What Happens When you Want to Sell Your Real Estate Business?
I've been looking into the future lately, maybe 5 or 10 years down the road. I was wondering what happens when I want to sell my real estate business. Lets say I've built up enough business to net around $3 to $5 Million dollars per year, but now I'm not interested in real estate anymore beyond passive income as a landlord. What then? Do I dissolve my business- selling off all the assets and keeping all the cash, or do I sell it to someone looking to get into the real estate business and has the capital to buy my business? Or do I sell it to a big regional or national real estate investment company looking to expand into a new market? Any suggestions? What would you do?
Tiara
Some of your questions are so out there, just not possible. I do not believe its possible to build up a 3 million dollar NET per year business in this market with, starting new, without lots of $$$ to invest. The market is so tight right now, tons of good deals, but not enough financing for such. Theres NO WAY a newbie could produce a 3 million dollar NET PER YEAR business in Real Estate in 5 years. You'd have to have like 500 units providing 500 NET PER MONTH, just not realistic. Im sure theres on person whos done it, and tons of people on here to disagree with me, but not common, Sounds like a late nite info commercial.
Then, if you did succeed to NET 3 million per year, why would you sell it, exp after such little time, not like this company has been neting 3 million for 40 years, It'd be very recent.
If you have a 3 million dollar net a year company thats going to be a high dollar company, prob minimum 20 mil. Not many people looking to get into real estate bring 20 mil to the table, so I'd say thats not an option. Problem with real estate is its liquidity, its not easy to convert into money in a short period of time. I know tons of VERY VERY successful investors, wholesalers, ect. Theyve been renting/flipping/wholesaleing/owc for years, little bit of everything, while there net worth is probablly far beyond 3 million, theres no way there close to 3 million net per year.
-Scott
Actually, here in Detroit, that is very realistic.... there are still homes here that are going for less than $5,000, nice homes, in great neighborhoods. But I didn't mean in 5 years, I meant later down the road, after the 5 year threshold. I was just wondering about my options if I ever wanted to switch industries and get into something else. I probably won't because real estate is so exciting. I think people tend to think really localized when thinking about real estate. Everyone assumes because of the down market that every place is in turmoil, or if the market is looking up, that everywhere is looking up. Michigan and Detroit in particular is a goldmine for properties netting $500 in NOI, I'm just glad that I am here to take advantage of it.
If you have a business that nets three to five million dollars down the road your financial advisors will know how to sell it.
Build it and they will come.
Tiara,
Glad to see your excitement about real estate. 3 million a year is a lofty goal. Good for you. I think most of our problems are that are goals aren't big enough and we reach them with ease. I would rather be a little short of my 3 million a year goal than to make my 200k a year goal.
What can you buy for $5000 and what does it rent for?
What you can sell a business for depends on the business.
If you mean a rental business, the "business" itself has zero value. The rentals have value, and you can sell them for what they're worth. Doesn't matter if it the Trump Towers or a bunch of houses. The value is in the company assets.
If you mean a software company, like Microsoft or Google, the "value" of the company is driven by its income (much like the value of the rental properties) AND its potential for growth. Companies that have very high growth potential have a significant premium in value from the future growth.
Many companies are somewhere in between. Some of their value comes from current income and assets and some comes from future prospects.
If your real estate business is a property management company, for example, its value is largely in the income generated from its clients. If it has a great reputation and has prospects for continuing to increase its client base, it may have a premium over existing income. However, if you were considering buying that business, you would ask yourself what it would cost you to build that business from scratch. With a PM business, the cost is low. There aren't any significant barriers to entry. I can easily start from scratch, market my business, and build it up.
Many businesses aren't like that. A liquor store has value beyond the income (and real estate and inventory) because liquor licenses are hard to get. A McDonalds has value because the franchise is hard to get. Same may be true for a real estate brokerage where you have a franchise from one of the big outfits.
There can be liabilities, too. If you're a big home builder and build a bunch of crummy houses, you have a huge liability. Your business is devalued by these liabilities.
So, I suspect most, if not all, of the value in most real estate businesses is in the real estate and nothing more. If you think you might want to sell out to some big company, you'll need to work up to a big project. If you were to develop some big whopping mixed use complex, you might sell the thing to some big company. More likely, you'll sell it piecemeal to different types of investors or entities.
Correct, but your $5000 house that rents for $500 is still a $5000 house, if you aquired 600 of these, you'd make your goal. and actually, $500 net would mean like a $800 rental minimum thats just $300/mo to cover expenses/taxes which are high in detroit/and insurance (probablly wouldnt even have)
I've studied the Detroit market a ton, and there are $5000 properties that rent for $800. Not many are move in ready at $5000. There are properties there for $100, but if you buy a $100 house that needs $20k, you now have $20,100 in the house, doesnt matter that you paid $100. Unless you find some amazing private financing, which is out there, your going to have a hard time financing your houses, Most banks have minimums that the require the property to meet, especailly all your bigger companies (countrywide and such) Most the local banks there are NOT loaning on the lower class neighborhoods these houses are often located in. Signature loans are really the only way to obtain non commercial financing from banks. maybe you have $3 million to invest, i dont know, i know i dont.
