Buy and Hold Strategies

[Monid]

I thought it might be interesting if people posted some different strategies for making buy and holds work. So basically what I am looking for here are some longish term strategies to a reasonably risk free way increase wealth...

Roughly the format I am going for is:
Strategy name:
Basics:
Example:
Part of the Cycle it best suits:
Time frame:
Advantages:
Disadvantages:

I've got a couple of suggestions I'll add over the next couple of days.

Cheers
David

[Monid]

Strategy name: Snowball
Basics: The idea of the snow ball is very simple, purchase enough properties to make yourself financially free once they are all paid off. These properties can be positive, neutral or even negative cashflow as long as you have a decent amount above your living costs and any additional costs these houses impose on you. It does work best with positively geared properties.
The idea is pretty simple plunge as much as you can from your wages into paying down the capital on your properties. As your overall mortgages decreases reinvest the money that would have covering the mortgage interest back into paying down your properties faster and faster (thus snowballing). In effect this is compound interest, but with properties.

Example: suppose that you have 5 properties each of which costed $100000 and return $200 so you have a mortgage of $500000 in total. Suppose by scrimping you can save about $500 a week to pay down your mortgage and the properties are cashflow neutral on 25 year mortgages at 10% interest. In the first year you save $25000 to pay down your mortgages, and your properties pay themselves down by about $7500.
So your mortgage has reduced to $467500
You were paying $50000 in mortgage repayments for interest alone now you are only paying $46750

So you can now pay down the mortgage by $29750 + $7500
So after year 2 the mortgage is: $430250
In year 3 you can pay: $31975 + $7500
Mortgage = $390775
In year 4 you can pay: $35922 + $7500
Mortgage = $347352
In year 5 you can pay: $40264 + $7500
Mortgage = $299587
In year 6 you can pay: $45042 + $7500
Mortgage = $247045
In year 7 you can pay: $50295 + $7500
Mortgage = $189249
In year 8 you can pay: $56075 + $7500
Mortgage = $125673
In year 9 you can pay: $62432 + $7500
Mortgage = $55740
In year 10 the properties are paid off.

NB Figures are simplified and do not represent proper compounding, if this was taken into consideration it would snowball even faster. However tax would slow it down. (Depending on depreciation.

Part of the Cycle it best suits: Slumps since this is when it is easiest to pick up cashflow positive properties that aren't complete dogs. However it can be done at any point in the cycle because of the decreasing LVR and increasing cashflow.
Time scale: medium term about 10 years.
Advantages: Very low risk. Your LVR is constantly decreasing and your income increasing.
Disadvantages: Slowish. Requires considerable personal outlay of cash in the above example $250000.
Optimising it: There are trade offs between which properties to pay off first. Roughly the first should be your PPOR. Secondly you should probably pay down any properties up to the maximum amount you can without penalty (most banks this is 5%). Finally the properties with the highest interest rates first.

[Monid]

Strategy name: Balloon
Basics: The idea of the Balloon is to let inflation do the dirty work for you. (Note this was inspired by Libertas) While we can't rely in the short term on capital gains, in the medium to long term we can rely on at least inflation pushing up house prices... So the idea of the balloon strategy is to buy twice as many properties as you need to be financially free. You then wait until their price has doubled (Use the rule of 72 to figure this out, if you count on inflation alone at 3% it is about 23 years if you add 2% for capital gains it drops to about 14 years. (It would be somewhat faster than this if you aren't using interest only loans) You then sell half of them and use the money generated to pay off the other half. Leaving you with enough income from your mortgage free properties to be financially free.

In terms of properties that this plan suits obviously the better capital gain areas are going to be better (so Auckland, Wellington, Queenstown etc). However this does need to be traded off against the increased holding costs, there is no point paying 2% extra to get 1% increased profit... It probably best suits neutral or positively geared property in reasonable neighbourhoods.

Example: You decide you need $1000 a week to live on. So you purchase 8 properties which are cashflow neutral but once they are paid off will in present terms return $250 net a week each. They each cost $200000. The growth (including inflation) over the next ten years averages 7% so in ten years your properties are worth $400000 each. You sell 4 of them, becoming financially free. (Note selling costs would also need to be taken into consideration.

