Is the Buy and Hold Method still an appropriate strategy for building wealth?
- Thread starter jingo
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What's a bond yield?
Interest rates in simple terms.
And this is one of the MAJOR RISKS i see to long term out performance of property as an asset class.
I'm not talking one-two years time horizon but longer.
Its only a risk, but in my opinion its a doozie.
There was some talk on bloomberg several months ago.
According to 'theory' shares should out perform bonds over longer periods of time. But they did a study in the US running from 1980-2009 which shows that bonds actually outperformed during this 30 year period. Now outperformance over a longer period is a reasonable theoretical outcome given that shares are more risky, but 30 years, thats a heck of a long time for most of us.
Now before i get flamed to the max.
Let me reiterate my thoughts on property re Jan Somers strategy.
For most people, adopting Jan Somers strategy creates the highest probability of achieving long term sustainable wealth for the average person.
However like any good long term strategy Jan Somers 'model' has been corrupted over time in order to turbo charge the results.
Jan Somers 'original model':
Buy one property when you can AFFORD to do so. Buy a medium priced property.
Hold that property until you have achieved increased equity over time. Use that increased equity to buy another property.
Repeat Repeat.
When you are approaching retirement, SELL DOWN SOME OF THE PROPERTIES, to pay down debt and live on the net rental proceeds.
Very long term, very safe, very effective for those with a long term wealth creation strategy.
No living off equity, no turbo charged 0-130 properties in three years with none of my own money etc etc.
Let me reiterate my thoughts on property re Jan Somers strategy.
For most people, adopting Jan Somers strategy creates the highest probability of achieving long term sustainable wealth for the average person.
However like any good long term strategy Jan Somers 'model' has been corrupted over time in order to turbo charge the results.
Jan Somers 'original model':
Buy one property when you can AFFORD to do so. Buy a medium priced property.
Hold that property until you have achieved increased equity over time. Use that increased equity to buy another property.
Repeat Repeat.
When you are approaching retirement, SELL DOWN SOME OF THE PROPERTIES, to pay down debt and live on the net rental proceeds.
Very long term, very safe, very effective for those with a long term wealth creation strategy.
No living off equity, no turbo charged 0-130 properties in three years with none of my own money etc etc.
absolutely
and there's no reason why, if you like this strategy, that you can't combine it with a little CF+ and/or speculative investment as well.
and there's no reason why, if you like this strategy, that you can't combine it with a little CF+ and/or speculative investment as well.
Buy and hold will always be a safe way to invest and will be effective - just not 'get rich overnight' stuff
Absolutely. Most people will probably only be able to buy 10 properties over 10 years or more, so by this time the values of the earlier purchases will be approaching double their original value, and can be sold to retire debt on later purchases.
It is all relative. Anyone starting out seems to think prices are only high NOW, and never were in the past. They have always been high in my lifetime. I remember my parents struggling to come up with the funds for a $32k house. Prices were high then apparently.
Debt reduction, maximising all factors of each investment such as depreciation, tax returns being re-invested back into the loans, continually buying when able to, as the more exposure you have to the market, the more your wealth grows.
For example; if you have exposure to $1mill in property, and it goes up by 5% per year, you are getting $50k per year growth. If you only have exposure to $500k in property, you only make $25k per year in growth.
No, never sell is the philosophy. Ours is to use the wealth base to accumulate more, but not necessarily only property now.
We have only ever sold two of our IP's - both to improve unpleasant cashflow predictions when our incomes were low. Our philosophy is to buy and not sell, and the increasing equity has been used to fund more purchases, and in recent years businesses, which have a much higher cashflow return than geared property.
For example; we bought a business this year for $380k, plus stock etc. Total outlay of approx $440k - all borrowed funds using mostly equity and a bit of unsecured debt.
To do this with an ordinary 3 x 2 IP would nett maybe a neutral cashflow in year one, but in most cases would be negative cashflow for a few years at least using only borrowed funds.
In contrast, the business will return a nett income of well over $150k per year after tax. That is a very nice yearly return on the $440k.
However, I still want to do a few small developments - say; 4 townhouses. Sell 3 and keep one, then repeat. This way, you are increasing the portfolio, the return is very high as the IP you keep is virtually debt free, thus increasing the cashflow even more.
In both strategies, both the wealth base and the cashflows are increasing - especially if you are employing a dedicated debt reduction policy. This is the hidden accelerator.
We may sell the odd one in later years and live off rents, but no pans to do it as a necessity. The good thing is knowing that if you need to; it's there to be able to do it.
I think the plain old "buy and hold' is excellent - but only to give you a base from which to operate and accelerate the wealth. It depends on what you want from the strategy.
On it's own, it's a 20 year mindset to get to the freedom stage where you sell a few to retire debt and live off the rest, and many people don't want to wait that long to be free.
We have chosen to deviate off the path for a time; using the increasing equity and yields to accelerate the cashflows through business purchases.
Not everyone will want to do this; some will want to move into shares, some will move into developing or flipping etc to accelerate the wealth and returns. There is more risk this way, but it can be managed through increasing your knowledge in that chosen strategy.
The main point I reckon is to keep on increasing the cashflows and wealth BASE - not continually buy and sell just to free up a bit of cash. This is a shorter term view, and ultimately you need to keep buying back in at an increasing size of investment to keep pace with the ever-widening wealth base of someone who just buys, sits and lets time do its thing.
I think there's more common sense in that post than the whole of the rest of the internet .... thanks Marc.
