeeds. Ben is writing why the one fails, AND why the one succeeds! Everything, with the exception of a PI payment with a fixed rate, is fluid and dynamic, constantly changing. Those that plan for the changes succeed and those that don’t, fail.

      • James Rodgers

        Ben and Ben,

        Newbie here with first RE investment in the works.. Rather than take the easy way out and get all frustrated, I’m going to let these 2 acronyms be my take-aways and go study them.. I’m sure doing so will answer my question, but can you give me a real world picture in both of your experiences why knowing this gives you an advantage?



  15. Jerry W.

    It seems I always play devils advocate to ben, but here goes. First Ben appears to be preaching to the 1% i9nvestors with massive experience, not the new 25 year old investor he is describing. Forced valuation in massive wealth building comes from buy large poorly cash flowing apartment complexes and getting them doing well in terms of cash flowing so their value goes up dramatically. Example buy a 20 unit apartment building in a nice area that is poorly manages with below market rents, and get it to full occupancy and raise rents and the value of the property goes up massively. This is because commercial property is values based upon its cap rate. that is not true of single family houses. You could buy a property for $500K and make it worth over a million in less than a year if all went right.
    The problem is only a few very experienced investors can do this. it is highly unlikely the average investor could. There are a lot of moving parts for a new investor. What is the neighborhood is not as good as you were led to believe and no matter how you fix it up you keep getting crap tenants who tear it up, or you cannot rent apartments at all. What if you were wrong on what you thought rents could be raised to by fixing up kitchens or bathrooms? What if codes were so strict it tripled the cost of repairs? What if you were no better at managing than the last guy was? What if you hire a manager that steals you blind? What if the contractors rip you off? that kind of a play is not for a first time investor. How will a 25 year old get the $100K to put down on an apartment building and still have reserves to work with? The reality is that new and young investors need to start in single family or small multi buildings. So there is a point to what Ben is saying but it only applies to one percent or less of the folks reading it at this stage in their investing career. New 25 year old investors need to look for cash flow and learn about screening tenants and learn how to deal with contractors and learn about estimating repair and upgrade cost before they go for a large value appreciation play on an apartment complex.

  16. Ben Leybovich

    Jerrry – few thoughts:

    First, you are right, I am speaking a language here that is more sophisticated than most will comprehend. So? I am saying the truth. Should the newer investors not hear the truth because they don’t understand it at the moment. Everyone else on this blog just regurgitates common wisdom, which is easy to hear, but is almost always wrong…

    Secondly, I was a newbie once. The reason I tell people not to buy pigs is because I did it and know how this story ends. Similarly, the reason I tell you that 99% of the time CF alone can’t drive the IRR is because I’ve done it and now I know…

    Lastly, I am not necessarily suggesting that newbies should play the game the way Serge S. and I do. In fact, I am not telling people to do value add at all, seeing as it’s easier just to buy assets in organically appreciating markets and let the market do the heavy lifting. All I am saying is that one way or another we need appreciation on the back end in order to see the type of returns for which we all hope – whether it’s market-driven or forced.

    Thoughts, Jerry?

    • Angelou Masters


      You are correct that some many of the postings are regurgitated time and time again. I read to many articles on why you should or should not use an LLC etc.
      So anytime we can get a new idea or approach I’m greatful and appreciative. Please keep being Ben!

    • Jesse Barron

      I’ve been buying pigs and beating the returns of most of my buddies for a dozen years.

      My best years were the crash and recovery, when all of the people who were newly forced out of their houses needed my rentals. After the crash, I deployed all of the cash I had available to pick up anything I could at insane discounts. I went on a buying spree while others were retreating.

      I am focused again on raising and hoarding as must cash as possible. I am seeing too many “infomercial real estate investors” out there and am betting on another dip. I smile every time I get a post card for a seminar by some house flipping TV star. History will repeat itself. That is the beauty of cyclical markets.

      If it’s not distressed, I don’t want it.

      Please tell me, ol’ wise one, when will my story end? My fund LPs wish to know as well.

    • Ben Leybovich

      What can I say, Minh – it is what it is. DO you disagree…?! This community is likely 300,000 strong by now – I can count on my hands and feet the folks here who truly have a full and seasoned perspective on what we do here…

  17. Minh Le

    “We buy income property for two reasons:

    To generate stable income with which to replace earned income and thus retire.
    To generate value — and with it, wealth.”

    May I add a third. Here in the Bay Area, I see people buying real estate as part of capital preservation. I bet some investors are doing the same thing in other big metros.

