Why do most syndications sell instead of long term hold?
Austin 路 Member since 2015 路 149 posts 路 80 votes
Why do most syndications sell instead of long term hold?
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Developer 路 Cincinnati, OH 路 Member since 2018 路 1k+ posts 路 3k+ votes
6yOriginally posted by @Kalen Jordan:
Seems like pretty much all the syndications I've seen recently exit within a short number of years - I'm curious why they don't hold long term?
There are several reasons and it also depends on the apartment syndicator.
Here are some of the reasons why my exit time frame for apartment deals is 3 to 5 years (although, in one of my deals lately, I have an exit of 6-10 years):
1. My strategy is VALUE-ADD. So as I increase the NOI of the property, with today's low cap rate environment, I create significant increase in value. A lot of things can happen in the next 10 years - one of which is cap rate decompression. If I exit in 3 years (and hopefully, cap rates have not decompressed significantly), it BENEFITS my investors because they get a BIG profit from the sale. Big profit from the sale means higher IRR for the project and higher IRR for the passive investors.
For example, if in 3 years, the cap rate is the same - say 5%, per every $100K in increased NOI, I increase the value of the building by $2M. If 10 years from now and cap rates go up to 6%, the same $100K increase in NOI will only increase the value of the building by $1.67M - about $333K less.
Of course longer term, the income should have increased more but the faster the increase in value, the higher the Internal Rate of Return.
2. Compound the return by getting into another deal. By exiting quickly, I can compound the returns for my investors since they can choose to reinvest their capital into another value-add deal. IRR factors in the time-value of money so the faster the money is reinvested after it grew, the more it will grow.
If with 2 investments, investment A you get 2X equity multiple after 5 years but investment B, you get 3X multiple after 10 years, which one is a better investment? Hands down, investment A. Specially if you can reinvest it in another deal with a 2X equity multiple again - then that means, you grew your capital to 4X (2 x 2) in 10 years!
3. Aiming for projects with faster turnaround gives us an option to REFINANCE if we decide to hold the property long term and take advantage of the low interest environment. I love value-add projects because with a little bit of work, I can increase the NOI, increase the value in a few years and refinance and take advantage of the low interest environment. If the increase in value is big enough, I can refi and return all of my investors' money back in 3 years and they retain their ownership equity in the deal. It's better to refi now (or in a few years) vs. 10 years from now where the interest rate is likely going to be higher than where it is today.
4. Protect the cashflow from Higher Interest Rate in the Future. If let's say my strategy is not value-add and my NOI remains the same, say on year 5 until year 10 but the interest rate goes up 100 basis points during those years, my cashflow actually drops because of the higher debt service. So the sooner you can exit, you can avoid the risk of higher interest rates. Of course, you can avoid this risk if you get a fixed 30 year loan but you get better rates for 10-yr ARM - which translates to higher cashflow and higher yield for the investors. But since there's a 10-yr time limit, I aim to exit in 5 years because if something happens and there's a couple of years delay in exiting the investment, I will still be within the 10-yr ARM.
71 Replies
- Rental Property Investor 路 Phoenix/Lima, Arizona/OH 路 Member since 2012 路 4k+ posts 路 4k+ votes6y
Originally posted by @Alina Trigub:
Ben,
Bobby pretty much explained what I meant. If one eats into every word, then you can turn black into white and white into purple.
Yes, I could have been a bit clearer in what I meant but most people don't major in philosophy and concentrate on the main points.
In summary, while there some some markets that I like, I will not go into every single market during the uncertain times. If I can find an asset that is undervalued and buy/re-position it with the plan to hold on for a while in a place that is indicative of continued strong economy I will.
Originally posted by @Ben Leybovich:Originally posted by @Bobby Larsen:
@Ben Leybovich
Generalizing here to possibly explain Alina鈥檚 point but true for the most part, If you invested in a property in 2008 on a 2-5 year strategy your return was probably in the -100% to 5% annual realm. If it was a 10 year strategy, it was probably in the 0-10% annual realm.
If someone is uncertain in the market, a longer term hold mitigates some of that risk. Actually, part of the beauty in a long term strategy (10+ years) is that you can factor that there will be a recession at some point in your hold and therefore reduce the need to time the market. It also allows you to always be a market buyer whereas if you鈥檙e trying to time the market, there should be periods of time that you鈥檙e not buying.
