Why Patience Pays Off in Real Estate
Today, I want to dive into a concept that might just change your perspective on real estate investing: waiting over transacting.
The Concept: Waiting Over Transacting
So, what does "waiting over transacting" really mean? At the time of this recording in 2024, we've seen a significant slowdown in transaction volume. Since 2012, the real estate market was on a steady climb, peaking around the COVID-19 pandemic, and then taking a nosedive. The primary reason? Mortgage rates.
People who locked in two, three, or four percent mortgages are now holding onto their properties because refinancing at current rates (around six to seven percent) would skyrocket their payments by 30-40%. This phenomenon is known as the "lock-in effect."
The Real Estate Community's Perspective
Real estate agents and investment coaches often push the narrative of constantly doing deals. They want you to believe that growth comes from continuous transactions. But is this really true? Charlie Munger, Warren Buffett's right-hand man, once said, "The big money is not in the buying or selling, but in the waiting." And let me tell you, this couldn't be more accurate when it comes to rental real estate.
Why Waiting Works
When you buy a property and hold onto it, several things happen:
Rents Increase: Over time, rental income tends to go up.
Mortgage Stays the Same: Your fixed-rate mortgage payment remains constant.
Equity Grows: As property values rise, your equity stake increases.
Eventually, you can do a cash-out refinance, which is tax-free, and continue to benefit from the increased rental income. Selling, on the other hand, comes with numerous costs—agent commissions, closing costs, and not to mention Uncle Sam's cut.
The Pitfalls of Constant Transactions
Let's break down the costs associated with selling a property:
Agent Commissions: Agents love it when you transact because they earn commissions.
Closing Costs: Title companies, lenders, and other parties all take their cut.
Taxes: Capital gains tax can significantly reduce your profits.
After all these deductions, what seemed like a $100,000 gain might dwindle down to $60,000 or $70,000. And then you have to figure out how to reinvest that money.
The Balance: Don't Fall into Analysis Paralysis
While waiting has its benefits, it's also essential not to get stuck in analysis paralysis. If you're looking to build a long-term portfolio, buying properties every one to two years can be a smart strategy. Over a decade, acquiring five to ten properties can almost guarantee millionaire status due to rising property values and inflation.
Key Takeaways
You Don't Always Have to Do Deals: It's okay to hold onto your properties and let them appreciate.
Understand the Costs of Selling: Be aware of all the expenses involved in selling a property.
Long-Term Strategy: Buying a few properties over a decade can set you up for financial success.
Final Thoughts
Remember, real estate agents and coaches get paid when you transact, so their advice may not always be in your best interest. While it's okay to seek advice, always consider the long-term benefits of holding onto your investments.
I hope you found this post helpful. If you did, please subscribe and share it with someone who might benefit from it. And hey, leave a comment below—I love getting feedback!
Until next week, happy investing!
