Top 4 problems with the Buy and Hold Strategy

The buy-and-hold strategy is a passive, hands-off approach to investing.

Buy a good investment property, and wait for it to go up in value. That’s about it.

Compare this to an active BRRRR strategy, where you renovate a worn-down house to increase value.

For many Kiwis, the buy-and-hold strategy is an easier way to get started in property investment. It requires no background knowledge, fits around your schedule, and doesn’t need as much money to get started.

But, it has drawbacks too.

In this article, you’ll learn the 4 problems with the buy-and-hold strategy, along with solutions. That way you can decide if it’s the right strategy for you or not.

What is the buy-and-hold strategy?

The buy-and-hold strategy is exactly what it says on the tin. You buy an investment property and hold onto it for the long term.

The secret is staying in the market long enough.

Over time property prices go up, and the value of your house is likely to increases. This is known as capital gains.

Your rent is also likely to go up while the size of your mortgage stays the same. That means that over time you may earn cashflow from your investment property.

So, with this strategy you won’t renovate for a quick profit (flipping), or massively increase the rent.

You borrow a lot of money (if not all the money) to buy a property, and then wait for it to go up in value.

Buy-and-hold is the most common strategy used in New Zealand.

This is for a few reasons:

• It’s a way to build your wealth
• It’s the least time-intensive
• You can earn money through cashflow over time.

What are the top 4 problems with a buy-and-hold strategy?

Every strategy has its own pros and cons.

Here are the top problems we hear about buy-and-hold investing.

Problem #1 – Property values don’t always increase

The crux of a buy-and-hold strategy is buying a property and waiting for it to go up in value.

So, unlike renovation, you don’t actively contribute to the increase in value.

But some investors don’t like relying on the markets, because while the market can go up in value, it can also go the other way.

Depending on how long you hold, there is a chance the market won’t increase over the time you own the property.

To take an extreme example, between 2007 and 2015 the Wellington property market didn’t increase in value much at all.

So, if you bought a property in 2007 and then sold over the next 8 years, you wouldn’t have made much money.

But there’s a saying in property that “time heals all mistakes”.

So, if you’d held for another 5 years, the value of your house would have gone up over 70%.

So the first way to combat this reliance on capital growth is holding for the long term.

The second way is to invest in an area that is likely to go up in value over time. We call these undervalued regions.

Problem #2 – You don’t get the money until you sell the property

Another drawback of following a buy-and-hold strategy is you don’t get the money straight away.

Let’s say you’ve owned a property for a few years, and the market has been doing well.

Let’s say your property has increased in value by $50,000.

At this moment, you might feel like you’ve made a ton of money.

But that equity is often locked in the property. It’s not cash you can spend on holidays and clothes.

Yes, the property has increased in value, but it doesn’t mean you can go and spend the money. Of course, you can get there eventually once you sell.

But you’ve got to own the property for several years before you see any significant cash.

Whereas if you were flipping, you will have all those gains in your bank account to spend how you wish.

Some investors see this as a benefit since you’re not tempted to go and spend the wealth you have tied up in your property.

Problem #3 – It’s not an active strategy

The buy-and-hold strategy is like buying a share.

You find a company that you think has long-term prospects, you invest and then hope it goes up in value.

You’ve got to get a tenant, and there’s a few other things to do, but it’s mainly a set-and-forget approach.

This means the investor doesn’t actively increase the value.

But some investors prefer to be hands on; they want to actively increase the value of their property.

This could be through renovation or actively developing a property.

Again, it means you are a more passive investor rather than an active investor.

Problem #4 – It often requires a “top-up”

Often investors who take the buy-and- old strategy are negatively geared.

This means that the property’s rent doesn’t cover all expenses. That means you, as the investor, need to cover the shortfall.

We call this a “top-up”.

If you are borrowing all the money to invest, then your property will likely need a top-up for the first decade or so.

Over time rents will likely increase faster than your expenses, so the top-up should decrease over time.

To overcome this problem, you’ve got to be sure you can afford the top-up.

If you can’t afford to keep the property for 10+ years, then you may be forced to sell early. That could mean you haven’t been in the market long enough and your property may not have increased in value.

Is the buy-and-hold strategy right for me?

Of course, the buy-and-hold strategy has benefits too.

Most Kiwis find it an easier and less risky strategy, at least compared to a more active strategy like BRRRR.

Most importantly, it doesn’t take up as much time. You can use it to build wealth alongside your day job.

If you are a doctor, or factory worker doing 12-hour shifts, it’s a way for you to grow your wealth separate from your income.

So, it’s a great fit for people who have office jobs or busy family lives.

You also don’t need any background or specialist knowledge to be successful. You don’t need to be a qualified builder and you don’t need to know how a hammer works.

But to be successful with this strategy, we recommend holding on to your investment for 15-20 years.

That can be tough, especially as things change.

To be successful with this strategy it’s important to have realistic expectations.

This means knowing what the risks are and mitigating them.