Buy and Hold Strategy vs. Buy and Sell Strategy

Photo Credit: takacsi75Some investors strongly believe in the buy-and-hold strategy to build long-term wealth. They claim that long-term wealth can be created by buying one property per year, say for 10 years, renting all the units out as they are purchased, and paying down the debt with the rents collected. After that, the investor could conceivably live 100% off the rents. Arguably, this strategy does work, but there is a cap to the financial benefit.

On the other hand, investors using the VMM strategy maximize their investments through equity compounding and cash flow to ultimately create a far greater wealth than the buy-and-hold investors who cannot use the newly created equity on a cash flow basis. The new equity dollars is tied to the building and therefore is not “working” to generate any kind of cash flow or return on investment.

The basic assertion of Value Management Methodology system is not to buy-and-hold but rather to buy-and-sell to generate cash flow and new equity dollars, and to utilize both to buy other properties. Comparing strategy to strategy the answer becomes obvious: buy-and-sell strategy is far superior to buy-and-hold strategy.

Here are three scenarios using table ‘A’, table ‘B’ and table ‘C’. Which strategy really generates better results over a period of 25 years? The attached tables demonstrate the difference in the income earnings potential:

  1. The buy-and-hold strategy for SFR properties for investment purposes (Investor A).
  2. The buy-and-sell strategy for Residential Income Property, using the Value Management Methodology (Investor B).
  3. The buy-and-hold strategy for Residential Income Property not using the Value Management Methodology (Investor C).

According to these tables, the difference between the income potential of the buy-and-hold and buy-and-sell strategies are staggering. Investor A’s equity in the combined properties is $8,648,928 at the end of 25 years.

These properties are SFR that the investor chooses to rent out for the purpose of generating an income, and keep for 25 years. Because they are homes to begin with, they are subject to real estate housing market trends with regard to their appreciation and/or depreciation. Their market prices are based only on the existing housing market conditions in their respective locations. Their prices do not fluctuate up or down because someone decided to buy and rent them out to generate an income, nor are their prices tied to their NOI, CAP or COC. They are single family residences (homes) to begin with, which were built for this purpose only. Renting them out does not make them Residential Income Properties. If someone decides to purchase such a property he or she will do so primarily because they are looking for a home, not an income property. They will write a purchase offer consistent with other residential homes for sale in that same area, using the comparable sales method. NOI, CAP rate and COC have nothing to do with the purchase of such property. The buyer is buying a home, period.

Investor A achieved his investment portfolio results by buying one property every year for 10 years and then holding these properties for 25 years. No selling. This resulted in a nice retirement income — until comparing it with the income generated by the Investor B using a buy-and-sell strategy, the Value Management Strategy. Investor B managed to amass a fortune of $97,922,136 using the VMM strategy over the same period of time, acquiring pure Residential Income Properties, i.e., apartment buildings, six-plexes, eight-plexes etc. A momentous difference.

What about Investor C? He is also a buyer of pure Residential Income Properties. But he doesn’t believe in buying and selling. He is a buy-and-hold investor. He creates value in his properties in the first year of ownership, and then holds them for 25 years counting on 4% appreciation and a cash flow. No selling. He did well; in fact, he was able to accumulate a bigger nest egg than investor A. His fortune is $10,378,714.

The following tables will be presented to you in a lightbox viewer. The viewing window may be resized depending on your screen resolution and browser type. In order to scroll and view the entire table, simply click anywhere inside of the viewing window and drag it up or down, left or right.

All three investors started with the exact same amount. However, Investor B sold his current property and bought a new property every 15 months instead of holding them for 25 years as investors A and C did. He created 20% new equity in each property within 15 months of purchase and resold each, creating additional new equity and cash flow to leverage into his next purchase. He did not need an additional layout of capital to purchase his next property, as Investors A and C needed. His newly created equity dollars keep compounding with each property he buys and sells. The reason that Investors A and C have to come up with a new down payment for each transaction is because their equity is tied up in the property. They have no room to expend, grow and leverage, for a chance to put their equity to work. Over the years they never sell and all their equity continues to remain tied up in the walls, roofs and beautifully manicured yards. The only hope for a return on their investment is through property appreciation.

But let’s stop for a minute and ask, what happens if real estate prices take a tumble while they are holding onto these properties? What will happen to their equity in these properties? Well, most likely it will go down along with the entire real estate housing market. Their equity position in the properties they own may be damaged in a significant way if not wiped out in its entirety.

To fully utilize the wealth-creation potential of the Value Management Methodology, one must develop a plan, adhere rigorously to it, be disciplined and run it like the business that it is. Wealth accumulation does not happen by chance. It happens by knowledge, design and hard work while maintaining integrity and fairness for everyone. It happens by managing properties properly with “hands on” attitude and hiring the best property management firm to oversee the investments, in order to minimize possible risk.

Photo Credit: takacsi75

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