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Using the Buy and Hold Strategy in Real Estate Investment
Billionaire tycoon Warren Buffett is a strong advocate of the buy and hold strategy in the financial markets, but does such a plan really work in real estate? The buy and hold strategy is based on the idea that over the long-term, an investment is going to give a better rate of return, even in the face of volatility or overall decline. Of course the strategy also has a “timing” component and that states that market timing will make a difference in whether the buy and hold strategy has paid off.
So, once again the question is asked – does this work with real estate? There may be many examples of buying and holding on a property that yielded some high profits, but overall the acquisition of such hefty debts is not going to allow for a significant profit margin. Even a multi-property owner who is looking for rental income from each of their buy and hold entities is going to see only a trickle of regular income on their investments.
Consider the risks of the buy and hold strategy – an investor may acquire a few properties which they believe are going to yield high sale prices at some point in the future. Over the course of the years one of the buildings may demand enormous amounts of improvements – such as a new heating system or plumbing upgrades that place a hefty burden on the investor’s capital. Additionally, a majority of these properties will be used as rental units until the time of sale and even a few vacancies a year can put the investor in the red.
Owning several buy and hold properties might also take a toll on the investor’s net worth and also limit the amount of capital a bank or lender is willing to make available to them due to their debt-to-income ratio.
Finally, the element of time comes heavily into play where buy and hold strategies are concerned. An investor is going to have to know the market and be able to unload the properties when they have reached their peak. This requires some luck, knowledge and skill that not all investors will possess.
Ultimately, the buy and hold strategy in the financial markets may work for those larger investors, but in the world of real estate an investor could find a few more stable methods for increasing their net worth or income.