Is a bad buy and hold deal possible?

[Jordan Sutherland]

Hey guys, i'm pretty new to REI, and I had an intetesting conversion with my grandfather the other day. My grandpa has a pretty impressive portfolio of SFR and small multifamilies worth about $5,000,000.... and it's all paid off! He started from scratch 40 years ago and steadily accumulated his wealth starting from nothing. We were analyzing a propery i was interested in and he told me something interesting. We were talking about what price i should offer for this property and he told me this: "Don't worry too much about the price, just make sure it's the right property. I have never bought a property that didn't make me a ton of money, as long as I held on to it for 10 years." I'm 23 years old and my goals are in buy and hold investing, so I thought maybe this was absolutely true, or maybe at least a little bit. What do yall think?

[Shawn Coverdell]

Follow the rules commonly found on bigger pockets and grow faster. I would say true. My mother bought her first home at 18. average deal. 4,400. that was 1970.  She could have negotiated back then and got a few hundred off the price, or she could have overpaid by say double. Heck she could have paid triple the value.  Portland Oregon so it  would rent today for 2K/month or so. 

Sounds great right! Well, truth is it would have taken her 10 years for inflation to bring rents up to 1%.

There is no need to do that, buy a 1%er now and sleep at night counting dollar signs instead of sheep.

Your father is right. real estate is so good, you can suck at it and still come out fine at some point in the future but do the best you can and finish the game well. I don't negotiate very hard. I just find ones that cash flow. make offer. might go back and fourth 2 times. I just want to close it and move on to the next one. 

One day we will all look back at that one we overpaid 10K on and just laugh. 

[Andrew Beaver]

Hey Jason V. I believe that is a small thought in the back of my head for risk in buy and hold.. Not many people talk about market rent prices decreasing. I was actually looking forward to someone bringing up this point. What I mostly here is that don't buy for appreciation because your property could lose value overtime but the same can happen with rents correct? Or is it that market rents tend not to fluctuate drastically for any significant market change

[Jay Hinrichs]

@Andrew Beaver  market rents can swing drastically..  just look at PHX  and Vegas circa 2007 to 2011.

in PHX you not only had rent compression you had complete vacancies.

4 plexs in that city that sold for 350k each in 2005.. were completely vacant in 2009 and were being lost to the banks left and right... and bottomed out at 60 yo 70k a 4 plex... 

vegas many apartments were experincing over 30% vacancy and were lost to lenders... 

these things are regional for sure.. in our market in Oregon.. our buy and hold held strongly and grew in those same years.

[Cerwin Haynes]

@Jordan Sutherland

I'm a buy-and-hold guy. Cash flow is key for me, because of my personal goal is to be free from having a job in 5 years or less. I'd love some appreciation too, but that's not the overall reality of the market I'm invest in (house prices in Syracuse overall dont change much). So my goal is to find properties that A. cash flow from day one, B. achieve or come close to the 2% Rule Brandon uses on here, and C. are in neighborhoods where I can attract decent to good tenants.

I see a lot of different angles of advice thrown to you here. I'd say to you that the first thing is to decide your overall goals as to what you want out of investing in buy and holds. How long would you want to hold onto yours? Do you want to eventually move up into commercial properties? Are you looking to retire early?

[Jason V.]

@Andrew Beaver - As always @Jay Hinrichs hits the nail on the head: it all depends on your market. He operates in quite a few markets, and in one saw huge rent drops and vacancies during The Crash, and in another saw rents increase. @Cerwin Haynes is actually right down the road from me, and our market (Western NY) is a little unique in some ways, but in general if a market doesn't see huge Booms, it will tend not to see huge Busts either. Of course, that's property value, and not necessarily rents. In my market, during the crash, values went down (although not as bad as the National Average) but rents actually went up a touch, and have continued to go up since. 

In my mind, the best thing you can do is talk to local investors who operated before, during, and after 2007/2008 - and ask them what their rents did.  The example I used ($400K property renting for $1500/mo) was actually pretty typical where I lived during the crash. And most of those buyers were using interest only ARMs, and paying the difference in negative cashflow out of pocket because everyone knew that property was going to keep appreciating 20% a year forever.  Lots of those houses sold in the $150s after they were foreclosed on. 

