Why would anyone get rid of a good asset?

Multi-Family and Apartment Investing
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Why would anyone get rid of a good asset?

Spencer Keables
Hailey, ID · Member since 2015 · 30 posts · 5 votes

OK this is a question that I have had in the back of my mind for a while, why would anyone sell a property that is cash flowing? 

I realize that some people might want to sell their property to invest in a better property that gives them more of a return. Also I know that there are people that are just bad property managers/owners who might be looking to sell to get rid of a head ache. I can imagine some owners are forced to sale because of financial problems.  Other than the reasons I just mentioned why sell a property that is clearly cash flowing? I can't help but to think that most sellers are ditching their property because they have some underlying issue with it; an issue that will be very costly in the future. Obviously this makes me nervous as an investor. Out of curiosity, for those of you who have purchased/sold a property, what caused the seller or you to part with it? 

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Israel Tabi
Investor · Los Angeles, CA · Member since 2015 · 38 posts · 26 votes
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 My strategy has always been to improve a property and maximize net income to create equity. Once you do that you aren't going to make much money on cash flow. Most wealth created through real estate isn't cash flow its equity growth. You have two choices, wait for the market to do it for you or create it on your own. I always choose the later. The properties I sell have great cash flow even at the inflated prices I sell them at. For buyers just looking to sit on a turnkey property, its perfect, for me its like a squeezed lemon with no juice left to give. I hope this helps, KEEP ROCKIN BP-ERS!

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  • Justin Tahilramani
    Rental Property Investor · Fayetteville, NC · Member since 2014 · 884 posts · 670 votes
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    @Spencer Keables - I think you have most of the bases covered:

    1) Under performing

    2) Deferred maint.

    3) HOA nightmare

    4) Out of state

    2Reply
  • Princeton Washington
    Anchorage, AK · Member since 2015 · 83 posts · 27 votes
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    Some properties have great flip potential that is just too good to pass up. It really depends on the investor and the strategy but the reverse is true too. I mean long term cash flow over short term gains is the question.

    0Reply
  • Jesse T.
    Herndon, VA · Member since 2014 · 1k+ posts · 324 votes
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    One thing that can happen is cash flow that looks great on the purchase price doesn't look so attractive based on the appreciated value.

    0Reply
  • Mark Brogan
    Investor · Roanoke, VA · Member since 2012 · 1k+ posts · 374 votes
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    not interested in landlording headaches 
    sell on terms move on to the next 
    great post @Spencer Keables

    0Reply
  • Randy E.
    Rental Property Investor · Durham, NC · Member since 2014 · 1k+ posts · 1k+ votes
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    @Spencer Keables, some investors are more motivated by instant big profit rather than long term cash flow.  That's one reason why some investors choose to flip rather than buy and hold.  

    Also, a buy and hold investor might need to cash out of a property because he/she needs the money for something else in their life.  Or, as you said, they want to purchase a different investment property and need the money to make that happen.

    But, one thing I don't worry about when checking out a potential buy is why the owner is selling it, what they might be hiding.  I perform my own due diligence.  I look at the property and I determine what repairs might be necessary.  There's not much an owner can hide from me that's of any significance.  And if I can't determine how much something might cost, I ask a contractor in that specialty what it might cost to fix the problem.  If I look at a property and decide it meets my criteria, I buy without worry.

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  • Joel OwensBusiness Member
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    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
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    Declining health, partnership splits, tax event, divorce and liquidating assets awarded to them in the divorce decree.

    I have ran across all kinds of reasons. I don't care about the reasons as long as they are a "don't wanter" and will sell for  a great price. 

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    1Reply
  • Israel Tabi
    Investor · Los Angeles, CA · Member since 2015 · 38 posts · 26 votes
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     My strategy has always been to improve a property and maximize net income to create equity. Once you do that you aren't going to make much money on cash flow. Most wealth created through real estate isn't cash flow its equity growth. You have two choices, wait for the market to do it for you or create it on your own. I always choose the later. The properties I sell have great cash flow even at the inflated prices I sell them at. For buyers just looking to sit on a turnkey property, its perfect, for me its like a squeezed lemon with no juice left to give. I hope this helps, KEEP ROCKIN BP-ERS!

    3Reply
  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    11y

    @Israel Tabi points out that great wealth is not created from cash flow.  Sure you can buy and hold, pay off the loan and have a cash cow.  You can also get a property that you can add value too, sell it and move the equity to the next deal.  If deals are hard to come by, you may want to hang on, but you money may be put to better use somewhere else.  Commercial loans are usually 5-10 years meaning you will have to refi.  Sell it instead and move up.

