Buy And Hold Versus Buy And Sell – Crunching The Numbers

By on June 3, 2013

You are right if you can define a huge variety of strategies to succeed in real estate. But every strategy will virtually always come down to buy and hold versus buy and sell. And while holding is generally seen as safer, players often decide to go with speculating or flipping for one reason. That reason is time. To put some distance and distinction between these two faster profit plays, speculating is conducted by those hoping for an upturn in fortune, while flipping is done by those who knows how to turn a profit instead of riding their luck.

Speculators can turn a profit without much effort and can sometimes turnover a transaction within days. Flippers can take some time to fix a house. But the added value they inject into the investment gives it a much higher chance of profiting compared to speculating.

The reason why time is an essential element for investors to decide which strategy route to go can be best described in an example. Let’s say a long term investors is expecting 10% appreciation each year. A flipper takes 6 months to flip a house for 7% profit. This means that a long term investor will make 10% a year while a flipper will make 14% a year. This is because a year allows for an investor to flip twice.

This clearly shows that an active investor can accept a lower margin but still trump a long term investor in terms of overall profits. Although there are much more details that go into property transactions, we used a simplified example to illustrate the point.

The most straight forward strategy for real estate investing is to buy and hold for rental income and appreciation. You can fill up a huge basket worth of equity with this method. And if you continually buy more properties with your income and hold onto them, you will accumulate a bulging retirement nest egg within 15 years. The other strategy that is often compared to the conventional buy and hold is a more adventurous buy and sell strategy. These real estate players are affectionally called “flippers” in many parts of the world. How will the numbers for a buy and sell strategy look if we are to put it side by side with a buy and sell strategy?

Lets do exactly that. Let’s name the buy and hold strategy as A and buy and sell strategy as B. Assuming A buys a property each year for 10 years. B buys and sell a value property each year for 10 years as well with an added value of 10% via improvements. B also uses 80% loan to value each time he buys a new property. Their objective is to have their holdings fully paid by year 15. And for simplicity’s sake in this example, let’s just assume each property is bought at $100,000. Annual appreciation is 5%.

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Does this look attractive or what? Now see below.

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As you can see from table A, you will accumulate about $1.6m after 15 years with a buy and hold strategy.  You have a nice portfolio of fully paid holdings to brag about with whoever you meet. But if you take a look at table B, a buy and sell strategy can accumulate a whopping $4.9m! That is more than triple the wealth accumulated from strategy A. Take note again that these 2 tables take into account the assumptions in paragraph 2. They are actually prudent assumptions.

To fully exploit the concept in strategy B, you have to be disciplined to execute your plans. It could take a lot of work. But strategy A takes a lot of work as well. Success with a B strategy does not happen by chance. This is why flippers of fixer-uppers are one of the most respected type of real estate investors. Some people might compare value flippers to speculators. But they are clearly nothing close to speculators.



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