Is the Buy and Hold Method still an appropriate strategy for building wealth?

I spent the past week re-reading Jan Somer's book - Building Wealth Story by Story. No doubt people who have bought property over the past 20 years and have held onto it have made substantial profits. Residential property as an asset class has been a top performer over this time frame.

With some in the finance world expecting capital growth rates in residential property to diminish over the coming years, it would seem appropriate to challenge the validity of the buy and hold method as a way to building and preserving wealth. The loosening of credit in the late 90's and naughties gave rise to an unprecedented boom in residential property prices that is unlikely to be repeated in the near future.

While the investors who have been successful in Jan's book have adopted a number of strategies (developing, renovating etc) the majority of successful property investors simply bought multiple properties over time (sometimes over a period of 40 years) paid down debt and held on. They then kept buying when they could afford to. (Never overcommitting!)

There is a section in the book devoted to mistakes that investors have made. Some of them are chilling - tales of people loosing everything (substantial portfolios) due to careless mistakes. Others selling up to invest in term deposits, only to end up on the pension later in life, and still one other example of a couple who after 30 years had a portfolio with 3M in equity, only to loose it by acquiring a business or two without undertaking proper due diligence.

What are are you thoughts on:

1) Whether the buy and hold strategy is still an effective strategy for building wealth going forward? Is it still feasible to rely on being able to buy 10 properties and then balance the debt when you want to retire by selling down a few properties??

2) Is future growth sustainable considering the high price of real estate today?

3) Apart from relying on capital growth, what are you doing to speed up the process of accumulating equity in your portfolio?

4) Are you selling to balance debt as you go along, or selling to move your money into other ventures (be they property, shares, business or other?)

5) Or are you buying holding and accumulating more properties with the view to selling down to retire debt and live on rents in years to come?


* I am a buy and holder and the strategy is working well for me to date. But I am always interested to read other's views.

Regards Jason.
 
Hi Jason,


What are are you thoughts on:

1) Whether the buy and hold strategy is still an effective strategy for building wealth going forward? Is it still feasible to rely on being able to buy 10 properties and then balance the debt when you want to retire by selling down a few properties??

Yes - I think the technique is still valid.....but then all properties are not equal....and you certainly don't need ten of them. I was looking at one building the other day with an annual rent of 9.3M p.a. I guess you wouldn't need ten of them to make a comfortable living.

We've found there is no need to balance the debt. A few good renters can do the trick nicely.

2) Is future growth sustainable considering the high price of real estate today?

Probably - but I am relying on that correlatable back to increased rent in the short term.

3) Apart from relying on capital growth, what are you doing to speed up the process of accumulating equity in your portfolio?

Nothing....it all seems like hard work, and I have an aversion to paying down debt, it's so damn hard getting funds from Banks, the last thing I wish to do is hand it all back to them again.

4) Are you selling to balance debt as you go along, or selling to move your money into other ventures (be they property, shares, business or other?)

Not selling at all. No need to to. Buy stuff that stands on it's own two feet, then you won't need to sacrifice stuff to pay down debt....you'll just create a big tax problem for yourself.

5) Or are you buying holding and accumulating more properties with the view to selling down to retire debt and live on rents in years to come?

Buying and holding - no selling, with a view to maybe retiring debt with excess rents - now there's a novel thought.
 
I'm a buy and hold person, with plans to reduce debt on all investment assets in the medium to longer term. It all comes back to your approach. Are you seeking to get ahead through capital gain, through strong yields, or a combination of these? Do you have other assets (eg shares)?

My plan was (and continues to be) to buy good quality assets while I'm young, focussing on building a strong and varied portfolio (different types of property, range of shares, etc), and to remove all non-deductible debt (2 years to go!). Then, I'll simply split all excess funds between increasing my shares assets and reducing my existing debts.

Time will do the rest.
 
3) Apart from relying on capital growth, what are you doing to speed up the process of accumulating equity in your portfolio?

I've tried a few things - ended up predominantly in the "mistakes" category so far i.e. would have been better financially to have stayed on the straight and narrow (although expereintially, it was probably priceless).

