As an investor, it’s important to know exactly when to exit your investments. Many investors make the mistake of hitting their goals with an investment, but stay in the deal rather than exiting as they originally planned. Jordan tells us how and why to stick to you original exit plan.
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Jordan Fishfeld Real Estate Background:
-Co-founder and CEO of CFX Markets, a venture-backed trading platform
-Assisted on implementation of the JOBS Act regulations and the intra-state crowdfunding rules
-Decade of investing, development and sales experience in the real estate industry
-Prior to he was finance attorney who assisted on more than $1 billion worth of syndicated loan transactions
-Based in Chicago, Illinois
-Say hi to him at https://cfxtrading.com/
Click here for a summary of Jordan’s Best Ever advice: When Is the Right Time to Sell Your Real Estate Asset?
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.
Because it is Sunday, we’ve got a special segment for you called Skillset Sunday, where we talk about a specific skill that you can hone after listening to this, or perhaps adopt if you haven’t adopted it. This is an important skill; this is a skill on how to stay true to your original financial modeling. Basically, how to not get greedy and identify when it is time to exit out of an investment. With us today to talk through that – Jordan Fishfeld. How are you doing, Jordan?
Jordan Fishfeld: Good. How’s everything? Thanks for having us!
Joe Fairless: Yeah, nice to have you on the show. Jordan is the co-founder and CEO of CFX Markets, which is a venture-backed trading platform. I interviewed him on episode 558, titled How To Invest In a Secondary Market… So you can learn more about it there, as well as hear his best advice ever on a previous episode, just by searching his name on the BestEverShow.com, and that will come up. With that being said, Jordan, even though we’ve talked about it a little bit, can you give the Best Ever listeners a little bit more about your background and your company? That will add some relevancy to our conversation with the task at hand for what we’re gonna talk about.
Jordan Fishfeld: Yeah, sure. My background is obviously in real estate. I ran a capital raising platform for real estate transactions and found that investor liquidity was a really big issue and something that I wanted to support more specifically, so my partner and I developed a trading platform where minority investors and LP investors could go and sell their assets in an open, transparent but secure way.
Before that I was an attorney, which was fun… Kind of.
Joe Fairless: [laughs] Alright, so you’ve got the legal background, and then you’ve done some crowdfunding work, and now you’ve got the secondary market with CFX Markets, where people can sell their shares of companies on a secondary market if they need to exit out of it. So the skill that we’re gonna be talking about today is how to know when to stay in or when to leave an investment. How should we approach this conversation?
Jordan Fishfeld: I think there are a few different things that come to mind in deciding when it’s the appropriate time to exit. I think when you’re the sponsor, when you’re in control of the deal, that decision is actually much easier. You’ll sell it when you want to, and when you think you can get that cash back that will be supportive to your investors. Where it becomes really difficult is what if you’re one of those small investors and right now is the time that you would normally wanna sell it – what do you do?
What we’ve found is most investors – both sponsors and limited partners – kind of suffer from what’s clinically called “the endowment effect.” Basically, when you own something, you kind of wanna keep owning it, even if it’s not in your best interest or fitting within your original model.
What I think is an unbelievably important skill is with every investment – real estate included, and probably most importantly – if you were targeting a 20%, 15% return on a specific project over a certain number of years and you’ve kind of hit your proforma, think “Would you buy it today at the price that you are looking to sell it?” and if the answer is no, then you should probably sell it, and really sticking to that proforma or that goal that you set for yourself going into the project.
I know prior to some of the new technology and new rules it was really hard if you were a limited partner to sell your asset, but that’s not the case anymore across all assets, so it really is now a skill of the investor… Not just the sponsor, but a skill that the investor has to have going into these limited partnership deals is annually reviewing your deal – is this exactly where you want it to be? Is the return that you’re expecting gonna continue? And if not, you have that opportunity to sell it and guarantee whatever return your goal was originally set for.
Joe Fairless: I’m reading a book that is titled Mistakes Millionaires Make. It is one of my favorite books of all time. I literally bought it yesterday and I’m probably gonna finish it today… It’s that good. I’d say 25% of the mistakes listed in there have to do with an entrepreneur having a company – in this case it’s not necessarily real estate, but it’s certainly relevant to real estate investors… Having a company, it’s worth 100 million bucks, but yet they stick in, stick in, they don’t sell, and then eventually (holy cow) something happens, the winds shift, the government gets into their business and all of a sudden it’s worth nothing.