  18. Jesse Barron

    I am sure there are high-frequency traders brazen enough to tell Warren Buffett that his investment strategy is wrong. He’d laugh them out of the room.

    These one size fits all “trust me, I am smart…” blog posts on BP are always hilarious since they never apply to the markets I play in (which just so happen to be some of the most populous in the nation). I laugh the author out of the room by hitting the X on the browser tab.

  19. Brenton Kasselder

    I have to say I see what you are saying Ben. This may be one of those articles that generate a lot of buzz. However, fluff it is not. If by chance, someone were to understand NPV and IRR they would quickly see what you are saying. I think this concept is just hard to see at first glance, and a skimming is all the average investor etc will commit. But the truth remains, regardless of ones “opinion.” And conversely will burn those ignorant of it, regardless of that individuals position on the matter.
    ALL expenses being accounted for, and I do mean ALL expenses, then you are absolutely right.
    READ: All Expenses. These types of property that often lack any significant appreciation will at first glance appear to Cash Flow like a BOSS. However they come with hidden expenses that can be admittedly difficult to see at first glance, and are anything but common sense to 95% of investors. Not to mention who considers the depreciating value of Cash Flow when evaluating expenses etc etc??? Very very few. Thank you for stimulating my mind beyond “Ten terrible tenant’s That Torture Landlords” hahaha
    It has been a pleasure learning from you Ben.

  20. James Walton on

    Great article Ben, and alot of great responses to the post thank you all. I’m new in re and trying to absorb as much information at this point that I’m mentally able.

  21. Russell Gronsky

    After reading this article and many of the great comments, I am reminded of a very valuable quote from “Rich Dad, Poor Dad”. It was something to the effect of: You make your money on the purchase of real estate, not the sale. To me, this mean that regardless of what your primary strategy or goal is with real estate investing, you can be successful with it, even if conditions change and you can no longer utilize the property for your original intent. So events like 2008 might hurt, but they won’t bring down your business.

    There were many areas before 2008 that were seeing double digit value appreciation year after year. Lots of people were buying to keep a place for a few years and then sell it. Well, 2008 happened and we all know how the rest went down.

    But, what about the Rich Dad quote?

    I know several investors that were slowed down by events of 2008, but they didn’t realize any loses. Yes, some lost 30%, some lost 50% of the value of their properties. Many properties went under water. But, these were all unrealized losses. these guys were able to work their investments into different uses and not lose them to foreclosure or fire sales.

    Just like others said in the comments, equity (or lack there of) is funny money. As long as it stays unrealized, it’s not real!

  22. Sarann K.

    It’s definitely a tricky business, and very good article for reality check. I’m new to real estate, this really helps me to look further not just the number, there are many things that I need to see not with my eyes but with my mind. Thanks Ben!

  23. Deanna Opgenort

    I’ve based my strategy on that of an elderly friend who purchased an out-of-town home in ’71. In San Francisco. For $17k (he was bright, analytical, and shopped for quite a while, & chose the house very carefully).
    Renters paid the mortgage for him while he worked in SoCal. When he retired 15 years later he moved into his (pretty-much paid for) home. Two years ago it sold for $850k. After a major rehab it went on the market earlier this year for @ 1.87mil. In escrow in under than a week, sold 20K+ over asking. Rehabbing is expensive in San Francisco, but $1million increase….the flipper did well.
    So. To recap;
    Renters buy the property (managing requires some effort, & occasional trips to check on the property).
    My friend moves in 14 years later, after he retires. He lives there for 25 years, rent free.
    When he sells, he nets more than he ever spent on taxes, insurance, repairs even in inflation-adjusted dollars, AND had somewhere to live for 25 years basically for free.
    On a small scale, it’s not a bad plan, and one doesn’t need to spend one’s life as a real estate mogul in order to do this.

    I may not chose to live in my rental when I retire, but it will be in a option should I need to. At worst it is a place-holder in the real estate market, & when I retire I sell & take my equity and move elsewhere.

      • Zach Ziskin

        What I’ve gotten from reading Bigger Pockets is that depending on which author you read, RE investing is either the greatest wealth builder and path to financial freedom that every person should be doing, or (seemingly according to the author of this article) 99% of people who try investing in RE properties will lose money and it’s a suckers’ bet.