Not quite. The "ability to hold" if necessary is what minimizes the risk, not holding itself.
Why would you hold into uncertainty? Most MSA's may not quite be in hyper supply but are getting there. Not all, but most. This is likely what Alina is referring to as uncertainty. And if this is the case - take profits and de-risk.
In other words, if her major premise is - I am not sure about tomorrow, then why would she want to stick around to find out? Makes no logical sense. Take the money and run.
And, of course, if she is willing to stay in, this is indicative of a bullish attitude toward the future, and all this talk about the economy is just lip service.
I'm just trying to figure out exactly what Alina's perspective is here.
Bobby didn't explain anything in any way that makes much sense to me. Now, we all know that I am not the sharpest tack in the box, but I would like to better understand.
Think of it this way, Alina.
You are driving on the freeway at 70-miles per hour. You become aware of some trouble in the next lane over on the right - what looks like a drunk driver drifting and swerving all over the place. You have a choice to make at this moment - stay in the lane as you are, or take evasive action. You obviously cannot control the driver next to you, so those 2 are your only choices. What do you do - stay as you are in the same lane at the same speed and hope for the best, or take evasive action?
Let's translate this into RE.
You are putting people's money into deals. You are the fiduciary. You are the driver. You are admittedly concerned about the state of the economy, as per your prior comment(s). You are the driver - what do you do? Stay in the same lane, be concerned but do nothing and hope for the best, or take evasive action?
I would think that if you are really and truly concerned, you will take evasive action. Sell now and take profits. On the other hand, if you are not selling, this tells us that you are not really concerned.
It's really just a very basic syllogism -major premise, minor premise, logos kind of thing.
I am still at a loss to understand what your position really is, Alina. Want to give it another shot?
- Specialist 路 Paradise Valley, AZ 路 Member since 2018 路 3k+ posts 路 2k+ votes6y
Originally posted by @Ben Leybovich:
Originally posted by @Alina Trigub:
Ben,
Bobby pretty much explained what I meant. If one eats into every word, then you can turn black into white and white into purple.
Yes, I could have been a bit clearer in what I meant but most people don't major in philosophy and concentrate on the main points.
In summary, while there some some markets that I like, I will not go into every single market during the uncertain times. If I can find an asset that is undervalued and buy/re-position it with the plan to hold on for a while in a place that is indicative of continued strong economy I will.
Originally posted by @Ben Leybovich:Originally posted by @Bobby Larsen:
@Ben Leybovich
Generalizing here to possibly explain Alina鈥檚 point but true for the most part, If you invested in a property in 2008 on a 2-5 year strategy your return was probably in the -100% to 5% annual realm. If it was a 10 year strategy, it was probably in the 0-10% annual realm.
If someone is uncertain in the market, a longer term hold mitigates some of that risk. Actually, part of the beauty in a long term strategy (10+ years) is that you can factor that there will be a recession at some point in your hold and therefore reduce the need to time the market. It also allows you to always be a market buyer whereas if you鈥檙e trying to time the market, there should be periods of time that you鈥檙e not buying.
Not quite. The "ability to hold" if necessary is what minimizes the risk, not holding itself.
Why would you hold into uncertainty? Most MSA's may not quite be in hyper supply but are getting there. Not all, but most. This is likely what Alina is referring to as uncertainty. And if this is the case - take profits and de-risk.
In other words, if her major premise is - I am not sure about tomorrow, then why would she want to stick around to find out? Makes no logical sense. Take the money and run.
And, of course, if she is willing to stay in, this is indicative of a bullish attitude toward the future, and all this talk about the economy is just lip service.
I'm just trying to figure out exactly what Alina's perspective is here.
Bobby didn't explain anything in any way that makes much sense to me. Now, we all know that I am not the sharpest tack in the box, but I would like to better understand.
Think of it this way, Alina.
You are driving on the freeway at 70-miles per hour. You become aware of some trouble in the next lane over on the right - what looks like a drunk driver drifting and swerving all over the place. You have a choice to make at this moment - stay in the lane as you are, or take evasive action. You obviously cannot control the driver next to you, so those 2 are your only choices. What do you do - stay as you are in the same lane at the same speed and hope for the best, or take evasive action?