It's going to be very hard for any new investor to obtain all these houses without money or financing. If you do obtain financing, unless its equal to hard money, cash basically, you'd often lose out on purchasing houses to cash investors, even if you offered more money, the cash is king in this market.
The houses that are $5000 are not in tip top shape, most need quite a bit of work, and will continue to need work. These low end properties have often gone years without maintance. The cost to replace carpet in a $5000 house is the same as a $20,000 house or a $100,000 house. You repaint and recarpet these houses, which is generally a minimum required to rent, you now just invested half the homes value in the house, or more. Doesnt make the price of the house go up, now you invested 150% of the CURRENT FMV. Also, most of these properties you need to have the money to upgrade these houses, as they are not rent read, some financing may allow it, but not always. Still, a big check book may still be needed, Although in this market its about ROI to most, they might have $7500 into that $5000 house, but it will have a wonderful return on there money, and is still worth doing. Just sucks when your renters move out in these bad areas and take the carpet and water heater with them.
If you know about the rental market in Detroit specifically there are very strict rental rules, from my understanding the Bulding safety department is very difficult to deal with, and i believe the city wants to inspect rentals prior to tenants moving in. Everything is suppost to be brought up to code at this time. Last count I heard, the county were looking to condem and demolish some 30,000 properties, which would help out the overage in housing in this town currently, but as it sits most of these houses are just abandoned, and boarded up if your lucky. There are actually tons of FREE HOMEs or $1 houses in the area if you look enough for them, but the owners are giving them away to get away from paying taxed on them, and its cheaper to give them away then demolish the house.
University of Detroit Mercy has some wonderful rental and property prices, and would probablly be a safe place as the University draws people to that area, there are other areas we drove through where there were no grocery stores for 20 minutes, as they have all closed. If your a renter, and have no car, you'd not be interested in renting in this area. In fact the whole time i was there, the areas we were in i never once saw a grocery store, a target, a mall, anything. Theres not much left in the city, which is why people aren't moving to this city, many many are leaving. Most of this town would be referred to by most investors as war zones.
Jobs are not existant in alot of the town, unemployment is insane, as most the auto industry is no longer interested in the state, and they have many reasons not to be, many have moves to south carolina, tennessee and alabama, as these are as pro union states, and are smarter moves for the auto makers.
ALOT of the new investors in the area are looking long term, and would rather rent the property to cover taxes and insurance, and there payment if they have one, there not looking for a profit at this time, they'd rather have a occupied unit then a vacant one, which will eventually drive down the rental price. The properties that rent for top dollar are almost ALWAYS rented by Section 8 HUD or other government program renters. I know several investors from Arizona with this investing method.
With Detroit rentals, the money is in the income of the property. 5 years from now the prices might triple, and youd have a good amount of money, but there is NO WHERE you can invest $5000 and get 500 a month forever, if you were to sell, even if it tripled, itd be a $15,000 house, or you could "net" $500 a month, you'd almost be stupid to sell, the actual profit of the house might be $10,000 before closing cost and such, but you'd make $6,000 renting it for one year in profit, unless some specific reason, possibly upgrade to apartment complex's or leave the area, you wouldnt make enough profit off them to make it a smart move to sell, theres no where else you can get those returns.
I had very little funds to start with, with the cheap prices in Detroit I was VERY interested. actually put 3 detroit properties under contract, went to Detroit looked at 100+ properties in one week, purchased one cash and sold it to another out of state investor, made a little, he calls me bout a month later looking for property, said he sold it again to another out of state investor and made some money, Out of town investors are in love with $5000 properties, I left and never returned to the area. The state is in a very bad depression, If the state turns around, this could be a gold mine, im sure it will, the question is when. When I was there I was told less than 1% of the sales in the city of Detroit were actual normal sales, non distressed, REO, type sells. This tells me not many are buying to live there. Just investors are buying.
Most the houses I looked at had anywhere from $4000+ property taxes per year. Believe the non homestead tax rate is around 75mils, which is insane. And everyone says Texas taxes are high. I believe, correct me if Im wrong, they do not use sale prices to determine property taxes, they assign a taxable value to the property. Ive heard many different ways how this number is decided on, not quite sure.
My vote for suburb to invest in would probablly be Royal oak area, and Ferndale probablly best areas to invest in at this time IN MY OPNION. Lots of growth, but no as cheap as "Detroit" decent areas to live in, yet if you take your time there are some amazing deals.