        But then when you start to think maybe you should just stick to investing in stock index funds, other authors here will tell you that’s a terrible choice, and in the end I’m starting to think just sticking all my money under my mattress is the best choice. :/

      • Keith Knobloch

        Zach and Roger, please don’t be discouraged… Ben has gone beyond most investors in his efforts to “perfect” his investment strategies, but you can still make money with imperfect (aka dumb) strategies in real estate. Maybe not as much, but you can still make money… I’m not encouraging dumbness (even though I’m probably dumb myself), I’m just encouraging you to get started as soon as you can, however you can, and learn as much as you can as fast as your life allows. Do your homework, but then get in the game…

  24. Julie Rogers

    Now I am really confused.
    So all I have to look forward to is lower income and higher expenses with my buy and hold SF homes.

    And I got them at a very low price?

    And I am about to buy a couple more?

    Good thing I did not read this article last year before I bought my first home or my second!
    No, that’s why I am confused, maybe I should not have bought from what I got from this article?

    If you can make money of SF homes, that would be the ones I bought, let’s see what happens!

  25. Jeff Schechter

    Ben, the only thing I agree with here is that some investors are dumb. That said, you make it sound like it is impossible to find good buy and hold deals. Nothing could be further from the truth. We buy low-priced properties that rent well in solid midwestern markets. We are VERY conservative in our calculations…putting away a large amount for future repairs, figuring in vacancy rates, etc. Even after all this, and after calculating taxes, insurance, etc, we still realize a 13-18% ROI on our little cash cows. And we have a lot of investors that buy from us, and continue to buy more…the non-dumb ones, that is.

    The reason investors get “dumb” is because they don’t plan for all contingencies, and they get hyped up on potential appreciation. When the next correction happens (and it WILL happen), those people will get left out in the cold. And our little $45K houses may drop in value to $41-42K, but we won’t care, because we will STILL be cash-flowing!

  26. Christopher Neeson

    In some sense this is correct, but it’s also highly based on each individuals specific investments

    The idea that 99 out of a 100 buy and hold doesn’t work , or that 1 in 1000 properties create good cashflow is a bit extreme. I’m a buy and hold investor and not to wave a golden key around and yell ” Ive got it”, but my investments have started doing very well.

    My initial 2 properties were in a high or ballooned market. Most people wouldn’t call it high or ballooned by looking at sales prices , but based on rents they are astronomically high.

    They key to a good cashflow property is find the market worth investing in. Then be able to walk away from your home town or desired investment market if prices don’t work.

    The biggest reason your numbers of 1 in 1000 good cashflow , or 99 out of 100 not being able to make the investment work would be do to someone investing in the wrong area.

    I can say by eliminating the entire west coast out of my current investing preferences I’ve eliminated a lot of loss! I’ve eliminated the break even or low cashflow.

    I’ve found properties in great neighborhoods that people could raise a family or retire that have enough cashflow in 3 years they completely pay themselves off.

    My odds……. Every property I buy with up to $40,000 out of my pocket will generate between $55,000 to $90,000 annual net income. Gurenteed…..

    Gurenteed in 4 years I’ve created at minimum $40,000 to $70,000 annual cashflow on each individual property 9 out of 10 times.

    When you do this your numbers do work, especially when you look at the opportunity to pull equity at the 6 or 7 year benchmark on all these properties and utilize other people’s money to buy larger 90 to 200 unit investments.

    Buy and hold works great, unless you are looking at real estate markets that will never work. Weed out those and the odds go way up.

    I find your insight welcomed but definitely a bit off.

  27. Dan D.

    The article does a disservice buy making things more complicated than they need to be. Yes, I’ll do some of the equations above to analyze my property, but for new investors, the summary (if I understand correctly) is, buy a house that’s not in a declining market.

    If you look back through any 20 year period of history, and bought a house that cash flowed even a single dollar at the point of purchase, with the factor inflation has on our economy, it would have been pretty hard to lose. Why? Inflation.

    Inflation is probably the #1 reason why most people benefit from real estate.
    Lock in your mortgage for 30 years.
    Watch inflation take over for 30 years.
    Around year 25-28, you will be wondering why you didn’t buy twice as much 25-28 years ago.

  28. Russ Olivier

    I think Ben makes some excellent points, but here are a few counterpoints :-).

    – In terms of cash flow stability, I do believe this can be achieved with scale. If you have only a one or two SFH, fluctuations will be great. As you grow your portfolio, your cash flow will start to even out as positive fluctuations in some properties offset negative fluctuations on others.