Let's translate this into RE.
You are putting people's money into deals. You are the fiduciary. You are the driver. You are admittedly concerned about the state of the economy, as per your prior comment(s). You are the driver - what do you do? Stay in the same lane, be concerned but do nothing and hope for the best, or take evasive action?
I would think that if you are really and truly concerned, you will take evasive action. Sell now and take profits. On the other hand, if you are not selling, this tells us that you are not really concerned.
It's really just a very basic syllogism -major premise, minor premise, logos kind of thing.
I am still at a loss to understand what your position really is, Alina. Want to give it another shot?
If you are in a 5 year Note and the economy hits a serious down turn at year 5 where banks aren't lending, what is the exit strategy?
Originally posted by @Account Closed:
Originally posted by @Ben Leybovich:
Originally posted by @Alina Trigub:
Ben,
Bobby pretty much explained what I meant. If one eats into every word, then you can turn black into white and white into purple.
Yes, I could have been a bit clearer in what I meant but most people don't major in philosophy and concentrate on the main points.
In summary, while there some some markets that I like, I will not go into every single market during the uncertain times. If I can find an asset that is undervalued and buy/re-position it with the plan to hold on for a while in a place that is indicative of continued strong economy I will.
Originally posted by @Ben Leybovich:Originally posted by @Bobby Larsen:
@Ben Leybovich
Generalizing here to possibly explain Alina鈥檚 point but true for the most part, If you invested in a property in 2008 on a 2-5 year strategy your return was probably in the -100% to 5% annual realm. If it was a 10 year strategy, it was probably in the 0-10% annual realm.
If someone is uncertain in the market, a longer term hold mitigates some of that risk. Actually, part of the beauty in a long term strategy (10+ years) is that you can factor that there will be a recession at some point in your hold and therefore reduce the need to time the market. It also allows you to always be a market buyer whereas if you鈥檙e trying to time the market, there should be periods of time that you鈥檙e not buying.
Not quite. The "ability to hold" if necessary is what minimizes the risk, not holding itself.
Why would you hold into uncertainty? Most MSA's may not quite be in hyper supply but are getting there. Not all, but most. This is likely what Alina is referring to as uncertainty. And if this is the case - take profits and de-risk.
In other words, if her major premise is - I am not sure about tomorrow, then why would she want to stick around to find out? Makes no logical sense. Take the money and run.
And, of course, if she is willing to stay in, this is indicative of a bullish attitude toward the future, and all this talk about the economy is just lip service.
I'm just trying to figure out exactly what Alina's perspective is here.
Bobby didn't explain anything in any way that makes much sense to me. Now, we all know that I am not the sharpest tack in the box, but I would like to better understand.
Think of it this way, Alina.
You are driving on the freeway at 70-miles per hour. You become aware of some trouble in the next lane over on the right - what looks like a drunk driver drifting and swerving all over the place. You have a choice to make at this moment - stay in the lane as you are, or take evasive action. You obviously cannot control the driver next to you, so those 2 are your only choices. What do you do - stay as you are in the same lane at the same speed and hope for the best, or take evasive action?
Let's translate this into RE.
You are putting people's money into deals. You are the fiduciary. You are the driver. You are admittedly concerned about the state of the economy, as per your prior comment(s). You are the driver - what do you do? Stay in the same lane, be concerned but do nothing and hope for the best, or take evasive action?
I would think that if you are really and truly concerned, you will take evasive action. Sell now and take profits. On the other hand, if you are not selling, this tells us that you are not really concerned.
It's really just a very basic syllogism -major premise, minor premise, logos kind of thing.
I am still at a loss to understand what your position really is, Alina. Want to give it another shot?
If you are in a 5 year Note and the economy hits a serious down turn at year 5 where banks aren't lending, what is the exit strategy?
You're screwed. Well, to be precise, the LPs are screwed and face a total loss of principal. And while the GP may or may not have had some skin in the game, I'm sure they collected a handsome fee for 5 years that will soften the blow. That's why it's important to secure financing that is at least a few years beyond the anticipated holding period...regardless of where we are in the real estate cycle.
