February 17, 2022

JF2725: How to Know When to Sell Real Estate | Actively Passive Investing Show with Travis Watts



When is the right time to sell your real estate? Today, Travis Watts shares his insight on what to consider when making the decision to sell, factoring in how value-adds, inflation, and rent increases can affect this choice.

Want more? We think you’ll like this episode: JF2710: 4 Strategies to Scale as a Multifamily Syndicator ft. Mike Deaton

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Travis Watts: Hey everybody, welcome back to another episode of The Best Real Estate Investing Advice Ever Show. I’m your host, Travis Watts, and today’s episode is called Sell Everything, Big Doom and Gloom. But hopefully not, I hope to have a bit more of an inspiring and uplifting message for you in the episode today. As the old saying goes, know when to hold them and know whem to fold them, so in today’s episode, I want to talk more about how do you know, as an investor, when the right time to sell is.

Today’s episode is obviously subjective, it’s opinionated, and as always, I’m never giving financial advice. These are just my opinions, this is just my perspective that I’m trying to help you guys with, for educational purposes only. Please always seek licensed advice when it comes to your own investing.

Alright, so let’s kick it off by talking about all of our favorite topics, which is real estate. I want to talk about value-add, which you’ve heard me talk about a lot on the show. It’s just a concept that’s so embedded in my soul from childhood. When I say value-add, this can apply to anything. I’m thinking back to childhood right now. Let’s go buy a car at an auction that has some problems, and it’s very cheap, because no one wants to deal with it, and not a lot of people have access to it… And let’s fix it up; let’s improve the car because maybe we have a connection through a mechanic or we can do it ourselves. Let’s do that and then let’s have a higher valued vehicle when it’s all said and done, and try to offset the cost. This could apply to furniture. The very first property I ever purchased as an investment — well, I did house hacking in it, so I rented out a spare bedroom and I furnished it, very well cheaply, through garage sales and Craigslist. I was staining, painting, and doing things myself to offset the cost. I added value to the home, to the room, and then to a potential renter who ended up becoming my roommate, who was willing to pay me $150 per month more because I was offering a furnished room that they had to bring nothing to. This was a college student, by the way. So that was really a value-add strategy, without me even knowing what the term value-add meant back then.

But of course, in today’s episode, we’re talking about multifamily or single-family real estate and we’re talking about the value-add component there, where you’re getting a property, hopefully, at a discount, maybe even off-market, and you’re improving it. You’re improving the units and the landscaping, the branding, the signage, the amenities, you’re just making it a better place for residents. The thing is, once you’ve added the value, once you’ve forced the appreciation, that’s the time that myself and many operators that I partner with, find it optimal to go ahead and sell. The reason why is something that I call the velocity of capital. I’ve made an episode on this, it was recorded last year in 2021, so check it out, velocity of capital. What that means is when I put money into an investment, how soon I can get it back, either through a refinance or sale, and then reallocate it into more deals that produce more cash flow, versus sitting in something for the rest of my life and just pays me an 8% distribution.

Money is a lot like electricity, it has to continuously be moving, and when it stops moving, it dissipates and disappears. You’ve got to keep your money turning over all the time, and that hints at the active components of being a passive investor, to the theme of the show. So here’s the simple math. If I put $50,000 into multifamily syndication, let’s say it’s giving me $300 a month in cash flow, and we’ve held it now for five years. Now it’s “Do we sell or do we not sell?” It has a lot less to do with the market, assuming that the market is flat or up from when we bought, but it has a lot to do with this idea that if we sold, and let’s say I doubled my money, that 50k turns into 100k, well, then I get to realize that gain, I get to pocket that 100k, just for simple math purposes. Then I can diversify, I can take the 100k, I can split it into two, and I can go do two new deals with 50,000 each. Then guess what? Maybe I could do each deal with a $300 per month cash flow. So what just happened? I doubled my cash flow in that scenario. So it’s like building a snowball, or it’s kind of like compounding, it’s however you want to look at that. It grows over time, the more velocity you have behind your money.

Let’s look at the equity side of the coin, which I pay a lot less attention to because I’m a cash flow investor. On the equity side of my spreadsheet, speaking personally on my net worth and how I track my finances, if I put 50,000 into syndication, I leave it on my spreadsheet as 50,000 until it sells. So I’m not trying to guesstimate what the value might be, or — appraisals are nice, but it doesn’t mean that you really have an offer, or that in two months the market shifts. So you’re really speculating, and I don’t like to speculate, so I leave it as 50k up until the sale. So I cannot have an increase in my net worth until a sale occurs. That’s nice, to turn the 50k into 100k in that example.

But there are benefits to holding and not selling. I work with a couple of syndication groups that I’ve partnered with probably about six years ago. I’m still in these deals, and they don’t project to sell. It doesn’t mean that they’ll never sell, it just means they don’t project to sell. They might be in a deal for 10 years, 15 years, 20 years, we really don’t know, but they’re are a long-term buy-and-hold multifamily buyer.