Cheers,

The Y-man
 
land is the only intergenerational wealth strategy viable in this century's fiscal climate.

in fact - look back throughout the ages - any man that was able to acquire land and pass it on to his children ultimately had very influential grandchildren.

if you pay $500,000 for a block of land in 2000AD, and your great, great, great, great, great grandchildren inherit it for nothing, at a value of $5,000,000 in 2300AD - then that's called INTERGENERATIONAL wealth.

this is the true way to "look after your own family and damn the rest" - as the rockefeller's put it so succinctly - and one concept that need to be taught to your children and theirs and theirs and so on.

building wealth takes TIME. allow inflation top erode your debt and increase your intrinsic value and enjoy correctons in the market that allow you to accumulate more.

wealth is not making a few buck in 5 years' time. wealth is banks falling over you to lend you other people's money so you can pay someone to find you another income or wealth producing asset while you sit back and watch it all unfold from your lappo in the carribean.
 
Buying and holding - no selling, with a view to maybe retiring debt with excess rents

But that would slow down the new acquisitions! Don't you mean "using excess rents to acquire more assets that look after themselves?" :)

My take on the questions is:

1) Buy and hold is very effective IF you buy the right property in the first place. It falls down when you pay too much to hold a property and only you can decide what "too much" is. I can only note that the really successful people I have come across in this investing business seem to think "too much" means "anything". Therein lies the difficult bit...

2) Capital growth or rental growth? I would suggest the rate of rental growth has been absymal for years for many properties so there is significant upside there, which should not be ignored in your deliberations. As for capital growth, I would think that a property which shows a good income should fare well in that respect.

3) As above, rental growth. Like others, our adventures with developing etc have not yielded any more gains than a B&H strategy would have to date and I already have a day job! Capital growth is just a nice bonus... which has always surprised us.

4) No selling for us. Will let time deal with the debt - it has worked well to date...

5) Again, no selling. As rents rise, we use the extra income to service more property purchasing. Likewise with the equity fairy... no need to sell. Indeed I now avoid any strategy that relies on transacting property as I am all too well aware of the costs (CGT, commission, Stamp Duty etc) involved. Just keep 'em and wait a little longer if need be...
 
I think the question should be why do you think it won't work into the future?

I bought my first house in 2002 for 300k, it was a lot of money and I found it hard to believe that it would double in value... ever... let alone in 5 years. Now to buy the same house you are looking at 700k and if I did, can I see that house being worth 1.5mill? No way, but it will be one day.

Buy and hold works because time and inflation erodes your debt while rents increase to cover your costs, allowing you to buy again and again as your cashflow improves. Given the banks preference to lend against housing, it's every persons opportunity to build wealth, albeit extremely slowly.
 
if you pay $500,000 for a block of land in 2000AD, and your great, great, great, great, great grandchildren inherit it for nothing, at a value of $5,000,000 in 2300AD - then that's called INTERGENERATIONAL wealth.

No, that's called 0.77% p.a. Better stick that half million in the bank :)
 
or perhaps he meant donating it to his younger sister in 2003, at 115% p.a.

or perhaps he meant donating to his daughter in 2030, at 7.97% p.a.

Either way, he's definitely onto something, even though the maths is a bit awry.
 
Yes I think it's still a very relevant strategy for building wealth/equity/capital growth.

The only thing I would question though is living off rents from un-leveraged residential property.

After expenses, your net yield is miniscule (relative to present day capital value rather than purchase price, and unless you have lots of them/multi-tenanted ones eg. apartment blocks).

So, whilst some may be comfortable sticking to what they're familiar with, I'd encourage them to consider alternative asset classes that have a better net yield and may suit them more in retirement phase where income may be more important.
 
No, that's called 0.77% p.a. Better stick that half million in the bank :)

it's not about the ROI.

it's about giving your kids a parcel of dirt that cost you nothing to hold and is now worth a motza that will set them up for life because there's a ton of equity and it cost them nothing to hold either.

get your grandkids to repeat the process and your lineage lives forever.

it never gets "sold" - it'll change hands through the generations, but is never "sold" - it's an equity building and accumulating asset.

there's always the old adage that "first generation builds it, second generation expands it, third generation blows it" to get around, but that's why i'm saying to teach your grandkids the right way.

no point you being smart about money if those you hold dear have no concept of it.
 
So, whilst some may be comfortable sticking to what they're familiar with, I'd encourage them to consider alternative asset classes that have a better net yield and may suit them more in retirement phase where income may be more important.
That's a good point worth a little exploration...

The primary benefit of residential property as an asset class is its preferential tax treatment. Its a great wealth creation vehicle due to the amount of leverage you can employ with it coupled with the lack of tax levied on your capital gains. This presumes of course a buy and hold strategy. You also get to claim non-cash deductions such as depreciation and claim as a deduction any shortfall against other sources of income via negative gearing. It really is a preferential vehicle.