Part of the Cycle it best suits: The beginning of a boom, since on average properties will rise faster through the boom meaning you can become financially free sooner. On the other hand during a boom it can be hard to source cashflow positive or neutral properties.
Time frame: 10-20 years depending on inflation and capital gains.
Advantages: Requires (if you get positive or neutrally geared property) little or no actual input from you in terms of money.
Disadvantages: Relies on the market and property prices rising with inflation. In the long term this is probably a safe assumption in the short term this is not. As such this suits a longer time frame as a plan. The holding costs could add up if you have negatively geared properties. Does rely on being able to find and hold quite a few properties.

Optimising it: There is a trade off between properties being easier to find and purchase that fit the cashflow positive or neutral criteria if your mortgages are interest only, and the speed at which properties may be paid off. If you can get properties that are cashflow neutral (or positive) on a 25 year mortgage then you will be able to sell down to pay off half sooner.

Buying more properties will also make this faster, so for example if you bought 2 times as many properties as you will ultimately need then you could sell 2 thirds of them off when they had increased in value by 50% and still pay off your remaining mortgages.

[mlkmnz]

I go through this game in my head every couple of months thinking of the best strategy to take with my cash. However, in the current market of low rent yields and crippling interest rate rises, without existing levels of equity of high income, there's no easy answer outside slowly building on at a time.

Lets take snowball for example. Lets say you buy 5 houses, and they're going to cost you at least 250k each (a lot more in Auckland), thats 1.25 million, with an annual finance cost of $125k. And lets be optomistic and say they return $350 a week for that value of property. That leaves you a defecit of $35k a year. Which means you have to cover $675 a week just on the finance, and then you can start trying to make a dent in the principal. But say even if you were earning the $120K plus to be able to make a $500 a week dent in the principle, at real world property costs, you'd spend 50 years paying it back (unless of course you sold some 5-10 years down the track to offset the others). Its really hard finding something that works.

Unless of course you have a large vault of cashflow neutral property you'd like to inform me of :P

[Monid]

Hi Mlkmnz

No secret vault I am afraid. Sorry I wasn't very clear in my first post. Basically all I am doing here is listing a variety of long term buy and hold strategies that can lead to you being financially free. Usually they will be medium term strategies. You are certainly right that most will not be a good move right now in the market, because right now dare I say it isn't a great time to be investing in property. But nonetheless I thought it might be useful to have a general collection of property investing strategies. Even if they don't apply right now, they will apply again at some future point.

Cheers
David

[Dean@Massiveaction]

This is no reflection on David's thread as I undertsand his intentions here but I saw some advertising somewhere recently for an "Advanced Buy and Hold Strategies" event.

It kind of makes me laugh because how can you have "advanced" buy and hold? You buy and hold, that's it.
It doesn't get more basic or more advanced, you simply have more of them :-)

[Monid]

When you put it that way it is fairly absurd isn't it...
Maybe they show you how to hold and buy as well as buy and hold...

Cheers David

[Dean@Massiveaction]

I'm sure the intention is to teach how to be able to buy and hold more property by leveraging off of other things but the title always makes me laugh

[Halfway To Paradise]

Our strategy is definately buy and hold, we have just come into this game buying our first IP just over a year ago and buying 3 since then. Our aim is long-term with a time span of 15-20 years. We expect to see through a couple of property cycles through that time. While neg geared at the moment we consider this to mainly be the effect of the higher mortgage rate. We have fixed term loans on each property ranging from 24-33 months. While interest rates are at a high at the moment (with possible further rises on the horizon) we feel we can live with this, knowing what our outgoings are. I fully expect (though nothing is guaranteed) that by we need to re-arrange our fixed term loans the interest rate will be in a decline faze. That with increased rents should put us in a pos geared situation. Leaving us in the position of progressively being able to expand our property portfolio. What I am trying to say is that interest rates are a major factor in property investment and it is possible to spread the pain with fixed rates, by having the renewal dates spread out.