The primary benefit is, with inflation and with rent increases over time, usually, the cash flow is ticking up every year. I got in the deals six years ago, we’ll say at an 8% annualized cash flow; by year two it had turned into nine, by year three it had turned into 10, then 11, then 12, and I think now we’re somewhere around 13% distributable cash flow here in 2022. And that’s quite nice. Where else are you finding steady, consistent, what I would consider fairly safe cash flow at 13% annualized? Not many places. So it’s nice to balance out the portfolio that way. But let me ask you this. If that operator chose to sell today, those properties, would the 13% be better to sit and hold as it goes 13, 14, 15 over time, or go ahead and reallocate the funds today? In these deals, I suspect that we would double our money. So again, like the previous example, I could then take the equity that gets returned to me, do two deals that are producing, let’s say, 7% a year cash flow, but I have twice the amount of capital to put to work this time. So that’s actually 14% total cash flow if you look at it from the original investment that I made.

So it’s my personal belief and opinion, it would be better for us to go ahead and sell and reallocate into new value-add deals that not only will we have the same or better cash flow more than likely, we will reset the clock for the value-add, and be able to potentially increase the value of these new properties, and have even more equity upside appreciation. Because the value-add plans have already been executed on these deals, there’s really nothing else we can do but sit and wait for inflation to lift the rents up.

Break: [00:10:24][00:12:20]

Travis Watts: In my experience of working with a lot of different indicators, they project what the returns might be. At the time that those projections get met or exceeded, they’re likely looking to sell at that point, the majority of them. So in today’s world of high inflation and high rent increases – you had about an 11% nationwide rent increase last year and CBRE is forecasting about an 8% 2022 rent increase nationwide… Every market is different; you’ve got Tampa that did 20% last year, you’ve got San Francisco that only did 3%. But again, we’re looking at averages. There’s a good chance that if you’ve already invested or are investing now in conservatively underwritten deals that are saying 3% and 4% rent bumps per year, and we’re actually seeing 8%, 9%, 10%, 11%, that those deals might sell early.

I certainly saw this in my own portfolio last year. I had a handful of deals sell early, that were underwritten for about five years but at the three-year mark decided to sell. This year I’m going to see probably a handful more, again, because of what the market is doing right now.  It’s a beautiful thing, because this helps accelerate the velocity of capital like we’re talking about.

And one more golden nugget I want to leave you guys with… I know this is a shorter episode and I want to leave you with this to kind of think about. I was at a conference speaking on stage last week, and I drew a parallel on the fly about dollar-cost averaging in the stock market, and kind of how I look at my own personal real estate portfolio. I essentially do the same thing, which is I continuously keep putting money to work. Everything is cyclical – the bonds, stocks, real estate, gold, silver, and oil, they all go up, they all go down. The thing is I put a consistent amount to work year after year, and sometimes, quite frankly, I’m investing at the top. Sometimes I’m investing in a downturn or a correction, but over the long haul, I’m getting an averaged out realistic price for what I’m investing in.

So I’m a fan of keeping money working at all times, but not trying to time the market. When a deal sells, what I’m doing is –I call it an opportunistic outlook; I look at the syndication space, I look at mobile home parks, self-storage, note lending, ATM machines, publicly-traded REITs, I look at all these different things that I could potentially put my money into, and I look at what’s the highest and best use for that capital right now at this moment.

Sometimes there’s not one good syndication that’s happening, sometimes stocks are trading at all-time highs, and I want to stay away from it; sometimes stocks are in a 20% decline and that might be an opportunity to buy some at a discount and kind of ride the wave back up. From my personal experience, it’s quite rare to have a private multifamily apartment building trading at a 20% discount. There’s a lot of competition out there, and in the private world, that generally doesn’t happen, especially when it goes through a broker or it’s publicly solicited. It’s really tough to find deals like that. But the stock market can be irrational, and there are times that maybe a REIT has been 30% to 40% down, but the reality is not much changed on the underlying fundamentals. They’re still making a ton of money, just like they were a year ago; nothing really changed. That might be an opportunity to buy in, the dip as they say, and ride back up. You never know how far it’s going down, so it’s this whole concept of just keep putting money into investments. Over time, it’ll all kind of equal out.

Endless stories about people trying to claim the doom and gloom is around the corner, I’m sitting on the sidelines in cash, meanwhile they’re just eaten away in inflation… And let me tell you something, it’s painful to sit on the sidelines and wait when you’ve got a year like we had last year, when real estate was 15% up and the stock market went up 28%, the S&P. That’s really tough to think, “Oh, I will sit on the sidelines waiting for a deal.” Not even the best investors, not even the best economists can consistently predict the market cycles, the outcomes, and what’s going to happen year to year. So I don’t pretend to know either.

To recap in this shorter episode, I like to keep capital turning over and working at all times. I like to basically dollar cost average over time to maximize cash flow and equity. It may not be the right strategy for you, it is the right strategy for me, so again, I’m not recommending or endorsing, I’m just sharing.

As you guys know, my goal with these episodes is to take a lot of complicated information, a lot of strategies, a lot of books, a lot of people I listen to, just a lot of sources and data, and CBRE, and Marcus and Millichap, cram this crap together, try to make sense of it, and to try to share a perspective with you that can help you along your own journey. I try to make things as simple and straightforward as I can. I know what’s worked for me and for the mentors that I have in my life that have been doing this so much longer than I have. That’s what I’m sharing with you in these episodes. I hope you can find some appreciation in that. Thank you so much. Speaking of appreciation, I appreciate you for tuning in. As always, this is The Actively Passive Show, I’m Travis Watts. Please like, subscribe, and comment. I love hearing from you guys. Let’s keep the conversation going. We’ll see you in the next episode.

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