The premise of the “Buy and Hold” strategy is to buy a property and hold it long term based on the expectation that over time the property will appreciate in value. During the period of holding the investment you will also profit from any monthly positive cash flow.
The Buy and Hold strategy is one of the lowest risk real estate investment strategies and it requires the least amount of an investors time to implement. If you employ a property manager (as we highly recommend) it is considered passive investing as it produces a passive income. What this means is that once you buy a property it will continue to provide you with monthly cash flow income without you needing to be actively involved. It is the dream of many investors to acquire enough cash flowing property to provide a liveable income so that they never have to work again.
Let’s take a look at two scenarios that illustrate this investment strategy. For the sake of simplicity while conveying the overall concept we will make some assumptions and considerations:
In the first scenario, an investor purchases a $50,000 investment property and sells after 15 years turning his initial investment of $50,000 into $254,000.
Over the 15 year holding period our investor will make money two ways:
Let’s consider point 1 – The cash flow the property produces
Yearly Cash Flow x Number of Years = Total income from cash flow over 15 years
$10,000 x 15 Years = $150,000
The total income from cash flow over 15 years is $150,000
Now let’s consider point 2 – The income from selling the property
Over 15 years the property will appreciate in value from its initial $50,000 to $104,000. See the chart below.
Now if we add the two together we will get to see what our investor has grown his $50,000 into: the cash flow the property produces + the income from selling the property works out to
$150,000 + $104,000 = $254,000
Here you can see our investor has turned $50,000 into $254,000 by adopting the buy and hold strategy.
Now the second scenario: What if our investor from the example above didn’t stop at one house and invested $50,000 of his own money every year on new property? What if our investor also reinvested the cash flow from each properties back into more $50,000 investment properties?
This strategy produces results similar to that of the principle of compounding interest, where a banks pay interest on deposits and it compounds against the money they have already paid interest on. In the early years of the investment, growth is stable and appears linear, but as time goes by the returns compound on themselves and investment values clearly begin to grow exponentially.
Let’s look at the number of homes our investor will acquire during this 15-year period. As he receives the cash flow and reinvests it, the number of homes he can buy every year increases from one to two to three and so on.
Now let’s consider the cash flow these properties produce each year. Unlike our first example where the cash flow was a constant and steady $10,000, in this case cash flow increases every year as more cash flow producing assets are acquired.
Finally let’s see how our investors’ net worth will increase over this 15-year period.
Now our investor is left with a tough choice-a tough choice that we all dream of having to make. Does he sell his 54 investment properties and cash out the 5.1 Million? Or does he continue to hold them and watch $460,000 roll in every year? Either way our investor is ready to retire very comfortably, or continue growing his empire.
Hopefully these two examples have illustrated the benefits of buy and hold investment strategy. It is a slow but steady strategy to acquire wealth in real estate. American Properties recommends the Buy and Hold strategy to all of our members.