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The “Buy and hold” vs “Sell and profit” dilemma via Real Estate

With stocks, this can be easier done.

What about Real Estate?

 

You’ve heard this before, when it comes to the stock market an age old adage of “buy low, sell high” is known by even the most novice investor. This past 25 years, a second way of thinking has permeated via Warren Buffett of buying and holding good companies for the long term (though few have the stomach to pull it off). These are the basics of stock market investing for people in 2019.

 

What about real estate though, which of those – if either, make the most sense?

 

Let’s explore that for a moment using the below example:

 

Imagine you can buy a property for $100,000 that has a fair market value of $160,000 and rents for $1200 monthly. You feel this property is in a good location, but not absolutely great to the point it’s land value exceeds that of the dwelling anytime in the future. By nature you are a firm “buy and hold” investor, do you take the profit up front and move on or hold?

 

Most people who fancy themselves buy and hold investors wouldn’t dare think about taking the profit up front, but therein lies the problem of being “locked in” to one type of investing. Like life, your investing journey isn’t likely to be linear – so it is ALWAYS worth it to do the math.

 

 

Buy and hold, let’s look at the 10 year outlook. Assuming rent of $1200 monthly, taxes of $1200 annually and insurance of an additional $1200. Property management fees of $100 monthly and 10% (low number) for vacancy/maintenance. At the end of 10 years, I’ll say the property is now worth $175,000 and the cash flow yielded a total of $96,000. That initial $100,000 investment has now accounted for $271,000 of your wealth – it looks great to me!

 

Now let’s take a look at the quick turn numbers, imagine you sell the property by owner to minimize fee’s (I wouldn’t recommend it but this makes for easier math) and turn a quick profit of $60,000. Now let’s invest that money in an S&P 500 fund and not touch it for 10 years, allowing annual compounding. We are left with $155,624.55 assuming a generous 10% rate of return.

 

Slam dunk for the buy and hold investor right? It certainly appears that way on a 10 year run. But what about 20 or 30 years? Since many people want to build life long wealth this may very much matter to you. It certainly does to me, so let’s run those numbers as well.

 

Buy and hold 20 year: $402,000    30 year: $523,000

 

Quick turn 20 year: $403,650     30 year: $1,046,964

 

The above numbers come with a caveat though, this is assuming you don’t reinvest the rental income along the way. You see, the market money is compounding which over the long run – runs away with a stellar growth pattern. What if you were extremely disciplined and reinvested the rental income in stocks? You would end up with the below:

 

Reinvested 20 year: $808,652    30 year: $1.956,828

 

Pretty amazing what one smart move can do over a 30 year run isn’t it? Now I’m aware we aren’t taking into factor tax consequences and none of us can predict the future – but if history has taught us anything then this is one amazing way to amass wealth. Do you see how pivotal the up front cash producing property is in this though?

 

Now imagine if you did that 10 times with a piece of real estate and just kept compounding?

 

That is how you end up with a Buffett sized snowball.

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