Why do investors sell cash-flowing properties?

Question

I've been researching small multifamily properties, and I (being the pessimistic skeptic that i am) constantly think people are dumping bad properties off on "the next sucker". I understand sometimes people want to scale up or off load some of their burdens, but it's tough to think that there are as many properties as it seems already making money that haven't been snatched up yet. Are investor to investor transactions typical and successful?

Charlie Nghiem · Answer

The answers I have heard are some owners simply want to retire and not have to deal with a property anymore. And some want to 1031 exchange into a more expensive property with better returns, or as you explained, want to unload all their properties. I don't see it as dumping bad properties off to "the next sucker".

If its a mom and pop place then I would say they are probably ready to retire, move to the city there kids are at. If its a company/LLC, then they sell to get a return for their investors.

Your probably only a sucker if you don't due your due diligence and you have to replace a roof as soon as you purchase. If the numbers work, the deal is always good! Just my 2 cents.

Jeff B. · Answer

I sold my 6-plex as I wanted my time back.  I made 19yrs cash-flow on it, plus forced appreciation by increased rents and the new owner 1031'd into it creating a cash-flow for him.

It was on the market 1-whole-days and a bidding war started - - oh yeah, what suckers, hey?

Alan Grobmeier · Answer

Yes, but you need your eyes to be 'wide open'.  Most of the time there is a ton of deferred maintenance, bad tenants, turnover, etc., being the reasons many landlords want out.  Or perhaps the market is 'up' and they just want out.  It's your job, basically detective work, to figure out which of the above is the case AND adjust your offered price accordingly.  Most MFH stay on the market a very long time when compared to SFH.

Account Closed · Answer

We are in the process of two 1031 exchanges. Both properties were cash flowing. The property we just put on the market last week, was tough. We could have plopped about 40k in rehab costs or moved on to a newer property. We opted to move on. This particular property is over 100 years old and while it cash flowed nicely and would have netted more rent had we fixed it, we were kind of done with it. The goal was to get into properties that were low maintenance and newer. The property was listed for one day and we got 6 offers on it. It's in a appreciating area and an Investor bought it. We could have kept it and kept fixing and fixing but I am OK with letting it go. Apparently the investor knew what he was doing, he bought without appraisal or inspection in place, closing in 2 weeks. Makes my life easier!

Jeff B. · Answer

Good perspective that few understand :)

The typical cross-over point for depreciation recapture is about seven years holding.

Jeff B. · Answer

The cross-over is that point where the recapture expense wipes out gains from the sale.

Those using deferred maintenance (aka doing none) attempt to stretch that as far as possible, casting the burden upon their buyer.

Matt John · Answer

@Jeff B. , can you explain what you meant by "The typical cross-over point for depreciation recapture is about seven years holding."?

Linda S. · Answer

We bought 2 duplexes, and the reason they sold to us is because they were inherited, and needed a TON of work.    So again, as others have mentioned-- when the deferred maintenance get too high, people just want out.     When people inherit properties, that they have no idea what to do with, and would prefer money instead, that's when they sell.

Josh Engelhart · Answer

I have the same fear. I've come across some 4 unit properties listed at or just above the 2% rule. They aren't necessarily places I would want to live. Even factoring in high vacancy and capex it looks like they would cash flow. Even if only 2 units were rented I could break even. It just looks too good to be true. I can't think of why I would sell if it was really working out that well. If the numbers are really working out that well I would have to be very disgruntled or have something great to do with the cash before I would ever sell.

Some of them sit on the market for a while but they all do seem to sell. Obviously you have to do your due diligence, but maybe we are just missing out on good deals.

Why do investors sell cash-flowing properties?

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