[Monid]

Hi Rob and welcome to the forum. Nice to see someone who has a longer term outlook. I think sometimes people get caught up in the retiring in a year mentality. Which is fine for some, but there is nothing wrong with having a long term plan. I think you are probably right that rates will go down in the long run but do you have the ability to cope if rates go up rather than down?

You seem fairly switched on so this may be unneeded advice, but I would try and ensure that you don't over-extend yourself by keeping a fair margin of free earnings spare above what you are already paying to support your properties. That way if interest rates go up you should still be able to hold onto your properties. This might create a natural limit on how much investment you can do.

I'd also contemplate making more than the minimum repayments on your flats if possible so that even if interest rates don't come down their profitability will be heading upwards and hopefully ultimately into the positives... This will reduce your risk and ultimately increase the number of properties you can afford to hold.

Certainly in your situation fixing is a good idea to increase the predictability of your costs and averaging your loan dates spreads your risk.

Cheers
David

[Halfway To Paradise]

Hi David
Thanks for your reply. We are well covered in the event that interest rates may go up. We were almost caught out in the early '90's in the UK when base rates went to 15%. Luckily we were able to back out of the move. I am happy to stay on an interest only situation at the moment as we concentrate on paying back the home loan on our home which is not tax deductacle. Once we are mortgage free on our home we will start chipping at the IP debt. I have noted another posters comment about keeping $5k back for each IP held to cover such eventualities as rate increases loss of tenent, repairs etc. This is similar to our strategy.

Rob

[Monid]

Strategy name: Someone else's back
Basics: This strategy is the cashflow positive property owners dream, basically the tenant ends up financing the property until it is entirely paid off. This will often be over a 25 year period although this will be reduced if the property is considerably cashflow positive since it's excess income can be used to pay it off faster. Obviously this really only suits cashflow positive or neutral properties. While a 25 year time period is not going to suit many people here at PT, it should be emphasised that this can still lead to early retirement (If you started at 20 for example you would retire at 45)
Example: You find 5 cashflow positive properties that once they are paid off will provide enough income to retire. You fix them on long term rates and wait 25 years volia financial freedom.
Part of the Cycle it best suits: Slump, since otherwise straight out and out cashflow positive properties are hard to come by. Of course with some creativity or a big deposit this strategy can be applied in any part of the cycle.
Time frame: 15-25 years
Advantages: None of your own money needs to be involved (except as an initial deposit). Means people who can't afford to snowball can still do this. Lowish risk (Although higher than snowballing).
Disadvantages: Slow. Can be risky if you misjudge a property to be cashflow positive when it is not. Oh and it is slow!
Optimising it: Difficult to optimise, without inputting your own capital. Can do renovations that increase the overall income. Can be easily converted into or combined with other buy and hold strategies.

[Monid]

Strategy name: Hundreds and thousands
Basics: This strategy is another cashflow positive property owners dream. However instead of being old fashioned and paying off their investments instead the aim here is to accumulate enough properties that on an interest only basis the excess cashflow will be enough to retire on. Obviously this is easier said than done and this strategy probably best suits the heart of the slump because otherwise finding that many out and out cashflow properties will be "challenging".

Example: You want an income of $1000 a week so you buy a mere 50 houses each making $20 more a week than they cost...

Part of the Cycle it best suits: Slump, since otherwise straight out and out cashflow positive properties are hard to come by. Of course with a lot of creativity or a big deposit this strategy can be applied in any part of the cycle.
Time frame: 1-5 years
Advantages: None of your own money needs to be involved (except as an initial deposit). Lower risk through diversification. Quick if you can find the properties.
Disadvantages: Can be risky if you misjudge a property to be cashflow positive when it is not. Are potentially exposed to market changes if you go the interest only route. Insanely hard to find that many properties, and may be hard to get enough equity to be able to buy them...
Optimising it: Difficult to optimise, without inputting your own capital. Can do renovations that increase the overall income. Can be easily converted into or combined with other buy and hold strategies.

[Gerrard]

Strategy name: Hundreds and thousands

Nice! I was trying to think of a catchy name to toss that one in as.

Gerrard

[Monid]

Well it was that or "drips and drabs"

Cheers
David