That leverage and tax effectiveness can create a hell of a lot of wealth over a relatively short time period. The trick in retirement is how to use that wealth to fund lifestyle. To JIT's point above, there are much better ways of doing this than using surplus cash flow from rental yields.

For example, Commercial yields are a lot higher and can be accessed either directly in the way Daz has, or via a REIT. For most, using an REIT or other high yielding fund is the easiest way to increase your equity yield. Borrow against the equity in your IPs via an LOC and invest it in a higher yielding asset class. Maybe even add some leverage such as a margin loan if the rates all add up. The interest is all equally deductible, but hopefully you'll get a better yield than your 4.5% resi yield.

I'm still in wealth accumulation mode so am focussing strongly on resi property with about 50% leverage so as to keep my cash flows in order. In time my portfolio will be reconsidered when I move to living off the proceeds. But for now my salaried income is sufficient to ensure we're not "suffering" through the wealth accumulation phase...

Cheers,
Michael
 
I think the question should be why do you think it won't work into the future.

I like to think of the disclaimers used by the finance industry when marketing their managed funds etc "previous returns are not an indication of future returns" or words to that effect.

Many finance writers point to the expedential rise in real estate values over the past 30 years or so, stating that residential property is well above the trend line and is overvalued by at least 20%-30%. The expedential rise in prices as a result of very generous credit conditions, and their recent tightening could be a valid reason as to why the buy and hold strategy may not work as quickly or effectively in the immediate future.

I bought my first house in 2002 for 300k, it was a lot of money and I found it hard to believe that it would double in value... ever... let alone in 5 years. .

In hindsight, you and I bought at one of the best times ever to purchase real estate. I was lucky in purchasing my PPOR in 1997 literally a week before the boom began in Melbourne. I watched in awe as prices literally increased each week up until 2003. I have accumulated my IP portfolio between 2001 and 2007 when prices were rising strongly. If I hadn't seen such a rapid rise in property prices when I bought my PPOR I doubt that I would have been attracted to the idea of accumulating investment properties. Now after a period of such expidential growth I would expect the market to settle down for a while.

Those starting out now would be sensible to question whether the growth seen over the past decade in particular can continue, particularly as credit has been tightened. They may choose to generate equity in other ways - flipping properties to raise cash to fund other more profitable projects, renovate and develop properties, pay down debt very quickly to increase cashflow etc.

I am a passive real estate investor (buy and holder), but I can understand why people may look for alternative strategies to build wealth.
 
I've tried a few things - ended up predominantly in the "mistakes" category so far i.e. would have been better financially to have stayed on the straight and narrow (although expereintially, it was probably priceless).

Cheers,

The Y-man

Hi Y-man,

Due to your extensive experience I am sure that you are well on the way to rebuilding your portfolio.

These are some of my stupid mistakes. Hindsight is a great thing! (Or is it!)

1) Fixing some of my loans at the worst time when rates were 8%! Ouch!

2) Dabbling in a gold warrent and loosing the lot. ($25,000 - although it has been handy from a tax point of view!! :eek:)

3) Going to cash in super fund and missing the latest share rally! (Effectively locking in a huge loss. :eek: I can sort of justify this though as I did move to cash as my strategy is now to set up a SMSF and buy a property in the fund).

4) Placing a property in a company name. (Although has been handy lately to shelter some income - so not an entirely wrong move).

5) Buying shares at the top of the market in 2007!

I am sure there are plenty more but I won' go on. Don't get me wrong, I have made some correct moves along the way!! :D
 
Many finance writers point to the expedential rise in real estate values over the past 30 years or so, stating that residential property is well above the trend line and is overvalued by at least 20%-30%. The expedential rise in prices as a result of very generous credit conditions, and their recent tightening could be a valid reason as to why the buy and hold strategy may not work as quickly or effectively in the immediate future.

tho 30 years is a long time to dismiss as a short term fluctuation. There are larger forces at work that continue to bless property investors in this country... they have been thrashed to death in other threads and include our high rate of urbanisation, hopeless planning rules, increased 'green' costs, population growth, credit crisis killign supply, unfolding resources boom etc.

the upside seems stronger than the downside. really the only downside is steven keen with his chart of debt to gdp. Just buy neutral to CF+ property and at the very least inflation will erode your debt.
 
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