What is the Ideal Hold Period for A Multifamily Deal?
A hold period is the amount of time you hold on to a property after purchasing it, and is usually measured in years. The question regarding the ideal hold period pops up from time to time, especially with those who are new to multifamily investments. The standard answer is, “It depends.”
Here’s why: there are many factors that go into determining how long to hold on to a property. Holding period depends on the investment strategy that was determined at the beginning of the deal. The investment hold depends on two main factors: the investment type and the investor’s preference.
Hold Period Strategy Depends on the Investment Type
Fix and Flip
There are basically two different types of strategy: “buy-and-hold,” and “fix and flip.” A fix and flip investor holds the property for a few months, and sells it right after the improvements to the property are done.
The hold period will be different depending on whether the investment is a buy and hold or fix and flip. In that scenario, the investors buy an unstabilized property with the intention of fixing the problems quickly and selling it. The asset is unstabilized due to a high vacancy rate or disrepair. The intention is to stabilize it and sell it, usually in a time period of up to 18 months.
The pro to that approach is that it is a short holding period. The cons are that financing can be a challenge, there would be higher interest rates, and the property would be highly impacted by market conditions, particularly if the property must be sold because the loan is due.
Buy and Hold
If the buy-and-hold option is used, it can be a multifamily property that is ether a turnkey asset or one that is a value add. If it’s a turnkey investment, then nothing needs to be done in order to hold and then ultimately sell the property. If it’s a value add property, different construction or renovations must be undertaken in order to maximize rents and maximize the property’s value.
Buy-and-hold can be one of three hold periods. The short period, which is similar to a flip, is one that might be held for a period of 1-2 years. An Average hold period is a property that is held from 3-7 years, and a long hold period is 10 years or more.
If you opt for the buy-and-hold option, make sure that you have a loan that matures after the hold period is over. Suppose you run into circumstances that require you to sell your property in 7 years, but market conditions are such that you should really hold onto the property for a few more years. If you have a 10-year, fixed-rate loan, you’re in luck, and in business, because holding the property a few extra years is in the best interest of the overall situation.
Hold Period Strategy Depends on the Investor Preference
Each investor has different preferences with respect to the actual amount of risk they are willing to take, and for how long a period of time that they are willing to tie up their money in an investment. The average hold period for multifamily is 5 years, however, some investors hold properties for as little as 3 years or as long as 10 years. Some investors are comfortable with a 7- year hold period, while others find that to be too long.
Before investing any funds, each investor should understand their options to sell their share if they want or need to take their money out before the end of the hold period. If you invest in a syndication, some deals are structured so investors are allowed to sell their share in the property; some are structured so that the syndicator must agree to the new investor prior to allowing the shares to be purchased. Make sure you are aware of the syndicator’s flexibility with selling your share, since it will impact your chances of getting out of a deal early in case you need your money before the hold period is over.
Research on Holding Periods
There has been some research conducted to look at several different holding periods and investment types, and the results of that research can help provide a substantive guide. This particular research was conducted by Multihousing PRO magazine, a publication geared to owners and operators of multifamily assets.
The study looked at different holding periods and compared multifamily investments with other real estate investments (office, retail and industrial) using data that was aggregated from NCREIF Property Index (National Council of Real Estate Investment Fiduciaries), the longest running commercial property return series in the U.S. The National Property Index maintains data on over 7,100 properties with a market value of $539 billion.
What did the results show? Across all holding periods the average (unadjusted) returns ranged from 8.6% to 10.2%. That’s a significant return, and these numbers outperformed all other commercial real estate asset categories regardless of holding period timing with only one exception - retail. But even that exception was only marginally higher in tier 2 markets over a five-year holding period. The research showed that overall, there were excellent returns, regardless of the holding period timing, and they reflect the stability of multifamily property returns. The strongest results for apartments against the other categories came during the 7- and 10-year holding periods.
As discussed, there really is no concrete or simple answer to “what is an ideal holding period” for a multifamily deal. it depends on the investment strategy – fix and flip or buy and hold, and on your personal preference. A common hold period for multifamily is 5-7 years, but if you are comfortable with a longer hold period, you might get higher returns.
About the author
Ellie is the founder of Blue Lake Capital, a real estate company specializes is multifamily investing throughout the United States. She is also the host of a weekly podcast called "That REllie Happened?! Unbelievable Real Estate Stories with Ellie", a podcast that brings the true stories behind the deals, from the most successful real estate investors around the globe. Ellie started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100,000,000. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations. She holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital at www.bluelake-capital.com and learn more about Ellie at www.ellieperlman.com