Originally posted by @Luke Miller:
@Kalen Jordan if a lot of syndicators are being honest, the real reason they sell is because our biggest capital event is on the back side. AKA syndicators make money on sale, not on holding.
I think that's a flawed reason to sell and NOT in the investors best interest. Refinancing and/or supplemental loans can get you your capital back, without the hassle of selling.
My preference is to model a 5-7 year hold with a sale in that period, but if I can fulfill the business plan and keep the property, I am going to. That is essentially an infinite return for the investors at that point. Who wouldn't want that?
Here's the honest answer. I can't figure out why this doesn't have a lot more likes.
- Rental Property Investor 路 Phoenix/Lima, Arizona/OH 路 Member since 2012 路 4k+ posts 路 4k+ votes6y
Originally posted by @Account Closed:
Originally posted by @Ben Leybovich:
Originally posted by @Alina Trigub:
Ben,
Bobby pretty much explained what I meant. If one eats into every word, then you can turn black into white and white into purple.
Yes, I could have been a bit clearer in what I meant but most people don't major in philosophy and concentrate on the main points.
In summary, while there some some markets that I like, I will not go into every single market during the uncertain times. If I can find an asset that is undervalued and buy/re-position it with the plan to hold on for a while in a place that is indicative of continued strong economy I will.
Originally posted by @Ben Leybovich:Originally posted by @Bobby Larsen:
@Ben Leybovich
Generalizing here to possibly explain Alina鈥檚 point but true for the most part, If you invested in a property in 2008 on a 2-5 year strategy your return was probably in the -100% to 5% annual realm. If it was a 10 year strategy, it was probably in the 0-10% annual realm.
If someone is uncertain in the market, a longer term hold mitigates some of that risk. Actually, part of the beauty in a long term strategy (10+ years) is that you can factor that there will be a recession at some point in your hold and therefore reduce the need to time the market. It also allows you to always be a market buyer whereas if you鈥檙e trying to time the market, there should be periods of time that you鈥檙e not buying.
Not quite. The "ability to hold" if necessary is what minimizes the risk, not holding itself.
Why would you hold into uncertainty? Most MSA's may not quite be in hyper supply but are getting there. Not all, but most. This is likely what Alina is referring to as uncertainty. And if this is the case - take profits and de-risk.
In other words, if her major premise is - I am not sure about tomorrow, then why would she want to stick around to find out? Makes no logical sense. Take the money and run.
And, of course, if she is willing to stay in, this is indicative of a bullish attitude toward the future, and all this talk about the economy is just lip service.
I'm just trying to figure out exactly what Alina's perspective is here.
Bobby didn't explain anything in any way that makes much sense to me. Now, we all know that I am not the sharpest tack in the box, but I would like to better understand.
Think of it this way, Alina.
You are driving on the freeway at 70-miles per hour. You become aware of some trouble in the next lane over on the right - what looks like a drunk driver drifting and swerving all over the place. You have a choice to make at this moment - stay in the lane as you are, or take evasive action. You obviously cannot control the driver next to you, so those 2 are your only choices. What do you do - stay as you are in the same lane at the same speed and hope for the best, or take evasive action?
Let's translate this into RE.
You are putting people's money into deals. You are the fiduciary. You are the driver. You are admittedly concerned about the state of the economy, as per your prior comment(s). You are the driver - what do you do? Stay in the same lane, be concerned but do nothing and hope for the best, or take evasive action?
I would think that if you are really and truly concerned, you will take evasive action. Sell now and take profits. On the other hand, if you are not selling, this tells us that you are not really concerned.
It's really just a very basic syllogism -major premise, minor premise, logos kind of thing.
I am still at a loss to understand what your position really is, Alina. Want to give it another shot?
If you are in a 5 year Note and the economy hits a serious down turn at year 5 where banks aren't lending, what is the exit strategy?
Well, that's exactly it. If Alina feels the risk is more than 50/50 that this scenario could be coming down the road, which would she want to stay in to find out? Why wouldn't she cash out and de-risk?
This is the very question at hand?
