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by | 26, Mar 2022

Selling Properties

In today’s episode, we are talking about selling properties.

When Dan and I first started in this business, we of course got advice from many of the pros in the industry. And they all said the same thing…

Don’t Sell! Often times their biggest regret was selling an asset and then seeing it double, triple, or quadruple in value over the next decade.

Now this is not to say that the business model of “get in and get out” that many operators use is wrong… it’s just not how we roll!

The trick is finding the right time to sell… but how?

All of this, and more, on another episode of Multifamily Investing Made Simple, in Under Ten Minutes.

Tweetable Quotes:

Wealthy people, like billionaires, don’t sell ever. They just continue owning and figuring out how to keep leveraging that asset and utilizing it to its highest potential”  – Anthony Vicino

“We’re trying to amass a portfolio and you don’t really amass a large portfolio if you’re consistently selling things off.”  – Dan Krueger

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** Transcripts

Selling Properties

[00:00:00] Anthony: hello and welcome to multifamily investing made simple the podcast. It’s all about taking the complexity out of real estate investing so that you can take action today. I’m your host, Anthony Pacino of Invictus capital joined by Dan yucky pants crew.

[00:00:26] Dan: Yeah, I

[00:00:26] Anthony: bet you guys don’t get to join us before these episodes go live.

But sometimes the witty banter gets a little yucky. Um, and Dan has a baby at home, so, you know, poop jokes. Let’s just say,

[00:00:40] Dan: leave it at that little baby

[00:00:41] Anthony: jokes. Anyhow. So, um, Dan today I was thinking, we talk about, um, some. I’m starting to think about when we were having a investor onboarding call earlier about selling, selling properties.

And there’s, I think a lot [00:01:00] of operators out there who function a little bit differently than we do, like their core thesis is a little bit different and there’s, um, there’s nothing wrong with that. I’m not saying that they’re wrong by any means. Just understanding what’s your investment profile. Like what’s your goal with your thesis for us?

We don’t really like the idea of selling all that. So that maybe flies in the face of other operators who want to get in. And then two to three years later sell. And I was talking to like a buddy of mine at the best ever conference two weeks ago, or whenever we were in Colorado. And he’s like, yeah, that’s my goal right now.

Like I want to get in three years later, I want to be out and I want to get that like two X, multiple and move onto the next thing. So I thought we’d just do a quick episode of like real quickly. Why do we think selling is overrated and then we’ll flip the script and actually circle back around and say, here are the scenarios where something actually makes a lot of sense.

[00:01:49] Dan: Yeah, for me, I think the, uh, uh, the, the logic with just kind of buying and holding and definitely for the most part, now this isn’t like a, you know, a static rule that [00:02:00] never changed as well as looking at every deal in a vacuum and say, what makes the most sense with this deal, with the capital that’s in this deal?

The structure, the macroeconomic environments, like what makes the most sense right here? That’s how we look at everything. But generally speaking, we’ve got this philosophy that we’re more of a buy and hold for a very long term guys. Then a quick flip kind of guys. And the reason that kind of started at least for me personally, is because when I was first getting started in this business, I would always ask anybody who is way ahead of me.

Um, what would you do if you were my age or what would you have done differently? Uh, when you started and the most consistent response I got from all these old guys who had been in the business a long time was I wouldn’t sell anything. And the things they regret or the things that they sold and watched double and triple and quadruple in value over the subsequent years and decades.

So that kind of started my brain down, going down that path. And then it also just makes a lot more sense. [00:03:00] Our goals. We’re trying to amass a portfolio and you don’t really amass a large portfolio if you’re consistently selling things off. So our goal is to grow a large portfolio isn’t necessarily served by selling things off.

Now, with that said, there’s always reasons to sell. Um, there’s some good ones, like pretty good ones, you know, we’ll, we’ll kind of get to what those are, but generally speaking, we want to accumulate. We want to acquire not necessarily, um, buy something, use it to make some money and then get ready.

