$198k cleared on sale of long term hold (no money into the deal), what I learned...

[Matthew Drouin]

I know this check says $176k but I held $25k in escrow, paid $10,800 to the buyers agent, and had a $8k in a holdback that was released after I fixed a furnace at the property.

This was a duplex that I bought in 2017 for $146k.  I recently sold it for $360k.  I raised the acquisition cost in hard money and rented both units out pretty quickly after buying.  I refinanced it in less than 12 months, took my hard money out and got my capital back that I put into the reno.

Why did I sell it?

I sold it because, even after I stabilized it, it only cash flowed about $5k a year.  I figured it would sell for around $350k+.  My loan balance was $138k.  My return on equity was around 2.25%.  Return on equity is calculated by dividing the cash flow by your equity position.  I have a portfolio policy that if my return on equity drops below 11% consistently, I will either sell or refinance (strap on more debt and cash out.)  In this case, I couldn't refinance because it wouldn't meet the Debt Service Coverage Ratio covenant with my bank.  So I sold.

What am I going to do with the cash?

I would have done a 1031 exchange but the market is so overheated that I didn't want to have the 1031 gun against my head and be forced into a bad or mediocre deal.  I believe the market is inflated.  I have been focusing on larger commercial acquisitions over the past several years.  With the interest rate environment, the cost of capital increase for both the banks and our investors has not come in line with seller expectations.  That being said, I'm taking the cash out and taking the tax hit.  Why would I pay $300k more for a property just to save $50k in taxes? (which is the worst case scenario if I don't have net loss carry forwards, which I do have.)  I am working with my accountant on getting cost segregation on one of my larger properties to defray the tax liability but it appears to be zero sum in the grand scheme of things.  So I am going to add to my stock portfolio of mostly total stock market index funds and increasing my securities based line of credit so I can use that line to fund future opportunities.

Incidentally, one of my biggest lessons learned was "search everywhere for deals and leave no stone unturned." This was an MLS listed property in a tertiary market (Rochester NY). I've bought deals "on market" and "off market". I've bought great deals and duds utilizing both.

Cheers and if you have any questions or thoughts, let me know!

[Matthew Drouin]

@Scott E. I decided to take the cash because I want to have as much dry powder as possible for when sellers start to really capitulate in our market.  Keep in mind, we are opportunistic on asset class.  We've been an opportunistic buyer of office since covid, but we started to see some systemic cracks in the capital markets as it pertains to that product, so we've made a pause.

Here's why.

We had the opportunity to buy a 125k sqft trophy class A office deal at a smoking hot price. We went out to our preferred lender to request a term sheet and they came back with 50% LTV max! So we thought... maybe that bank is changing their risk appetite. So we went out to 3 more banks and they came back the same, 50%-60% ltv. I could have raised the capital but I am thinking that this tenor with banks and office is going to create some serious liquidity issues that us and our investors will be able to come in at even more attractive pricing.

In regard to the Securities Based Line Of Credit, some brokerage houses allow you to borrow up to a certain LTV against your investment securities. The community bank's wealth management group that I work with will issue you a LOC up to 80% LTV.

This does a couple things: 1.)  It gives you a flexible credit facility at a great rate (relatively speaking).  2.)  As your commercial real estate portfolio grows and your loan balances grow with new acquisitions, lenders become more and more sensitive to your liquidity position when you are filling out Personal Financial Statements.  We want to keep our strong position as principals so that we don't have to bring on as many other principals (Co GPs) just for the balance sheet purposes.