    – On value of cash flow over time, although expenses will most definitely rise over time, so will rents which typically keep pace with inflation (or beat it). I’ve found my rents easily able to keep up with my expenses in the 10+ years I’ve done this (of course this is highly dependent on where you are!).

    – And on IRR being about the same as the stock market, that is probably right. But the big difference (in my mind at least) is that in real estate, the cash flow you can take out is not as highly dependent on the asset value. In other words when the stock market corrects, you need to proportionately lower your cash distributions or you’ll soon go broke. In real estate, rents aren’t as directly correlated to home prices. In the 08 crash I saw the value of my properties drop substantially .. but my rents actually went up. In fact I loved the property values declining because my property taxes declined! I know there will be periods of declining rents at some times, but I feel a lot more comfortable with my cash flow from rentals when markets are in decline, than I do from the stock market. And that’s pretty important if you want to retire on real estate (like I have)!

    Just my 2 cents!

  29. Gil N.

    This article seemed as if it was written with a two hour deadline. It should be titled food for thought. It would benefit a newbie better than some of us elready in the game and at that it will frighten some newbies. If I had read this as a newbie it would have possibly struck me with even more analysis paralysis.; I may have taken even longer to jump in the game.
    No doubt Ben is much smarter than I am with broader experience etc. Maybe I’m just not getting it but 99 out of a 100 and some of the other quotes are ridiculous given the subject matter. We all realise such fluctuations are possible as with anything else in life but we need a basis of info and a plan to point us forward and upwards when jumping in the game.
    I say to all new investors or those still in the ( read anything and everything real estate ) gathering stage fear not and use this as another possibility of the game,there is plenty of light at the other side!

  30. Vanessa Vandervalk

    All due respect to Ben Leybovich, he has only been investing since 2006, and I believe only in Lima, Ohio. I don’t think anyone here, including me, who is only familiar with one market and one market cycle, has true buy and hold experience. My favorite posts and comments on BP are those from people with the most wrinkly profile pics–the ones who have been successful with buy and hold for 30 years, who have seen prices, interest rates, and rents go up and down; those who have seen the lending practices go through various trends and regulatory changes; those who have seen various tax policy changes. I’m frustrated by blanket statements here on BP–PERIOD. Please, silver-haired investors, share your thoughts and invite your experienced colleagues to join BP and help the rest of us.

  31. Tim Johnson

    I don’t know what market you’re investing in but this isn’t the case in my area. Buy and hold is all I do and it’s working well. Sorry but I just don’t see your point. The true key to successful investing (in real estate) is to realize you make your money when you buy the property. In other words you must buy at a price, a price that will allow you to net a positive cash flow.

  32. Investing since 2006? Gee …
    I have shoes that old. let see how he’s doing with 7-8% interest rates. Buy , hold and compound is how generational wealth is created. I have homes paid for before this guy got into real estate that have cashed flowed for 15+ yrs mortgage free… the risk free peace of mind on that, the ease of renting versus constant time to find new deals…. priceless u ask me.

  33. Art Maydan

    I buy a HUD home. I hire a GC. I rehab the house. I rent it out. I refinance. I added value and now I have a cash flowing property. How is that 1 in 1000? You can do that all day. Limitations are time, money, and inventory. There’s plenty of inventory.

  34. Ariel G.

    I see people write here about “making the money when you buy”, and being protected by it, but no one has commented what the safe amount would be. What is a safe leveI?
    Would you say that if you buy with a 20% under market value, would your cash flow still be protected? Or even less than that?
    Is there a measurement of how much under market value should you buy for getting to Non-Negative 0% cash flow, that would keep you safe until the recovery?

    • Jeff Bader

      I think for some of these guys, 20% under market would be the maximum that they would pay. I think I’ve heard this author (Ben) suggest that a good metric could be to set your max price on what would still minimally cash flow ($100 per door possibly?) even with 100% financing. I’ve also heard him use the phrase “buying cash flow” in a negative connotation.

      So, for example, when you do find that perfect property after spending hours, days and months (possibly years) searching the market and you have a choice of putting zero down and STILL getting $100 (or whatever your benchmark happens to be) per door vs. putting more down in order to artificially increase your resulting cash flow, you’d be better off putting zero down because then you’d have more capital for the next purchase.

      I could be totally misrepresenting him here and anyone please correct me if I am.

  35. Sylvia B.

    “you rolled out of bed with a bit of a headache from the night before, peed, and washed your hands (I hope). You then walked over to the sink”

    So Ben, if you had to walk to the sink, where, pray tell, did you wash your hands?

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