    I do like to hear a good story, so I do ask. As Reagan said, trust, but verify.

    If you are buying with your own money, how much can you buy without selling off or doing a refi.  If you are using other peoples money, how long do they want to wait for their money back.  You could buy them out if that is in the original plan.

    Different methods for different folks.

    2Reply
  • Jane A.
    Investor · Shawnee Mission, KS · Member since 2015 · 423 posts · 114 votes
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    It depends on your business model. If property appreciated enough - we could take profit and move to a bigger deal. For example, if we have a general limit of 10 good rate mortgages - we could start with SHF and duplexes, build equity and move to 4 plxes. For example I could already sell my good performing duplexes and buy 4-6 unit buildings instead.
    0Reply
  • Tim Watcke
    Investor · Salt Lake City, UT · Member since 2012 · 19 posts · 10 votes
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    All the above reasons make sense. I personally sold a 22 unit building I have owned for 6 years that was making excellent cash flow and was easy to manage just to use the equity to pay off other debt.
    0Reply
  • Jason Mak
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
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    hubris - some people like selling the property to show others that they made a huge profit!

    2Reply
  • Marcia Maynard
    Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
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    Ditto to the reasons mentioned by other posters. 

    In addition, if the depreciation deductions have been exhausted, it might make sense to 1031 exchange and move on to another property. At least that is what I learned from another investor a few years back. Can anyone clarify that? I haven't been able to wrap my head around the concept, but I know investors who sell when they can no longer get the depreciation deductions.

    0Reply
  • Doug N.
    Lynnwood, WA · Member since 2015 · 221 posts · 157 votes
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    Generally speaking, one could argue that folks sell MF properties for pretty much all the same reasons you'll find in any good country western song...

    dog died

    girlfriend left

    new girlfriend wants more stuff

    CF/IRR sucks

    etc.

    1Reply
  • Ingrid J.
    Investor · Tromsø, Norway (Europe) · Member since 2015 · 431 posts · 194 votes
    11y
    Originally posted by @Spencer Keables:

    OK this is a question that I have had in the back of my mind for a while, why would anyone sell a property that is cash flowing? 

    I realize that some people might want to sell their property to invest in a better property that gives them more of a return. Also I know that there are people that are just bad property managers/owners who might be looking to sell to get rid of a head ache. I can imagine some owners are forced to sale because of financial problems.  Other than the reasons I just mentioned why sell a property that is clearly cash flowing? I can't help but to think that most sellers are ditching their property because they have some underlying issue with it; an issue that will be very costly in the future. Obviously this makes me nervous as an investor. Out of curiosity, for those of you who have purchased/sold a property, what caused the seller or you to part with it? 

     Good question! I myself would never sell a cash flowing property.

    I did come across good line of reasoning in the book The Millionaire Real Estate Investor. There are basically two forces at work which affect the real estate market: economic forces and personal forces. The former includes all the obvious ones, such as market trends, enployment statistics,  inflation, ect. The latter however include personal events affecting sellers and buyers, which can be both good or bad (marrige, retirement or divorse, death ect). In essence both forces can cause people to sell a cashflowing property, and personal forces are often overlooked.

    0Reply
  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
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    @Jason Makanyone that is selling to "show others that they made a huge profit!" is in the wrong business.  IMHO this is not a business about ego and who can make the short sighted quick profit.  Most of us here are looking for long term financial independence.  Selling properties to move up is a great strategy, but not for everyone.  Some people have a longer window and can hold a property and pay it off, or maybe sell other properties to pay one off.  Whatever the reason that they are selling, you need to do your own DD and figure out if it is a deal or not.  We are currently working on a deal where the owners have moved on to other asset classes and this no longer fits their criteria.  This happened to be their first purchase and they now own over 11,000 units.

    1Reply
  • Dean Thompson
    Investor · Houston, TX · Member since 2015 · 9 posts · 4 votes
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    Originally posted by @Ingrid J.:

    Great question!  When I owned single family exclusively I had the same question. But when I began purchasing multi families and began studying multi family literature I learned a lot from an investor/author named Steve Burges. He's fantastic.

    When you purchase an asset, you make your profit then and there.  Sure, you continue to make a return after all the improvements are made, but the value of your asset grows more slowly after the initial improvements are done.If I buy a 50-unit complex, fix the problems, boot the deadbeats, raise the rent, lower the expenses, and ultimately double the net income...not only have I drastically increased its value...ive run out of "upside".  

