1. The first thing many syndication investors ask is "when will I get my money back." Most investors don't want to part with their money indefinitely.
2. As hold times increase, IRRs decrease. Since many investors in syndications are IRR driven, higher IRRs are more attractive to them.
3. Most syndication business plans involve a value-add strategy of some sort. Most of the added property value happens in the early years of the investment. It makes sense to harvest that gain, then repeat the process on the next investment. You make 80% of you profit in 20% of the time. Move on and do it again.
4. As properties increase in value, return on equity decreases. Selling monetizes that equity and allows it to be invested and earn a higher return.
5. The sponsor's largest source of revenue is in the promote, which in most cases isn't realized until the sale. Most sponsors don't want to wait their entire life to get paid for their efforts.
6. Probably a dozen more reasons than the 5 most common/important above.
"Buy and hold forever" is a legacy-investor's strategy. If you own real estate in your own account and are just building wealth to pass on to your heirs, it works great. If you are a centimillionaire, legacy holding parks cash that has few other places to sit. Maximizing return is a lot less important than preserving capital.
But most syndication investors aren't centimillionaires. Rather than parking money, they are looking to maximize their returns and build wealth. Shorter-term holds provide a better vehicle for accomplishing those objectives.
1. The first thing many syndication investors ask is "when will I get my money back." Most investors don't want to part with their money indefinitely.
2. As hold times increase, IRRs decrease. Since many investors in syndications are IRR driven, higher IRRs are more attractive to them.
3. Most syndication business plans involve a value-add strategy of some sort. Most of the added property value happens in the early years of the investment. It makes sense to harvest that gain, then repeat the process on the next investment. You make 80% of you profit in 20% of the time. Move on and do it again.
4. As properties increase in value, return on equity decreases. Selling monetizes that equity and allows it to be invested and earn a higher return.
5. The sponsor's largest source of revenue is in the promote, which in most cases isn't realized until the sale. Most sponsors don't want to wait their entire life to get paid for their efforts.
6. Probably a dozen more reasons than the 5 most common/important above.
"Buy and hold forever" is a legacy-investor's strategy. If you own real estate in your own account and are just building wealth to pass on to your heirs, it works great. If you are a centimillionaire, legacy holding parks cash that has few other places to sit. Maximizing return is a lot less important than preserving capital.
But most syndication investors aren't centimillionaires. Rather than parking money, they are looking to maximize their returns and build wealth. Shorter-term holds provide a better vehicle for accomplishing those objectives.
@Chan Le, to layer onto Brian's response. I would follow up with what is your goal in your real estate investment. Everything Brian mentions is accurate, and I will follow up with for most investors it is trajectory of growth over length of growth. With the value-add business plan, you have huge trajectory in the early years. If you can capitalize on those early returns and recycle into another property with similar early trajectory, you will end with much more money over the same period of time.
Of course, being able to harvest those gains and recycle in a tax deferred manner helps even more, so you may want to seek out syndicators that are able to offer 1031 exchanges on exit, which is definitely possible.
Hi @Chan Le. My firm does due diligence on syndicators and we discovered one last year that has a very long-term buy-and-hold strategy. Indefinite hold in fact. Reach out to me if you'd like to connect with them. (I and my firm invested with them in 2020 and plan to again.)
@Chan Le With a value add strategy, usually the big payout comes when the property is sold. Investors like to double their money and recycle it again to the next. However, as @Paul Moore mentioned, there are syndicators that hold long term. It’s all about what your investors want!
The longer the hold period, the harder to sell to investors..for syndications. However, in today's market conditions syndicators that are pushing a hold period under 5 years would seem to me that they are being too aggressive on assumptions. I'm currently modeling a 10 year hold period to be conservative. I'd rather have investors be prepared for the worse case (long hold period), just in case we have to hold for that long to achieve returns. Modeling aggressive rent increases in the current climate is risky IMO.
Most are 3-7 years, but I know plenty that are 10+ years. In fact, we are looking at a portfolio that has been held for 25 years. If you are buying right and can add enough value to refinance and return capital to investors a 10+ year hold can make sense. The issue today is buying at a deep enough discount to be able to hit that refi hurdle.
Another thing to consider, is with a value add, you are renovating and lowering expenses. That lower expense amount helps drive NOI, which in turn makes the building worth more. As the renovations age, repairs and unit turn over becomes more expensive. Also, eventually, the renovations are out of date or worn and you need to do another cap ex spend.
I disagree with some here. Many people has different goals. There might be investors who want to hold for many years. I am working on creating a syndication and I will have the option where investors can extend their investment 5 to 10 years. I will structure my deals to have a clause where investors want to hold for a longer period.