Jordan Fishfeld: Or even – in a better case scenario that’s not tragic – you spend the next nine years with this business and it’s now still only worth 100 million, when you could have taken that 9 years ago and done something better with it, right? That’s where I think a lot of value is lost, both in real estate and in other opportunities, where you end a project where you’re like “Oh, this is great, but if I could have sold it five years earlier and had the same gross return” and put that money to work in maybe some project that’s more appropriate or even gained a little bit more diversification or more safety – was that a better decision at that time?
I think that you’re right… That mistake, that endowment effect problem is something that’s really hard to overcome. This isn’t an easy thing to do, to sell something you own that’s going well for you; it’s a very hard thing, and I think that’s why it’s a great skill that is a learned skill. It is not a natural occurrence, it’s something that you have to learn and be good at and really stick to. I think people that do it well benefit tremendously from putting capital to the most efficient use possible at the most efficient time.
Joe Fairless: And on the flipside, the grass is always greener, and if we have something that’s working and we are comfortable with — in this case we’re a passive investor, we’re not the general partner with a limited partner. If we’re happy with the general partner — because so often the number one thing is “Is the general partner someone who I trust and do they qualify based on what I’m looking for in someone overseeing my investments?” Because the deal is always secondary; the people running the deal is primary, in any investment.
So if we’re comfortable with that individual, then why not hold on to what we’re doing with that individual already, versus going and taking it out and doing “the grass is greener” somewhere else?
Jordan Fishfeld: Well, I think there’s a few points there. First is there’s no reason why you can’t take that money and put it into a new project of that same manager. Most managers aren’t running one project and are not raising for one deal at any given time if they’re that good… So to say “I would like to take my cash out of this deal, which has kind of already run its course” — specifically talking about a development project… We’ve found great developers who know how to manage a construction crew, know how to put together great plans, work with the government to get approvals… And then once they get their certificate of occupancy, they kind of pass it off to a brokerage or a property manager to lease it up.
So most of your bet is on the developer, not on the property manager, so in this case, why not sell at the time of the certificate of occupancy and put money into the new developer’s project, which is what you had bet on in the first place.
So things like that where 1) a new capability, given the new rules and the new technology – this wasn’t always possible, which is why many investors I think will have a very difficult time with this process in the early days… But if you compare asset classes, so public securities – specifically people who are not traders; people who invest, say, in Apple or Facebook, not to try to sell it the next day or during a spike and then a dip, but who say “I believe in this company, I believe in the manager and I think it’s gonna grow…” They look at that stock every six months (maybe every year) and say “Do I still think this is a good company that’s gonna grow?”
If you bet on Groupon early and then two years later you said “Is it still gonna grow?” and maybe you said “No” and you sold it and you did really well. Facebook, if you look at the company a week after it IPO-ed or a month after it IPO-ed and you looked at it today, in both instances you said “I think this company still has tremendous growth potential.” That’s kind of the same analysis – “I’m gonna buy it again today. If I wanna buy it again today, then that’s what I should do.” If you wouldn’t buy it today at that same price, then you should probably sell it. I think that’s the skillset that investors are almost required to have going forward, as choices and opportunities and efficiencies become more commonplace.
Joe Fairless: That’s a really simple, boiled down way of looking at it. If I wouldn’t buy it at today’s price that I could sell it for, then I should sell, right?
Jordan Fishfeld: I think so. And there’s obviously a lot of different theories, but this is one that I think will definitely be a great skill, and the more and more investors that start thinking this way — we’re seeing it already in the financial advisor and kind of alternative asset marketplaces. When advisors now do your annual check-up, this is exactly what they do; they just haven’t been able to make that recommendation for real estate. I think that’s why this is a really powerful tool for active and passive real estate investors, that has kind of been overlooked in this market, because it hasn’t been that easy to do earlier in the history of this asset class. Now that it is much easier – again, with the new rules and new technologies – it’s something that needs to bleed over into this space, to have that same type of efficiency that we have in the public market investment decision-making process.
Joe Fairless: The one challenge that I would have with that (just thinking about it a little bit more) “if I would not buy it at this price, then I should sell it” is I bought it at a lower price — and let me use a specific example… An apartment community I have in Houston – it’s 250 units, I bought it for 14 million dollars. 16 months later it is worth 21 million dollars; we got an appraisal. We put in 2 million, so all-in we’re at 16, now it’s worth 21 million dollars. Well, it’s worth 21 million, but I would have a hard time buying it for 21 million, because we bought it for 14 million. However, that doesn’t mean it’s not a very good investment if I brought in additional capital and did even better renovations and increased the rent even more. So there’s gotta be some sort of psychology with price anchoring tied into this. Because just like store – “Buy it for 100 — no, never mind, we just slashed the price to 50.” Well, now I don’t ever wanna buy it for 100, even though it might be worth $200. So there’s gotta be that playing into that mentality as well.
