When Does Long Term Buy & Hold Not Work?

Question

I have gotten into real estate in the last few months and for my real estate strategy decided on buying fixed up houses that cash flow (300-500/month) and hold onto them long term.

Many people have told me that real estate investing can be risky but it appears these risks are more often associated with speculators. People who are trying to time the market and aren't holding for the long term.

For people who are buying and holding, what has to happen for an investment to fail? I imagine as long as you can find a renter and the house doesn't fall apart it's a pretty rock solid investment.  If the price goes down you just continue to hold while the renter pays off your mortgage.

Maybe someone can share their experience if a buy and hold strategy failed for them and why.

Al Williamson · Answer

Neil, I have a long term strategy as well. I think it's a pretty solid strategy over all. But you need to be aware that neighborhood go through cycles. They are always changing as people and businesses come and go. They also go in and out of style as the economy changes.

Because of this I like to hold with a neighborhood revitalization mindset. I believe in doing thing that are known to make neighborhood better over time. Simple things like:

1 -  getting to know the neighbors and other landlord,

2 - insisting that every scrap of litter is off the ground,

3 - calling owners when something looks out of sorts with their property,

4 - a squeaky wheel advocate.

You may have come up with your own methods, but always do something to make your investment area better beyond your property line - this will be good insurance against neighborhood decline.

Shera Gregory · Answer

You say that your strategy will be "buying fixed up houses ..."  This is one part where you need to be very careful.  There is an alternative which is to buy somewhat run-down properties (for a good discount) and then do the rehab so that you know you have a new roof, new HVAC, new etc.  If you build that into your plans and still can meet your cash flow goal then you are doing your best to also minimize future capital expenditures that will eat up your cash flow.  Every long term investor has to deal with those expenses.  Roofs, paint jobs, appliances, etc have to be replaced at some point.  You may be buying what you think is a "fixed up" house but if the roof is four years closer to needing replacement or the HVAC is five years closer vs you installing it new then that's something that will catch up with you eventually.  Not to say you have to go the route of doing your own rehab, just take into consideration the expected remaining life of the big ticket items when you are purchasing.  This can be a negotiating point in your purchase.  And it might make the difference between buying or passing on a deal.  Even with long-term buy and hold you still "make your money when you buy".

Ellis San Jose · Answer

When you have bad financing,

When you lose control of management.

When you spread too thin and have insufficient operating capital.

Robert Brubaker · Answer

I think one problem for many people is thinking

of the " buy and hold" strategy in literal terms. It

still boggles my mind  the number of owners

that buy houses in reasonable shape,do nothing

to keep them up ,and expect to re-sell at a profit!!??

The " buy and hold " model only works if you are

actually in a  " buy-massage while holding-mode

with your purchase! Anything aside from that is

luck alone!  Best for Success!

Bob Brubaker

Jeff S. · Answer

Sometimes an area can just have a lot of vacancies and you have little ability to withstand that. Economic conditions can and do change.

Growing too quickly sometimes can become too consuming and when multiple problem arise, as they do, the ability to manage it all can overwhelm.

Your lenders get scared and don't want to finance your operations anymore leaving you short when notes become due.

You don't do a good job screening tenants and they tie up your property in court and/or do lots of damage.

You have to be or have a good business head available.

Dawn Anastasi · Answer

Long-term buy and hold doesn't work if you become a slumlord.  Those are people who buy properties and put anyone into them. They do not care who rents from them -- criminals, those with evictions, etc.  They do not screen.  They do not care about the condition of their property and don't fix anything unless the city gets on their case.  If someone doesn't pay, they toss them out and find someone else who will give them cash.

Be a good landlord, fix things, treat your tenants well, have enough reserves to handle the fixed expenses as well as the unexpected, and real estate can make you rich slowly.

Mike H. · Answer

Typically, I like to believe that the only way a buy and hold investor can run into trouble is if they don't repair their houses or if the house isn't cash flowing enough and they run into some bad luck.

The one exception to this I can think of is if you have a commercial loan on the house (i.e. 5 yr balloon) and the value of the home drops significantly and then you can't refi out of the balloon.

I'm guessing there may have been some buy and hold people that ran into this if they had balloon mortgages that came due during the bust. 150k house was now appraising for 100k so they had no way to refi the 100k loan (which at the time was 70% or better) unless they came out of pocket about 35k.

That aside, no, I see very, very little risk to being a buy and hold investor provided you buy it right and it cash flows right. Its going to be awfully tough to lose on a house that is cash flowing 500/month. Is it possible, yes. But I'll take those odds over any other investment any day of the week.

How would you have liked to have lost 50% of your 401k? That happened to people during that time too.  If you only 10% into the homes and lost them all but had made 500/month or so on each of the homes, how much did you really lose anyway?

Verran Jones · Answer

When the economy incurrs  significant losses since the great depression.

When Does Long Term Buy & Hold Not Work?

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