The Simple Man's Guide (TM)
To Real Estate
Why Not Buy and Hold?
Other real estate "gurus" will give you a lot of great reasons to own a ton of real estate, but we will give you a three better reasons why you should not (at least, not always).
1) It is hard to "buy right" and still get a positive cash flow. And even when you do, all it takes is one small disaster (a new furnace, roof etc.) or a 2-3 month vacancy to put you behind the 8-ball.
2) Most folks invest in rental properties for the income. Unfortunately, this income trickles in in small amounts. As such, it is usually spent along the way. In 10 years, you will not have substantially increased your net worth. But when you buy and resell at a profit, you get your profits in a large sum, right now. You can use some for living expenses and re-invest the balance to increase your net worth substantially, and quickly *(see below).
3) Even seasoned investors can't always judge the "bottom" of a real estate cycle accurately, nor be sure when the cycle has "topped". You would have to be lucky to make a maximum yield on property you hold.
* When you buy and hold, your cash is tied up in a property. This limits the number of properties you can buy. Also, banks do not like to give 2,3 or more mortgages on "income" properties, because mortgages are based on your debt vs. income. If you already have a mortgage (debt), will the small income from the next property be enough to qualify for the additional debt? Not likely.
But when you buy and resell, you can immediately re-invest in another property. You have no debt and you have plenty of cash. You can legitimately buy as many properties as you wish, as often as you want. Instead of 1-2 buildings a year that produce a trickle of income, you have turned over 12-15 or more properties, each of which has increased your net worth by $5,000-$50,000 or more. All this cash puts you in an even better position to buy twice as many properties next year.
Of course, since you are getting involved in many more properties this way, once in a while you will find a particularly attractive deal that it will make sense to hold. Soon, you will not only have what that other guy has (a few choice rentals) but also a bankful of cold, hard cash - something the "buy and hold" investor will likely never have.
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