[00:03:28] Anthony: Yeah. And this to your point about like when you talk to old guys and they’re like, the thing I regret most is settling.

I also listen to old guy, always listened to the old guys in general. Like they, they tend to know what they’re doing unless they kind of buy guns of an old era. And they’re a little bit racist still. And like, maybe don’t listen to grandpa selectively, selectively, listen, you know, use your best judgment here.

But, um, uh, I was listening to Alex Rosie. This is a long. And he, but he, you know, he’s coming from a similar concept of like, Hey, studying what wealthy people do. He’s trying to [00:04:00] like level up this guy worth like a hundred million dollars trying to get to a billion. Right. And so he’s talking to a billionaire friend and the guy’s like, listen, rich, the rich people, rich people.

But wealthy people own. He’s like wealthy people, like billionaires. Like they don’t sell ever. They just continue owning and figuring out like how to keep leveraging that asset and like utilizing it to its highest potential. But you can get rich selling. He’s like, but you’ll never get wealthy unless you own.

And I kind of like take that, that philosophy into owning real estate as well as like really like on a long horizon. Like you can’t go wrong. It’s really hard to go wrong. Um, In one of the things I think about is like, when you do sell your you’re presented with a very unique issue, which is okay now what do we do?

Yeah. Right. Like we have, we had a deal,

[00:04:47] Dan: a windfall of cash is a problem. Surprisingly and seriously is, um, a lot of people don’t realize that until they have one, uh, they think it’s going to be good. And then it happens. They’re like, oh shoot, I’ve got X amount of. [00:05:00] I don’t know what to do

[00:05:01] Anthony: with it. It’s like your ice cream on a Sunday, hot summer day, right?

Where suddenly you’re like, oh my God, I got a really big ice cream cone here and it’s melting. I got to figure out what to do with it. Well, that’s

[00:05:09] Dan: my worry with inflation. But I think generally people are just worried that all of a sudden they have this big pile of responsibility that is cash. And like, I need to put this to work and I don’t know what to do.

And that worries me because I might do the wrong thing. Yeah. In that situation, they get anxiety and they start to think a little bit too. Uh, anxiously about what they ought to be doing, which isn’t the kind of mindset you want to be in when you’re trying to deploy large amounts of capital. Yeah. And

[00:05:34] Anthony: generally, like, generally speaking, if you had a good deal that was like cash flowing and you had a good exit event, like theoretically you could have kept that asset, maybe done a refinanced.

You know, gotten all your money out of it and kept this asset. That’s cash flowing, but now you just, you got rid of this asset and you ask anybody that they’ll tell you deals are harder to find than capital these days, right? Like, so even if I give you a ton of capital, you have to go figure out what to do with it.

And that’s [00:06:00] not super easy. And so if you have an asset and you’re looking at it, you’re like, okay, well maybe this isn’t the highest and best use, strictly speaking, like I could probably go put this into something better. Like, it’s that whole burden of the hand, better than two in the Bush scenario. Now with that said there are some good scenarios for selling and one of those does revolve around highest and best use.

So what was that mean?

[00:06:23] Dan: Yeah, effectively is something that a lot of newer investors in the space, uh, struggled to kind of wrap their heads around is the return on it. Which is basically saying out of how much, depending on how much capital you have in a dealer, how much equity you have, you know, what, what kind of return are you generating?

Right. So if you’ve got a million dollar building and you’ve got a hundred thousand dollars of equity, well, let’s make it a little bit more, pretty much. Yeah. $300,000 of equity. Um, so you’ve got about, you know, uh, 70,000 or $700,000 of debt and. Um, a few hundred thousand dollars equity, uh, and you’re getting, let’s [00:07:00] say $150,000, $15,000 a year, something like that.

So you’re doing all right. As far as cashflow goes there, but let’s say over time that debt gets paid down, the value of the property goes up and all of a sudden you’ve. Half a million dollars in equity, and you’re still getting about $15,000 a year. Your return on equity actually dropped, and it’s going to keep doing that as the debt gets paid down and as the value goes up.