Despite rents in my market staying steady, I still run numbers on a deal with a potential 20% rent drop and/or 50% vacancy (what I see as being very doom and gloom) to make sure I can at least break even on a property in those circumstances. Personally, I'm of the opinion that you shouldn't buy any property that doesn't cashflow, at least if you're early in your investing career (like I am) or don't have a number of cashflowing/appreciating properties to offset potential losses while trying to buy only for natural appreciation. (Forced appreciation/Value Add Properties are another discussion.)

[Andrew Beaver]

Jason V. Interesting. Thank you for the detailed comment. I'll definitely start adding a forward thinking analysis to my property research. I've contemplated reaching out to investors of properties in my area to get an understanding of how they got involved but I think a great question going forward for investors during that time is how their properties were impacted. Good stuff to know. I appreciate it

[Dooreuhn Cee]

Not "absolutely" true.   But he was likely being over simplistic to make a point.

If you purchased in 2006 during the boom, you could be just now breaking even in 2016 due to the intervening recession.  Some are not yet breaking even.  And breaking even after 10 years of capital risk, hard work, and anxiety is not what we are here for. 

The conditional term "right property" makes this oversimplification more accurate, but also opens up a big can of worms because determining what is the "right property" is very complex.

[Michael Boyer]

It sounds a bit like the Dr. Schumacher thesis, of the Buy and Hold (Forever) genre. 

I liked that book and idea, but, of course, what do you do in the mean time (for ten years, etc if you are cash flow negative, especially starting out....) while you hold... that is always my question....

And, I think, the key for Schumacher (and maybe your grandfather) was being on the right demographic trends and in the right real estate market, such as when Schumacher (as savvy appraiser and investor) saw the post WWII boom in California, especially SoCal and along coastal California. The right location and just being able to hold on paid handsome dividends. 

So I guess if by "right" property you mean something like this... it makes sense provided you can hang on.. Maybe an even "righter" property also cash flows well.....

[Shital Thakkar]

You are very safe if you invest in major metroplex with following criteria ... Leverage initially and let tenant pay off

Class B property - 1% rent
Class C property - 1.5 to 2% rent

[Charles Worth]

@Dooreuhn Cee that depends highly on the market. I personally know people in my market who bought a property in the height of the craziness and have made $1MM+ on that one property. Breaking even is a tough term because all those properties are negative cash flow so yes they paid in every month but also ended up way better in the end.

Its not my cup of tea and I think its risky but if you have reserves, can wait and are right on the market it can work out. 

[Jason V.]

@Andrew Beaver If you want to get really deep into things, check out a couple of books/papers on 'Optimism Bias' and 'Planning Fallacy.' 

You, quite literally, have to train yourself to be negative/cynical enough in order to plan correctly. The only way to be able to accurately plan for just about anything is to have done it, or something similar before, and tracked your performance. 

It's About Time: Optimistic Bias in Work...

Of course, Pessimism Bias is a thing too.....

Keep detailed records of everything you do: deal diaries, budgets, etc. Keep many versions of everything over time, so you can see how they track. Check your real numbers against your original budget on everything you do. 

I would wager that many folks have no idea how successful they actually are (or aren't) because they aren't tracking vital data.

[Andrew Beaver]

Jason V. As a former auditor, "what if" risk based approach has been drilled into me so I'm all to familiar with preparing for worst case scenarios just in case. These books sound interesting and I will add them to my read list. Thanks!

[Dooreuhn Cee]

@Charles Worth  Yes, absolutely depends on the market.  In the Bay Area of California, the prices are  nearly 110% compared to the bubble while in Chicago they are 75% in some areas.  Also, 10 years of negative cash flow is absolutely draining and is the reason I look outside of California for cash flow.  As far as risks, I'd rather take the 10 years of certain cash flow with moderate appreciation over gambling on equity increases.