Jordan Fishfeld: There’s so much psychology in this decision process, and actually part of this thesis is coming from what’s going on in Michael Lewis’ new book “The Undoing Project”, which if you haven’t read, definitely check it out. It’s all about the psychology of decision-making and financial market decisions… And you’re exactly right – price anchoring, emotional relationships with the asset class, the fact that you already own it… I mean, they have a name for what you’ve just described, which I talked about earlier – the endowment effect. You own it and you bought it cheaper, so you don’t wanna 1) sell it, or 2) buy it for a higher price than you originally paid for.
I think this is a very hard skill to learn and to implement, but at the same time very relevant. Now, the question I would have for you is similar market, similar asset class, 21 million dollar apartment project that has some renovation capability with the ability to boost rents and increase occupancy – would you buy that next door? And if you said yes, then clearly the reason why you wouldn’t wanna pay 21 for this specific project is because your basis was lower and you’ve price-anchored. But if you would buy the project next door with the exact same features for 21, then I think you’ve made the right decision to keep it and hold it and put more money into it.
You’re exactly right, the psychology around this process is very potent, and it requires a very determined and sophisticated and focused investor. With this skill, I think you’ll see some great return on your projects.
Joe Fairless: Is there anything else that we haven’t talked about as it relates to “Should I stay in longer or should I sell?” that we wanna talk about?
Jordan Fishfeld: I think it’s a multi-variable decision. I think “Should I stay in longer? Would I buy this project at this price?” I think is a great baseline. Again, everybody has their own tax burden, so you have to just ensure that selling it is the same as buying it, because when you sell it, you’re actually gonna get a tax bill; when you buy it, you don’t get a tax bill… So making sure that that’s considered…
The other thing is is there a project that you can put your money in to satisfy your same goals? I think that’s a really relevant point right now – if I sell this project where my initial target was 12% and now I’ve hit that, and I know that for the next four years I’m gonna be making 8%, so that will reduce my overall yield on the project to (let’s call it) 10%, can I find anything that has a great than 10% yield in this market right now, that has the same risk profile? If not, then you’re kind of stuck in your current project for that reason.
Where I see it being really problematic is, specifically in the development project, you create all this value, you have this great jump in IRR from year one to year two or three – whenever you get your certificate of occupancy – and then during the lease-up phase you’re kind of averaging down your IRR as the leasing effect takes place. But if you can move that money into another development project and kind of go after your 25ish, 20% return over that two year period with significant risk, and if that’s what your profile is hoping for, then you should do it.
Again, it still always depends on the investor individually and the projects individually and the opportunities available to that investor. But as opportunities explode with the online capital raising space, as information explodes all over with podcasts and papers and books, and as yields compress, there’s a lot of different reasons why you should stay in and not stay in certain investments. But I think the skill of just doing a check-up on your investments and making that decision is very powerful.
Joe Fairless: Yeah, I certainly agree. This has been a fun conversation. Jordan, where can the Best Ever listeners get in touch with you?
Jordan Fishfeld: Come to our website, it’s CFXTrading.com. They can e-mail me at Jordan@CFDTrading.com. I’m looking forward to hearing from your users, and also always looking forward to chatting again with you.
Joe Fairless: Cool. Jordan, thanks so much for being on the show, talking about if we should or shouldn’t stay in an opportunity. We should just always do a check-up on our investments, take a look at the tax consequences, the true value of it today versus when we bought it, if we still would pay that same amount for a similar or exact property, but just not that one, to try and distance ourselves from the process. If we’re reaching our goals, if we already reached our goals, and if we have a new project that will accomplish whatever we’re looking to accomplish in the development deal is a good example of that.
There’s more risk on the turning dirt into actual steel and places where people can live, but then there’s less return on the lease-up because the risk has certainly been mitigated a lot once people are starting to move in there and occupy. So maybe if you want to do something more aggressive, then you can just bounce around from development deal to development deal during the first 12-24 months.
Thanks so much for being on the show, Jordan. I hope you have a best ever weekend, and we’ll talk to you soon.
Jordan Fishfeld: I appreciate it. Thanks so much. Talk to you soon, Joe.
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