- Rental Property Investor 路 Phoenix/Lima, Arizona/OH 路 Member since 2012 路 4k+ posts 路 4k+ votes6y
Originally posted by @Jeff C.:
Originally posted by @Luke Miller:
@Kalen Jordan if a lot of syndicators are being honest, the real reason they sell is because our biggest capital event is on the back side. AKA syndicators make money on sale, not on holding.
I think that's a flawed reason to sell and NOT in the investors best interest. Refinancing and/or supplemental loans can get you your capital back, without the hassle of selling.
My preference is to model a 5-7 year hold with a sale in that period, but if I can fulfill the business plan and keep the property, I am going to. That is essentially an infinite return for the investors at that point. Who wouldn't want that?
Here's the honest answer. I can't figure out why this doesn't have a lot more likes.
Can we try to insert a little intelligence into this conversation, ladies and gents? Please!
We are paid a split on the equity on the back end of the deal. This means that we, the sponsors, get paid much more for staying in the deal longer, rather than exiting sooner.
But, a prudent sponsor will exit sooner, to his/her own detriment, if we feel that the risk/reward is flipped. In other words, if we feel the risk is climbing, then by de-risking we effectively increase risk-adjusted returns.
If we exit sooner, that's what we are doing. This is a prudent and thoughtful approach.
The other approach is to stay in the deal longer just to get paid more split. Ignoring the notion that by staying in longer we may be picking additional risk, and therefore decreasing risk-adjusted returns.
Thus:
If you are staying in the deal it should be because potential returns to investors are much higher than the risks. When the potential for risk begins to elevate relative to returns - look for the ext. Simple - right?
Which brings me right back to Alina's comments. She sees future risk. I would assume she'd be looking to liquidate positions in this environment. Yet, she feels that it's safer to stay in the deal and not look for the exit.
I don't understand this perspective. Do you?
- Rental Property Investor 路 St. Paul, MN 路 Member since 2016 路 3k+ posts 路 3k+ votes6y
Originally posted by @Kalen Jordan:
Originally posted by @Todd Dexheimer:
Maximum profits. If you fix and add value to an asset its highest value is shortly after the renovation is done. The longer you keep it the less ROI/IRR
Interesting - I'd have thought that holding it essentially forever and having the tenants pay off your mortgage and then getting a pop at that point would give you the best ROI - similarly to how people tend to long term hold SFRs.
I realize additional capex expenses come into play down the line but don't you just have to properly budget for them?
When you complete a value add on multifamily, you maximize rents, which in turn greatly boosts your NOI and property value. Your income to expense ratio is at its greatest spread right away, which even further adds value.
Also, its about the velocity of your money. If we can sell and make $500k, we can use that for a down payment on the next asset. Rinse and repeat and you can see that after several times you will have millions more for a down payment.
- Austin 路 Member since 2015 路 149 posts 路 80 votes6y
So far my takeaway is that there is not much consensus on this question 馃ぃ馃槶
- Developer 路 Cincinnati, OH 路 Member since 2018 路 1k+ posts 路 3k+ votes6y
Originally posted by @Kalen Jordan:
Interesting - I'd have thought that holding it essentially forever and having the tenants pay off your mortgage and then getting a pop at that point would give you the best ROI - similarly to how people tend to long term hold SFRs.
I realize additional capex expenses come into play down the line but don't you just have to properly budget for them?
Kalen,
Budgeting for capex becomes harder over time or as the building becomes older. After we renovate the building, we have more control on the repairs & maintenance and we have minimal capex in the first few years of holding it (since we renovate our properties the right way).
Yes you do get a "pop" on the CoC when the property becomes free and clear but your ROE (return on equity) drops significantly. That's basically "dead money" sitting in the property that could be put to better use - say through refinancing and then investing into another project - which will result in higher return for you and your investors.
Having said that - I also own houses (I have 45 of them) and I prefer them to be free and clear. Why? Because their vacancy risk is costlier than apartments. You get 1 vacant house for 2 months (with a mortgage) and your entire year's cashflow is gone. That's not the case with apartments. You get 1 vacant out of 20 units and you're still fine even if you have a 75% Loan to Value mortgage.
