There are many successful investing strategies in real estate. I’ll grant you that not all strategies work all of the time, or across all markets. Because of this fact, it’s important to apply the right strategy at the right time. First, we’ll talk multifamily buy and hold as a tactic.
What is multifamily buy and hold?
Let’s break down the phrase multifamily buy and hold first. Multifamily in this context is the same whether we’re talking residential multifamily or commercial multifamily. Multifamily is any residential real property that has more than one unit.
Next, let’s explore the term ‘buy and hold’. To some degree the phrase is self-explanatory: an investor purchases a real property and holds that property for a length of time.
True multifamily buy and hold?
We’ll draw several inferences from this definition and fill-in the scenario. First, the investor will hold the property as-is. The property is currently performing. Any variation from these two assumptions points to alternate investing strategies.
In addition, we cannot avoid the topic of sale timing. There are roughly three hold periods to concern ourselves with when considering a hold. An asset that is held for a few weeks or months, and certainly less than a year, is not considered a buy and hold acquisition. In fact, your transaction may be handled differently by the IRS if the hold period is less than a year. For tax and other considerations, contact your accountant or tax attorney.
Furthermore, buy and hold assets have time constraints. Buy and hold applies to assets held through at least a year and through their depreciation period. Assets held beyond the period of depreciation are also buy and hold investments.
Why investors do not select buy and hold as a strategy
There are several reasons why an investor might pass on buy and hold as an investment strategy. First, some investors desire active real estate income. While there are opportunities to actively own and operate assets for an individual investor, a big portion of the available opportunities in larger multifamily projects are designed for passive investors.
Secondly, many investors seek to turn their money more rapidly. Opportunity cost becomes a factor when investment dollars “sit” in a project, multifamily or not. The opportunity cost problem is solved utilizing investments where monies that can be invested, earn a return and be re-invested in short order. This is a valid argument against the buy and hold strategy. In other words, all investment dollars should not play the same role in any portfolio, but dismissing buy and hold over opportunity cost may be a strategic error.
Why investors select buy and hold as a strategy
Again, the benefits of buy and hold may seem apparent, but let’s discuss.
Investors have many objectives with their investments. Investments like multifamily can solve for several objectives. And consequently, Investors who seek to solve for multiple variables turn to apartment investing. Apartment investing can address investor needs like:
- positive cash-flow
- tax concerns
- desire for appreciation
- generational investments
Interestingly, the larger the multifamily project, the more financially advantageous it is apt to be. As a result, investors who couple the buy and hold strategy with large apartment investing can advance their investment objectives quickly.Tags: buy and hold, depreciation, hold period, multifamily, opportunity cost