Buy, Hold or Sell

One of the cornerstone ideas in investing in RE that we push is cashflow.
You must have proper cashflow.

Investment in anything means looking at your ROI, "Return On Investment".
If you don't get a good ROI, why invest in the first place?



How do you get a return in RE?
Only two ways I know of:

1. Cashflow
2. Appreciation

Think about that for a minute.

What do we see in the marketplace these days?

Flippers? Not many.
Let's talk about appreciation in terms of flipping.
Flipping is, buying low, then turning around and selling higher.
It's not that easy of course. Can it be done with foreclosures, short sales and bank owned homes? Probably.

Sometimes you need to buy low, invest big $ to fix and fluff, just to be able to sell higher - right?
We'll that's "Appreciation".
The cashflow in flipping comes into play when the first mortgage payment is due.
No rental income means total negative monthly cashflow.
That's ok for the short term if the flip yields enough appreciation.

The greatest ROI comes from the strategy of Buy and Hold.
You know this. Look back over the years and during good times and bad, property just keeps on chugging along.
Yeah, we're in the bad now, but take a step back and look at a wider view.
Somebody somewhere said ( I can't remember right now) that property values at least double every ten years, as an average, since the 1930's.
Never less than double.

As a real example let's look purchasing a $500,000 income property and holding for 10 years.
Let's assume you put down 100,000 (20%), have good cashflow, and you never pay a dime towards principal.
Let's also assume we have a dismal appreciation rate over the course of those 10 years of only 5% each year.

Now let's look at the numbers:
Present Value would be what you have in it now - $100,000
after 10 yrs appreciation the market value or Future Value would be $820,088
subtract the loan amount of $400,000 and you'll have $420,088 in equity right?

Now go put that in a calculator and see what your ROI was.
Oh, here's an online one I found: LINK
What did you find out?

Your ROI was 15.43% right?
That's each and every year and at a very dismal 5% appreciation rate.
Still don't believe it?
Take any regular calculator, or an 8th grade math student (Hey Emily, i have a project for you...),
and start by adding 15.43% of 100,000 to itself.
The first one is going to be easy $15,430 added to 100,000 is 115, 430.
Now add 15.43% of that to the total and so on and so on.
Do it 10 times and you'll come up with $420,088 give or take a penny.

But is 5% appreciation too small?
You might think so. Most professionals would agree with you.
We may never see triple digit appreciation again, but what about double?

Go back and do the same at 10% a year.
Now at year 10 the same property is worth roughly a cool $1.3 Million!
Subtract the loan amount of 400,000 and that leaves 942,355 to be exact.
Pop that in the ROI calculator.
WOW!
25.15%

And that folks, is why Buy and Hold makes so much sense.

Yeah, I know.
I left out Inflation, Taxes, 1031 Exchanges, Realtor Fees, and so much more.
Let's not cloud the issue, the point is more about the "WHY".
Why anyone would want to buy and hold RE.

But there's a catch.
To properly buy and hold, you need to be able to HOLD.
This is where the Cashflow comes in.

Proper cashflow allows the investor to hold.
It may provide anywhere from a decent or minimal income each month.
But the real returns are usually found in the appreciation, not in the cashflow.