Even better I'd Drive to and invest in Flint.
If you were a regular non real estate investor, why would you move there? No jobs, ****** government officals, police and ems arent the best, not very good public schooling, VERY high property taxes, very high theft/crime rate with an average high of 34 in the months of dec-feb. and HIGH rental rates.
Vegas, Phoenix, Dallas, Memphis, all have way better weather, and according to the rental rates were discussing, those areas arent any higher.
According to this article http://www.sodahead.com/business/detroits-unemployment-rate-is-nearly-50---is-this-the-bottom/question-779751/ the unemployment rate is INSANE.!
Im actually in one of the best real estate markets in the country, according to housingpredictor.com im actually in the hottest market for 2009, so I do not fall into that down market area your referring to, I moved here because I think its a very smart area to invest in, and there are several VERY smart and educated investors here, some even a member of this board. I moved here to invest specifically, orignally from Arizona.
My take is,
You buy a $50 house and pay cash, but with $4000 taxes, thats $333 a month going JUST TO TAXES. Add insurance lets say 50, and half of your $800 rent is GONE that means the property is meeting the 50% rule, but thats with NO MORTGAGE, and this is on your $5000 house.
I can buy a property here locally for $25,000 with $600 in taxes yearly, pay 12% interest(realistic local current rate), have a mortgage of $257.15, $50 in taxes and $50 insurance my $25,000 house only rents for $600, doesnt even meet the 50% rule,but im in better position then you I THINK, plus eventually if I pay of my house, my returns will be greater, Yours will probablly not get much better, so then you hope for appriciation so you can sell. And im in a pro landlord state, much better then some of your (specifically wayne county) pro tenant courts.
Plus your rate is probablly HUD Section 8 rates, which mine would rent for more to a section 8 tenant.
Not trying to be rude, just giving you my take on Detroit, and how hard it would be to obtain $500 month net, after taxes/insurance/maintance/property management/vacancy, month after month and do it with SEVERAL (600 in your case) properties.
-Scott
Forgot to mention, my realtor I delt with there, who deals with TONS of out of state investors, said he had one investor purchase 100 units the week before i was there, prepared me in his office for what we saw, and loaded his gun and took it with us, different kinda place up there. Very successful, well dress realtor loading his gun so we can drive his BMW around the area to look at property. Anyone interested in investing there PM me I'd be more then happy to put you in contact with this realtor. I paid him $1000 fee and paid for his gas as he drove me around, and it WAS WELL WORTH the money I paid to have help decide weither or not it was right for me to invest there as an out of state investor, and he made a little money out of it too.. we all left happy.
-Scott
I don't take offense Scott. I absolutely see your point. And I agree for the most part, except that the realtor most likely took you to the worst of neighborhoods. You should check out this site...
wholesalemi.com
Those are one of the investors on my buyers list and the neighborhoods are great, and most of the houses are in great condition with very little rehab needed.
PS I had planned on wholesaling and rehabbing to achieve that $3 million to $5 million dollar goal.
A big point no-one has address yet is...what is your relationship to the business?
For example, a lawyer working 80 hours per week on his own could generate $3M per year in income, but he wouldn't be able to sell the business for very much, because HE IS THE BUSINESS.
On the other hand, a guy who runs a law-firm that has other lawyers who are generating $3M per year in income could probably extract himself from the business, and the business would still have value without him around.
So, how your business is structured is going to have a big impact on how much it's worth.
Most traditional businesses have a market value of about 3-5 times net revenue, so using that metric, if your business could continue to generate $3M per year without you in it, it would probably be worth somewhere in the $10-15M range (assuming a lot of other factors are considered, of course).
Your busness would be worth the CAP rate at the time yoiu sold your properties or the comparables of the properties you own.
I hope you are in that situation. Good luck.
That's a great point J. Scott. In the beginning I plan on doing most of the work myself with the help of Virtual Assistants. But as the revenue grows, I plan on hiring a full time staff to help me with everything.
Originally posted by Curtis Gabhart:
Your busness would be worth the CAP rate at the time yoiu sold your properties or the comparables of the properties you own.
That is what the assets of the business would be worth. If built correctly, the business should be worth much more than the sum of its assets.
As an example, if Donald Trump were to sell Trump Organization, he presumable could get a lot more than just what the assets would fetch. There is value in the name, the brand, the relationships, the management team, the business plan, etc, that makes the company much more appealing than just a bunch of land and buildings.
But again, that's only if a company is built correctly...
I think the term business is the wrong term. Sounds like you will be building up a portfolio of properties that you will be renting out. When you are ready to sell you would be looking to sell the assets not for someone to step into your shoes and take over all of your existing inventory of properties.
Tiara - You need to clarify your question.
If that income is derived from rental properties and passive real estate it is one answer.