And so your money’s becoming your money is being used less and less efficiently as that plays out. And so your return on equity goes from maybe 20% to 15 to tend to, you know, gets pretty low as that debt goes down. And as that property value goes up and that becomes less and less efficient. So it becomes a question of opportunity costs.

Where is. 500,000 or however much equity I have in this building, uh, being used at its highest and best use here, or would I be better served by taking some of that out, either from a refinance, which is our preferred method or sale and putting it somewhere else where it’s going to earn more than it’s currently, already.

[00:08:00] So that’s really the question that people need to be asking themselves is not just, oh, am I making more dollars? This. Then it was last year. It’s am I, am I making more return on my equity than I was last year? And chances are, that’s probably going down if you’re not improving the asset and if the debt’s getting paid down and the value is going up, that return on equity is actually kind of dropping.

[00:08:22] Anthony: Um, the other, the other aspect of opportunity costs. I want to point out here real quick is, you know, you might have. All this equity in your, your return is dropping and you’re looking at it and like, well, I could refinance it or I could sell it and I could get X and I can maybe go find another deal. The other part of opportunity cost is to look at like the time and energy required to go and execute.

Like if I was to sell this asset, how much time energy is that going to require to then go move it into this other asset? How much time and energy is that gonna require? Would I be better served, you know, doing the refinance, maybe it’s a little bit less work, keeping the money in there and then. Maybe it’s not as high of a percent return as you ultimately could get.

But when I think of [00:09:00] opportunity cost, it’s not always just about the dollar bills. It’s also about like the time of the mental angsty and everything else that goes into

[00:09:05] Dan: it, which yeah. And there’s, there’s more costs to selling. Then there is the refi as well. Uh, depending on how you refinance something, it might cost you half a percent, maybe even less up to like a percent.

Whereas, if you want to sell it, you’re going to pay a broker three to 5% plus the closing costs plus the taxes. So the actual cost of liquidating that asset and turning it into cash it’s it’s expensive. Yeah, you can 10 31 and you can get creative to avoid the tax. That, that, that commission that you’ve got to pay, whether you pay a broker to do it, or you invest your time and sell it yourself, which is pretty much the same thing as putting money out the door.

If you’re putting time out the door, it’s going to be more expensive to sell than it is to refi.

[00:09:49] Anthony: So that’s all to say, this is why we think selling is overrated. Now, obviously we’re speaking. Hyperbolically, it’s not always overrated there’s scenarios where it makes a lot of sense. Um, and we’re not saying never sell, but [00:10:00] just hopefully this provided you with a new lens, a new context for thinking about, should I sell or should I hold onto this asset?

Cause I think it’s a question. At some point, hopefully we all have to answer for ourselves. Like if things are going great and our investments, we have to ask ourselves what’s the highest and best use. And what are the opportunity costs that I’m foregoing both monetarily, but then also psychologically and, um, temporarily.

Um, and

[00:10:21] Dan: also just to throw it out there, this, all the stuff that we just chat about, make sense in today’s environment. This could be very different if. You know, over the next several years, interest rates go up dramatically, you know, the whole refi and hold for everything might not make as much sense. Yes.

Rates change. So this is all assuming that we’re in a relatively low

[00:10:39] Anthony: interest rate environment. So if you’re listening to this from the future a hundred years down the road and the lizard people have taken over, just take this with a grain of salt. We might be wrong now we might also be dead. Um, hopefully not.

I’m going to live forever. You can’t get rid of me. Now. I put best set with that terrifying omen of things to come of. Uh, immortal. Anthony. I want to [00:11:00] just let you guys know. I appreciate you taking some time out of your day to join us on this existential ride through the cosmos. And hopefully you got a little bit of value out of it.

If you did go drop a review. Also go drop a review, let us know, let us know one way or the other we’ll do better. We can do better. And we’ll catch you guys in the next episode.

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