why sell cash flowing multi property

Question

Hi, I am looking to buy small multi family.  Since this is my first venture i tried to gather as much information as possible before getting into it. From all i read, the financial ratios specifically cash on cash needs to be in 10-12% range.  This makes sense but finding such property seems to be very very hard ( im trying in phoenix and Las Vegas).  well this is not supposed to be easy, I understand that.  But if its so hard to find a good cash flowing property what would be the motivation of any one holding such property to get rid of it?    Whats making me more curious is many of the properties listed, when i check the price history is not selling for much more than what it was worth 10 yrs ago.  So why sell something thats producing income for less than what you bought?

Michael Boyer · Answer

Sellers' motivations can run the gamut... You can do detective work to try and discern it (bad tenants, financial distress, etc) but sometimes it may be a life change (divorce, death, retirement, moving), wanting to cash out, tired of being landord, or simply they feel it is a good time to sell.

Remember in every transaction--for a share of stock, a used car, a property--there is a buyer and seller. This is how markets work. For every seller that thinks an asset is headed down, another may feel it is on the way up or undervalued (especially with stocks)... For every long time landlord looking to retire, ideally there is a bright new one (like you) ready to start.... Just how it works... But be sure and do all your homework on every purchase...

Gino Barbaro · Answer

@Lenin Belangonda

Hi Lenin

I agree that investors should strive for cash on cash returns of at least 10% based on ACTUAL performance, but it may be difficult to hit that target here in NY and CA.  Investors flock to other markets and bid up those assets to achieve the return. In Knoxville, where I am currently investing, you can look around and find CA investors owning many units, but they tend to buy at higher asset prices because these prices look so cheap to their market.

Investors sell for many reasons, retirement, burned out, buying bigger asset, wanting to pay bills,etc

Your job as an investor is to find these motivated sellers and try to purchase them

Gino

Tom Lafferty · Answer

I agree with all that said it just depends on your goals and initial business plan.  I'm going through this right now with an apartment complex in DFW.  Our goal was to purchase and rehab the property, and then sell in five years hoping to double our investors money.  We've hit our goal in less than two years, so I put the option to sell to the investors.  Most were totally in favor, but a few wanted to refi to capture equity and keep it.  In talking to them all I got to hear their thoughts on this and they were all different in some way.   I could completely see all viewpoints, so it was an interesting lesson in this very topic.

Josh Eitingon · Answer

It varies, it is just a matter of strategy.  When getting started (especially if you have investors), there is a lot of value in being able to turnaround and exit properties in a shorter time frame.  More fees in a shorted period of time and the ability to re-deploy those investors dollars.

Alternatively, for a quality asset, there is nothing better than being able to hold the deal for a long time paying down principal, depreciation benefits etc.

Even if they bought wrong, there is always the opportunity for the seller to re-deploy whatever equity they have in the property and they may believe it could be better utilized elsewhere.

In today's market, you definitely see people 'riding the wave' trying to sell their property for no reason other than a pie in the sky valuation that they think there may be a chance to achieve.  Understanding the seller's story/ motivation is always helpful.

Best of luck!

Jacqueline Carrington · Answer

People buy and sell for various reasons. It could be an elderly couple who just don't have the time or energy to deal with tenants and upkeep. It could be someone who wanted to cash out so they could use the funds for another project, property or idea. Inflation still matters, so some people just want to get whatever is left from the property before taking a loss.

Every property has a story and the reasons for buying and selling can vary greatly.

Kathy Stewart · Answer

Selecting value add and under market rents will increase your CF and property value.  Why you would sell a good cash-flowing property depends on your strategy.  For example, selling and investing the profits in a larger property for greater CF is one strategy.

Joshua Nicholas · Answer

1. If someone has investors, most likely they have a finite time frame with which to exit an asset. If their fund is a 5-7 year fund, around year 4 or year 6 they're going to be forced to begin liquidating assets and winding the fund down to return investor money.

2. If you buy a small multifamily and complete your value-add, it might make sense to sell it and move onto a bigger property. A crappy 5 family you fix up and get rented may be now worth the down payment on a 20 unit property. Makes sense to roll your equity into a new project where you get bigger cash flow and bigger depreciation.

3. People get old and tired. I'm under contract on a deal with a landlord who is selling me an amazing property at a 6.8% cap rate. In my area that's a WILD deal. He's owned the property since he built it around 1968 and in his words "I've been a landlord for 50 years and I'm just done with it now". He's 85 so he's willing to just relax now, he's going to hold the note for me so he can get cash flow without the hassle and it frees him up to enjoy his remaining years.

4. The 10% rule, while it's useful to aim for, is not realistic in the hot markets, at least from day 1. I don't care what anyone says, 10%+ cap rates do not happen in supply constrained markets with aggressive rent growth. And you can't think of that as the only rule of thumb. If you grow your NOI by $10,000 in a 10% cap rate market, you created $100,000 of value. In a 5% cap rate market, you created $200,000 of value. If you were looking to create wealth quickly, you're going to build a large nest egg faster in a low cap rate market.

David Dey · Answer

@Seth Wilson said it best.  Or more specifically, Seth reiterated the investor mentality perfectly.

At one point I made a campaign where I went into the property appraiser/assessor office, (in many areas you can do this online) and received a list of all the duplexes in my county.

Yes, the property appraiser has a database of every single property and property type in that county.  They have this info so they can charge taxes.  And since it is the government that has this information, it is public record and you can have it too.

My rational was that, I would market to this specific list because this was a list of investors.  (It doesn't matter if you are renting both sides or "house hacking" as the cool kids on BP call it, and living in one side and renting the other, both are investors in mentality)

In marketing to investors, I removed most of the emotional entanglements that I would address with single family owners.  Investors, cash flowers or house hackers, all have one mentality in common, "everything is for sale for the right price."

Additionally, I would sort the list to show longest term owners as they would have the most equity to play with and out of state owners, who would be most willing to sell.

Over all this was an awesome campaign and we got a lot of deals done.

Stephanie W. · Answer

Possibly owners have owned for more than 27.5 years and thus their depreciation expense has petered out and are looking for a 1031 exchange.

Seth Wilson · Answer

Because you don't make money owning property, you make money by buying and selling it.

Turn-and-burn them baby!

why sell cash flowing multi property

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