Do you buy and hold or sell on top?

Question

I am a 26 year old investor with 3 rental properties that i bought in the last year. My goal is to build a large portfolio of single family cash flowing houses for my retirement. My market here in Cleveland tends to lag behind the rest of the country and the swings are not as volatile so prices are still 40-60% below the highs of 2007.

As a buy and hold investor looking 30 years into the future - does it make sense to keep these assets until I retire our should I sell them if the market here goes back up in 5-10 years.

Example - the house I picked up in a Cleveland suburb for 50K sold for 120K in 2006 - if the market reaches this level should you always sell if you are looking long term.

Franklin Romine · Answer

pull equity out and buy more.  Once you get a ball rolling of equity, debt and cash flow you can have properties in various life cycles.  My point is stay a vie and don't close your eyes.  Always be looking for opportunities to move equity into.

Adam Craig · Answer

Right now I have a property manager and I have no complaints so far. I wanted to stay away from the multi family space for the time being - I feel like SFH is better option for the long run in terms of resale and being liquid - not to mention usually better quality tennant and lower turn over in SFH.

Lee Smith · Answer

Don't be afraid to diversify into multifams as well.. You may like that investment better. I am not sure if you manage your own properties, but when I make investments I plan for someone else to be managing them in 3-5 years.

Josh Rich · Answer

A good book on this subject is Wm Nickerson's "How I Turned $1k into $5M".  It's a rare find and written 30+ years ago, but the classic investment principles still hold true today.  Worth the investment in reading.

Rick Baggenstoss · Answer

Yes.  You don't have to sell to get money to buy another house.  In fact, you'll lose time and money with each transaction.

You can let your houses appreciate until you have $60k (for example) in equity or 50%, refi cash-out to 25% equity and reinvest the cash.  It will increase your ROI.

Diversify out of Cleveland too.  It's a beautiful, but somewhat risky city.  You may want to look at a complementary market like Charlotte or Jacksonville with a more service-oriented economy and warm weather when you're ready to buy more.

Rick

Brian Gerace · Answer

Rick,

Am i understanding this to mean refinace to extract any excess equity?

Thanks,

Brian

Robert Weissman · Answer

You're doing a great job getting started at your age!  I recommend you continue to acquire more properties and use leverage (as long as you don't leverage beyond your properties cash flowing) while you're young to acquire more.  In 10 or even 20 years, depending upon the market and your results, you should work on restructuring so that you rid yourself of the least desirable properties and work toward having as many good free and clear properties as possible.  When you accomplish that, you'll be almost completely immune from market shifts and won't need to worry about trying to time the top or bottom of any market.

The problem with selling, in your example, at $120k, is that prices may never again reach $120k or they may substantially exceed that.  If your crystal ball is tuned into that, please keep me in the loop!  I suggest you focus on buying properties which cash flow (with a sufficient cushion for vacancies).

The more properties you acquire, the more difficult it is to time selling all of them at a market high (unless you sell them in bulk which usually means a wholesale sale) and almost impossible to purchase all of your properties at the market bottom.  But if market timing is your goal, I suggest you find out who the guru(s) is/are in your market who have successfully predicted prior market trends and follow his or her reported trends very carefully.  But be careful.  Most who track trends tell their subscribers about them 3 months after they occur.

Best of luck.

Robert

Rick Baggenstoss · Answer

Hi Adam - Congratulations on picking a good time to invest and a good start.

It's very difficult, if not impossible, to time the market.  Unwinding your holdings quickly is also difficult.

My advice is to buy 'value' based upon income, regional health, etc. and you'll do well over the long haul.

Put a plan in place to sell or leverage your properties as you build excess equity.  Trick is not to over leverage.

Then you're not worried about cycles hurting you, but you're prepared to buy aggressively when cycles are in your favor.

Time is in your favor.  Enjoy!

Rick

Do you buy and hold or sell on top?

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