If that income is derived from wholesaling/retail sales/etc it is another answer.
For example, I wholesale properties, fix and rehab and have rental houses. They are almost like two separate businesses.
My wholesale and retail sales business purpose is to create short-term income and as a business is worth very little to someone else. Almost all of the work is done by myself and business partner, if you take us out of the business no additional profits would be generated. I would venture to guess I would be very lucky to get 50% of 1 yrs net income (not revenue) if I sold "this business" agreed to train the new owner and signed a non-compete.
Systematizing this business is difficult and in some sense if you train someone to do everything you can, they can easily replace you.
On the other hand, the rental properties I am purchasing are worth what similar properties have sold for recently and what the market is willing to pay. I have no intentions on selling them short-term, but their highest and best use would be selling them to owner-occupants on an FHA loan.
You could also sell it as a package to another investor (you'd probably get less $$) or hire a property manager and retire.
As your business grows your focus needs to be to take your short-term profits and control positive cash-flow real estate long-term. The tax benefits and ability to 1031 exchange properties are keys to getting wealthy.
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Tiara, Lower your expectations and you'll be more successful! Many have touched on the goals being rather lofty. But thinking of an exist strategy to get out of the business someday is good thinking. In fact, it should always be part of any business plan for small businesses (regardless of income).
Other things happen that require people to sell a business. Most small businesses rely on the owner to manage and direct the affairs of the company. This is not an insurance ad, but if you were in a car accident and spent the rest of your life in a nursing home, your family can't run your business, it would probably be sold off. Same thing if you died in that crash.
Every state as proceedures for winding up a business and closing any entity. Anyone in business should review these rules and determine if that is the way that would best suit your needs. While many rules are requirements, thos you can't change, but who does it and how assets are sold should be addressed.
Now, it sounds like an ad for a Will, maybe it is, but your company can also provide for many issues of selling bbusiness assets. A LLC can address these issues in the Operating Agreement in more detail, as all O/As address winding up business affairs.
Any company, including real estate companies, will (should) have an amount of Good Will, the name of the business. The number of customers you have had and the company reputation is somewhat difficult to ascertain, but can be estimated in a dollar value.
For a real estate company, one of your biggest assets in the Good Will department is the list of past clients. There are repeat customers in every business, even real estate. Someone who has leased from you can also buy from you later on, what's that name worth? You would be surprised what kind of business you can dig out of old business files!
Another asset forgotten are the contracts and forms in a real estate operation. You can have thousands of dollars invested in certain contracts. Attorney fees, trial and error, devising strategies and risk reduction techinques that are incorporated in your contracts has real value.
What's it worth to have construction crews, maintenance people and managers in place ready to go on any deal or transaction? Having contracts with a general contractor to provide off peak labor available to you at discounted rates is another business asset.
When it's time to sell your company you need to look at your company as a going concern and what it would cost to put a new company in place to be in the same condition and function as yours. (Hmmm, sounds similar to the cost approach in the valuation of real estate huh?)
You'll likely know what the properties are worth that you want to sell off, don't forget the real value of the business itself. Good luck, Bill
J Scott is right. In order to build a going-concern value that is higher than the value of the assets (liquidation value), you will need to build a business organization that can continue to flourish in your absence. It is not hard to do if you have a good long-term plan and execute well.
So first off, if I have a company netting me $3-5 million per year, I'm going to my grave owning part of it. Even if I have to spend some money on staff and systems and suffer with $2-4 million passive income, I think I'll survive.
I'll be blunt (about myself). I'm pretty sure that 5-10 years down the road, I'll be very bored with real estate and will want to do something else. It's either a personality trait or a character flaw, depending on if you like me or not. That's why I'm building my company to be able to run without me. If I'm bored, I can just set the company on auto pilot and do something else (while still watching from a distance of course).
I'm a big fan of the e-myth book, and part of my business-owner philosophy is that it's the job of the owner to make sure the business will still be there in 30 years and leave the day-to-day to the employees.
Regardless of the business you get into, I would be more concerned with ensuring that your company can be automated in 5-10 years, not sold.
Edit: I hope this comes off as light-hearted and fun, not mean and sarcastic.
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Hi, another point. If you had a bookkeeping and tax business, who might you sell your business to? If you had a Pacific Island resturant, who might you seel that to? Well, if you had a rel estate business who might you sell it to? It's likely you'll sell to someone who has the knowledge and experience in that business.
Putting you business on auto pilot is a good thing if you can find people you trust to do that, but if they can do it for you chances are they can do it for themselves and make alot more than you're paying them. That would apply more in some areas than other, but it's a consideration. If your goal is to sit back, then you better train people to do what you need and keep it specialized, having a GM who is well compensated.
And, if you need to seel or really want to sell, selling to your employees is usually a great option, you can groom them to do that! Bill