    I could continue making a good (maybe great) monthly income...or I can flip it...and put my seed money AND my profits...into another asset...one thats "broken" and needs fixing.

    For me the question is...do I settle for easy renal income of $30k per month with a million dollars tied up in equity?...or do I sell the asset, recouping the equity, and reinvest it into another asset (or two) which will make MORE income? 

     And if in fact, it makes more sense to flip it and reinvest the equity once, wouldn't it make sense to do it again? The answer is yes! And thats exactly what happens in multi family...the "fixers" fix and flip making a HUGE profit in a short time. And the HOLDERS   hold on to the asset long term, for a smaller, yet easier income.

    0Reply
  • Spencer Keables
    OP
    Hailey, ID · Member since 2015 · 30 posts · 5 votes
    11y

    Awesome!! Thank you guys so much for the quick responses, definitely helped clarify a few questions I had. I recognize that there are a lot of good investments and reasons that people want/need to sell them, but I wanted to hear what experiences you guys had personally! I enjoy reading books and other forum post to learn about real estate, but I feel like I get the most out of the forums when I get active, and you guys personally start answering my questions. Thanks again everybody! 

    0Reply
  • Gilbert Dominguez
    Investor · Chicago, IL · Member since 2015 · 677 posts · 309 votes
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    One more reason is that they may see the writing on the wall with regards to ever increasing property taxes. I see many properties around the county where properties independent of property taxes cash flow beautifully but the property tax sometimes is 100% or even more of the gross income causing the cash flow to go negative. Can you imagine paying $9K in property tax on a $150k home?

    How might you feel if you saw a listing of a $67K house with rents at $950.00/mo. Hummm ! might get your attention at first until you see that the taxes on it are $7,500.00/yr. More and more what a property's tax is will be  the one determining factor whether I will buy it or not and sell it or not. 

    0Reply
  • Jason Mak
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
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    @Jeff Greenberg How are you my friend?  Sorry but I think you missed my sarcasm in my comment.  But that being said, the OP asked why would anyone sell a good asset and while I agree with what you say, I've seen plenty of transactions driven by ego!

    0Reply
  • Eric D.
    Investor · Eagan, MN · Member since 2014 · 86 posts · 58 votes
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    At some point, I will be selling mine and get to 100% retired on an even more passive income base.

    Mine cash flow like a madman now.

    0Reply
  • Spencer Keables
    OP
    Hailey, ID · Member since 2015 · 30 posts · 5 votes
    11y

    @Gilbert Dominguez why do certain properties have such high property taxes? I couldn't imagine paying 7,500 a year in property tax, that is crazy! 

    0Reply
  • Okeoma M.
    Brooklyn, NY · Member since 2015 · 84 posts · 94 votes
    11y

    Great question. I'm happy to hear I'm not the only newbie investor with this concern. Along the same lines, if a multi-family has been on the market for awhile I can't help but wonder why other investors haven't picked up the property yet if it IS a good asset.  I suppose this is probably just a version of analysis paralysis. 

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
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    Some good reasons mentioned above. and I'll repeat some as I go through my list.

    To trade up, like William Nickerson taught.  

    Running short on depreciation expense.

    Want more passive properties.

    Want more hands on properties.

    Re-balance portfolio.

    Move to a different class of property, like SFR to triple net commercial.

    They are personally moving and don't want far away properties.

    Change in family situation.

    Needing more security.

    Wanting more risk/speculation,

    Have enough cash flow, now want appreciation.

    Got bored with what they have.

    Chasing demographic changes.

    Ready for a value add project.

    Wanting to lever up.

    Wanting to lever down.

    Preparing estate for passing on.

    OK, I'll stop.

    1Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
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    Bank is going to call a mortgage because investor is in violation of terms/covenants.

    Needs money for a big toy.   Like beach house, boat, or plane.

    Needs money to buy a business.

    Thinks economy is going blow up and wants to buy gold and guns. 

    Moving from class C to B, or A, or from A, to B, or C, or...

    1Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    11y

    Every transaction requires a buyer and seller. There is usually only one good reason to buy but a million reasons to sell. You buy because you think you can make money on the deal (as an investor anyway). But you can sell for many reasons other than what you listed. You may just need the cash for other expenses. You may think you can find an even better return for your money. You may be dissolving a partnership. You may be getting divorced and need to split the property. You may be moving out of town. You may think God told you to sell. You get the point? There are a million different reasons to sell. Just because someone is selling doesnt mean its a bad property.

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