Long Term and Buy/Hold in Memphis, TN/What does long term mean?

Question

I would like to pose a question, and a little bit of advise.  I do not think this can be stressed enough to investors, young and old.   It seems that several times a month, an investor crosses my desk that purchased a "long term" product and they're having difficulty getting out of the market.  I know we are not fortune tellers and cannot predict the future, but the definition of "long term" or "buy and hold" is important.

"Long term' in my opinion is 7+ years.  It is impossible to plan 10 years down the road, you can try, but life happens.  These investors I'm speaking of, have most likely called everyone for an opinion and speak as if they were not sure of what they purchased in the first place.

My advice is if you're making a commitment to becoming a real estate investor, through the good, the bad, and most of all the ugly times.  Be prepared and fully understand the meaning of the words, "long term"

I am curious to what the BP communities position is on the definition of "long term" and what they tell their clients?

Alexander Price · Answer

This seems reasonable to me.

I think if more people read Millionaires Real Estate Investor, they could temper their expectations. The goal of cash flowing a million does not require hundreds of properties, just lots of time. Near the end of the book Keller highlights what buy and hold can do for you financially over 30 years. Personally I get excited when I think about holding the properties to the point of reinvesting or owning them outright and pocketing all the extra cash.

I do not understand holding real estate short term unless it's a trade up. I am also a newbie at this so maybe I am naive.

Douglas Skipworth · Answer

Hi, @Patrick Scifres.

Great question!

I don't have a definition of "long term," but in my mind it is 20+ years.

To me, short term is less than 5 years.

Everything in between that is neither short nor long (I guess it's medium term).

I think buy and hold is just a philosophy of owning a property for longer than 5 years.

So, I believe you can be a medium-term or long-term buy & hold investor, but I think the term "short-term buy & hold" investor is an oxymoron (since, to me, buy and hold is 5+ years and short term is less than 5 years).

Can't wait to hear what other people think.

Account Closed · Answer

Great question posed. I look around the site and found my answer. If you're looking to invest and break even at any point you should be looking to invest for 18 years. That is the average duration of a housing cycle from peak to peak as outlined by this article.  https://www.biggerpockets.com/renewsblog/2015/03/0...

Alex Craig · Answer

I tell everyone 5 to 7 years, especially if they are buying turnkey which typically means that perfectly good HVAC systems and roofs are replaced because they only have 7 to 10 years of life remaining.  Replacing these working items adds up to $10,000 to the price of the house.  If you are truly a long term buy and hold, then having these new makes sense as the lost cash flow on $10,000 worth of capital expenses is probably a loss of 30 to 40 months worth of positive cash flow with a 30 year mortgage.  If investors want to exit in 5 years or under, the first thing I tell them is that Memphis or Little Rock is not for them.  However, if they really want this market, they probably need to either source and rehab the property on their own or find the best possible deal out there and roll the dice that the 15 yr old HVAC system can get them another 5 to 7 years or the 20 yr old roof can make it another 5 to 7 yrs too.

I see properties on the MLS all the time from out of state investors who have owned properties for short periods of time, often times 4 years or less. Makes me wonder what the expectation or mindset was going in.

I think you nailed with the "ugly times." Yes, it can get ugly, own enough and it will happen. I think it is fair to say that with the # of properties @Douglas Skipworth owns, that he would agree. Unlike a friendship gone bad or a family disagreement, what makes real estate so great is that it can forgive and forget. I had a property that from 2008 to 2011 had so much drama.  Since 2011, it has performed better then any other home that I own--it does not care what happened in 08 to 11. Life is good since then. So long as you don't have a glass jaw and can hang in there, more often then not, in the long run, you will make money.

Patrick Scifres · Answer

Great advise and experience from everyone.  I'm working a deal with code right now that the seller is going to hire a structural engineer due to code saying the property is "uninhabitable".  I met the code officer at the property and all they could do was point at what they thought was an issue.  There appeared to be no experience or expertise in their findings, just "this looks like it might be wrong, so prove that it's not."  This doesn't hold up in a court room, but they hold the power, so as @Alex Craig stated, "fix things ASAP".

Also, back to the long term.  I just want investors thinking about Memphis to realize that is work, a business, that has it's ups and downs.  I know the world is full of all types of personalities, but patience is definitely a common trait you see in successful residential investment property investors.

And in the words of my first broker, "Pace yourself son, and remember, it's a marathon, not a sprint!!!"

Alex Craig · Answer

I saw that on Facebook, good thing no one was hurt. That is about worst case scenario as it gets. My worst story was a tenant smelling gas and calling MLGW instead of us.  There was a small gas leak in the service line, should have been a simple $150 to $195 repair.  Instead, MLGW came out, alerted code and $6,000 later I have all new gas service lines to my triplex, hot water tanks are in different locations, floor furnaces were reinstalled among a few other things. I am willing to bet that I am the only person in the area that owns a 1940 construction home with all plumbing up to today's building code. Really, I have never seen anything like that as we pull permits on all our work and a inspector has never made us do anything like that.  That is why I always stress to investor to fix things ASAP so that tenants do not call building code.  A simple repair can get expensive if the wrong inspector goes to the house. In this case, the tenant didn't even call us. They had to go 2 weeks without hot water; in a nice way I reminded them of the procedure that we have always made repairs in 24 hours and to never, ever call anyone but us to get things fixed.

John Caviness · Answer

Patrick.  I agree with you regarding code.  My experience has been in new construction and I have dealt with most of the officials for years.  While they are nice guys and know the code most do not have field experience.  The best is to use structural engineer and get things fixed quickly.

Douglas Skipworth · Answer

@Alex Craig,

We literally had a duplex explode two weeks ago and now we have to tear it down (thankfully, no one was injured!).  The way it was insured, there is no reason of us to even file a claim.

So, yes, the ugly times are real.  I just pray they are few and far between.

Long Term and Buy/Hold in Memphis, TN/What does long term mean?

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