Who buys repositioned MF?

Question

MF investors always look for some sort of value-add opportunities when buying, and so will I. The goal is often common as to buy one at below market price with an opportunity to add value, raise rents, reduce expenses (increase NOI/Reposition it) and sell (or re-fi) within 5-7 years based on loan terms and exit strategy. Question is: if all investors are looking for deals to add value, who will actually buy my building for top $$ when I want to exit?

I am sure there are investors who like to buy "no-work needed" deals but I am guessing those would be very few and eventually, I will have to lower my expectations and settle for less. Please share how you overcome this issue or guide me if I am not thinking through this correctly. Thanks a lot!

Hardik Patel · Answer

good points @Mike Dymski and @Hadar Orkibi ... thanks again for your input.

Mike Dymski · Answer

"Core" stabilized assets are for investors with low risk profiles who want capital preservation and stable predictable cash flow with low risk (versus higher risk alternatives in stocks and bonds...or value add and real estate development).

REITS, insurance companies, pension funds, family offices, very high net worth individuals/families who have already made their wealth, etc.  Once you have won the game, it can be okay to stop playing it.

Hadar Orkibi · Answer

That's why I don't buy at 6% Cap @Hardik Patel !. with interest rates are at 6% now or very soon it doesn't stack up.

Stick to close to 8% once re positioned or when buying 0 even better and you will be much better off then 6% cap.

Hardik Patel · Answer

thanks @Hadar Orkibi and @Sam Grooms. I didn't think about institutional investors. However, even though current cap might be at 6% (for example), a (smart) buyer would still low-ball the offer to buy that for 8% cap so he/she can reposition and try to sell at 6% cap if thats prevailing cap rate at that time.

Hadar Orkibi · Answer

Im a long term investor and when buying not planing to sell in 5 years, the reposition and sell play is basically Flipping MFR. Large complexes can take 2-3 years to reposition.

This strategy was very, and still is popular in hot Markets like Texas and Florida for Example.

Although these market still growing there is a real possibility of somewhat slow down and these type of strategies could turn to be a 7-10 plan.

Within 7-10 years from the time of purchase your rents should go up and so your NOI, so you will have some built in capital gain which MAY allow you to sell at the same cap-prate say 5%-6% and still make a profit.

Ie. a 6% Cap on 200k NOI is 3.3million.  while 6% cap on $350k NOI its $5.8million

Sam Grooms · Answer

@Hardik Patel, the big money (institutional money) buys "no work needed" properties. Think about an insurance company or pension plan. They don't want to take on too much risk. They're OK with just beating out inflation.