I agree with the above and it does seem an endless grind. There are points when you can pay down your debt to get ready to purchase again. This is still with the view of being cashflow positive. I use spreadsheets so I can forecast forward to keep me focussed on the big picture.
Charlotte 30
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Yes and no.
Google the Herengracht Index.
The Herengracht is one of the canals in Amsterdam and has been a highly desirable address for nearly four centuries. So prices have remained at a constant level relative to the Dutch property market for the whole time, and that's the critical point.
A researcher studied price movements, and found that they tracked inflation over the long term, though shorter term they're more volatile. Or, in short, don't expect prices to continue to outpace earnings.
So prices will increase in the long term, though if inflation remains low it won't be at a huge rate. And if it rises, property offers a decent hedge against it.
I took a look at the numbers today with some pessimistic, but I think realistic, assumptions:
How about capital appreciation? Flat or rising prices will benefit the investor, so the risk is that there's a big slump.
Running with the assumption that prices track inflation (or wage inflation), and this remains at 3% then it will take:
The buy and hold strategy is looking good if you can hang onto an IP for 20 or 30 years. No matter how bad the buy is, it'll eventually come good.
- IP worth $500,000.
- Mortgage rate of 7%, fixed for the duration, for the whole value of the IP.
- Initial rental yield of 5%.
- Rents rise in line with inflation, which I've taken to be constantly at 3%.
- It will take 13 years for the rent to exceed the payments of an interest only mortgage.
- It will take 17 years for the rent to exceed the payments on a 25 year repayment mortgage.
- On an interest only mortgage, it will take 20 years with negative gearing, or 23 years without, for the property to show a profit in terms of rental income exceeding total loan payments.
- Without negative gearing it'll take 27 years for a property on a 25 year repayment mortgage to show a profit from rental income. With negative gearing applied to the whole payment (I know this is wrong) it takes 26 years. That said, the IP would be paid off at that point, so another $500K profits.
- I need to get out more.
How about capital appreciation? Flat or rising prices will benefit the investor, so the risk is that there's a big slump.
Running with the assumption that prices track inflation (or wage inflation), and this remains at 3% then it will take:
- 5 years to recover from a 10% fall.
- 9 years to recover from a 20% fall.
- 14 years to recover from a 30% fall.
- 19 years to recover from a 40% fall.
- 25 years to recover from a 50% fall.
The buy and hold strategy is looking good if you can hang onto an IP for 20 or 30 years. No matter how bad the buy is, it'll eventually come good.
Hi Nathan.
The idea was to see how things panned out given a fairly bearish scenario. The short conclusion is that if interest rates and inflation remain about what they are right now, then even a really bad buy will work out over a period of 25 to 30 years.
I'd agree that buying CF+ at below-market values makes for a far better strategy. (At 8% my calculations suggest a break-even on rents in the first year on a repayment mortgage.) It's just that if you can hold then even a terrible investment will pay off. And I suspect that there are a lot of landlords who'll get into trouble if the economy turns sour.
The idea was to see how things panned out given a fairly bearish scenario. The short conclusion is that if interest rates and inflation remain about what they are right now, then even a really bad buy will work out over a period of 25 to 30 years.
I'd agree that buying CF+ at below-market values makes for a far better strategy. (At 8% my calculations suggest a break-even on rents in the first year on a repayment mortgage.) It's just that if you can hold then even a terrible investment will pay off. And I suspect that there are a lot of landlords who'll get into trouble if the economy turns sour.
I'm with Nathan, even if I can't afford to fund anything at this exact moment.
Why buy it if its not cf+ (give or take an initial reno) in the first place?
Why buy it if its not cf+ (give or take an initial reno) in the first place?
I'm with Nathan too.
I was just surprised how forgiving a property purchase could be if you timed a buy at the worst possible moment.
Actually, a quick question for Nathan: How do you get a property for $50K below market value? Is it forced sales, fantastic negotiating skills? Or just your easy charm?
I was just surprised how forgiving a property purchase could be if you timed a buy at the worst possible moment.
Actually, a quick question for Nathan: How do you get a property for $50K below market value? Is it forced sales, fantastic negotiating skills? Or just your easy charm?
You just don't buy the first thing you see, and you only buy if the vendor will accept your terms. Make that clear to the agent. It works well if you stick to your guns 100%.
I am not Nathan....but, here in regional Vic:
I have found just some people's perception of "stuff" whether it be properties or land can be their loss, my gain.
I invest in regional cities, a few auctions for houses and land have not received a bid, maybe the house is presented rather grubbily, a small hole in the wall, mangey garden state...nothing structurally wrong with the house a good clean, paint, airconditioning system doesn't fix.
Sort of the equation of perception meets opportunity=little bit of elbow grease + my gain.
I have found just some people's perception of "stuff" whether it be properties or land can be their loss, my gain.
I invest in regional cities, a few auctions for houses and land have not received a bid, maybe the house is presented rather grubbily, a small hole in the wall, mangey garden state...nothing structurally wrong with the house a good clean, paint, airconditioning system doesn't fix.
Sort of the equation of perception meets opportunity=little bit of elbow grease + my gain.
i agree - find intrinsic value where you can.
regional hubs make for some good investments IMO.
regional hubs make for some good investments IMO.
Sorry just found this thread again.
With the purchasing under value.
I guess its a matter of knowing what value is in your area(s) and playing with vendors. I find mix of all different vendors and situations to play with.
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