Why ever sell? Why not keep the asset and refinance?

Question

As I read through and enjoy The complete guide to buying and selling apartment buildings by Steve Berges, I have a question that I hope someone can help me out with. In the chapter on the "value play strategy", he adds a tremendous amount of value to his multifamily project. He then looks to implement his exit strategy. Plans A and B are 2 different ways that he can sell the multifamily and plan C is a plan to refinance. My question is why would anyone who has successfully implemented a value add strategy, and has the option to refi and hold onto a cash-flowing asset look to sell?

Brandon Vukelich · Answer

Don't forget that you run out of depreciation at some point as well.  If you don't cost segregate, you are done at 27.5 years for residential rentals, commercial property is longer.  If I recall correctly.  I'm not an expert on cost seg/tax strategies but wanted to highlight that one as well.

Bruce Woodruff · Answer

@Yitz Parnes Why ever sell? Why not keep the asset and refinance?

Because you will have debt. Now I understand this will not matter to some and is even considered a positive by others...but it is a reason some would consider......

Caleb Brown · Answer

#1 reason why I see is to increase capital for larger deals or more deals rather than doing 1/2 at a time. For wealth holding is ideal but many people in the early stage sell and then scale up till they are able to pay down debt.

Robert Williams · Answer

I have not read this book, but I can see a ton of reasons for selling, but I think it comes down to 4 major categories

1. Cost of Holding: Buildings eventually need repairs, so getting out before all the capital expenditures hit you at once. Troublesome tenants, property management.

2. Value of the Investment: Although it may be plausible, I have yet to hear of an instance where by refinancing, you get to cash out 100% of the value. By selling, you get hopefully 100% of the equity minus closing costs, and can continue on with your ventures. As long as that number is more than you would get doing a refinance, it is a win. With all of the "appreciation" that has been happening in the past year or two, It makes sent to me to sell and pocket some extra cash. Sure it is a gamble as prices may continue to go up, but I would want to get out before a crash happens. You are still ahead.

3. Passivity: You could sell the building, and put all of your proceeds into being a Hard Money lender. If I had a few hundred thousand to invest and could get 10-12%, I would definitely be doing it.

4. The End Game: Using the example you gave from the book, It seems that the fix-n-flip strategy is the strategy. We see all the time with big businesses. Troubled company, Fires CEO, Hires New CEO, Company Thrives, New vision, Troubled company, Fires CEO... I feel like being able to do this type of RE on a grand scale is AWESOME!!!

All-in-all It is abut your goals and having multiple strategies. You should always have an out so your property does not become a money pit.

Joe Splitrock · Answer

@Yitz Parnes because investing in syndications is more like investing in an apartment flipping business. The sponsors make money doing the deal, so they want to make money and get out. The investors don't want to lock up capital for 20 or 30 years, so they like a shorter run way. Those apartments are then purchased by funds that have long term value strategies. Someone like an insurance company or retirement fund, who is looking for a safe return over longer periods of time. They may only get 5% annual return, but at low risk since they purchased a stabilized building that was rehabbed.

Also keep in mind that tax strategies will advance expenses into the early years. This makes it less desirable to hold longer term. There is more risk of the investment producing lower returns in later years than the early years. Syndicators want to get out before this happens.

It is two different strategies, different risk tolerance and different type of investors.

Charles Carillo · Answer

@Yitz Parnes

When I am purchasing apartments 100% I do not sell but rather refinance however; when we syndicate properties, our partners push to resell the asset at the end of our business plan. There are a number of reasons for this but you are able to show the highest ROI to your investors when you sell vs. refinance since you are cashing out all of the equity; not just part of it.

David M Trapani · Answer

4 reasons come to mind (there may be others):

1) changing market conditions (equity has gained, rents soften or are reduced by govt or market factors);

2) expansion of govt regulation of LTR’s (i.e. statewide rent control);

3) expansion of govt regulation of STR’s (govt makes it more difficult or less profitable to operate); and

4) differing goals of partners in a partnership.

In any of these instances, prefer not to “sell”, but rather 1031 tax-free exchange to friendlier climes & better growth and cash-flowing opportunities.

Kris L. · Answer

@Yitz Parnes

Some properties are more work than others, so occasionally one might sell a “headache” property and use the funds yo buy one that is more passive to operate.

Yitz Parnes · Answer

Thanks!

Why ever sell? Why not keep the asset and refinance?

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