- Real Estate Broker 路 Canton, GA 路 Member since 2010 路 15k+ posts 路 11k+ votes6y
I think it depends where the passive investors are and the syndicator is in their life cycle of age and also investing.
At some point as net worth grows really high the syndicator or investor might simply have less of an appetite for value add and move more toward (set it and forget it) investments. They reallocate the portfolio to percentages of less versus more headache for yield.
I have a friend who has been doing it 40 years and has about 10 million sq ft of retail centers. He simply buys, improves value, almost never sells but refinances many times over decades. Pays off the investors or keeps them on. He has had life cycle of passive investors from the grandparents, to the parents, to the children, etc. invest in his properties.
Some investors with track records already do not need to sell. It's a different ball game for a syndicator starting out worth 1 million that wants to grow super big and likes to project excitement and an experienced syndicator that values time more than money and is worth over 100 million or more. A lot of times they just want to have returns but not grind themselves out so much.
- Developer 路 Cincinnati, OH 路 Member since 2018 路 1k+ posts 路 3k+ votes6y
Originally posted by @Todd Dexheimer:
Originally posted by @Kalen Jordan:
Originally posted by @Todd Dexheimer:
Maximum profits. If you fix and add value to an asset its highest value is shortly after the renovation is done. The longer you keep it the less ROI/IRR
Interesting - I'd have thought that holding it essentially forever and having the tenants pay off your mortgage and then getting a pop at that point would give you the best ROI - similarly to how people tend to long term hold SFRs.
I realize additional capex expenses come into play down the line but don't you just have to properly budget for them?
When you complete a value add on multifamily, you maximize rents, which in turn greatly boosts your NOI and property value. Your income to expense ratio is at its greatest spread right away, which even further adds value.
Also, its about the velocity of your money. If we can sell and make $500k, we can use that for a down payment on the next asset. Rinse and repeat and you can see that after several times you will have millions more for a down payment.
I agree completely with Todd.
Let me give you an example Kalen - from one of my deals. 96-unit apartment complex. Once we stabilized it (after a 2 yr hold), the cashflow we receive is about $12,000 a month or $108,000/yr. Our investors' money in the deal was $1.2 Million or a project CoC of 9% (and since it was a 50-50 split with 6% pref, they get 7.5% yield).
Six months later, we got a great offer/ we sold it and we netted $1.5 MILLION profit. My investors were happier to sell because they got their money back and they got 50% of that net profit - which is $750K giving them a 66% ROI just from the sale.
So the choices were:
A) continue getting 7.5% yield and maybe get an even higher payoff in the future or
B) get 66% ROI after 2.5 years + all my investment back (with the possibility of growing that money even more)If you were one of my investors and you know that we can line up another good deal like that, doesn't it make sense to choose B) rather than A)?
- Rental Property Investor 路 Sioux Falls, SD 路 Member since 2015 路 9k+ posts 路 18k+ votes6y
Originally posted by @Kalen Jordan:
So far my takeaway is that there is not much consensus on this question 馃ぃ馃槶
Because you are not asking a yes or no question. There are varying business models and varying goals in each syndication. In other words there are many answers.
Maybe if you tell us why you were asking the question, you might get a more useful answer?
- Austin 路 Member since 2015 路 149 posts 路 80 votes6y
Originally posted by @Michael Ealy:
Originally posted by @Kalen Jordan:
Interesting - I'd have thought that holding it essentially forever and having the tenants pay off your mortgage and then getting a pop at that point would give you the best ROI - similarly to how people tend to long term hold SFRs.
I realize additional capex expenses come into play down the line but don't you just have to properly budget for them?
Kalen,
Budgeting for capex becomes harder over time or as the building becomes older. After we renovate the building, we have more control on the repairs & maintenance and we have minimal capex in the first few years of holding it (since we renovate our properties the right way).
Yes you do get a "pop" on the CoC when the property becomes free and clear but your ROE (return on equity) drops significantly. That's basically "dead money" sitting in the property that could be put to better use - say through refinancing and then investing into another project - which will result in higher return for you and your investors.
Having said that - I also own houses (I have 45 of them) and I prefer them to be free and clear. Why? Because their vacancy risk is costlier than apartments. You get 1 vacant house for 2 months (with a mortgage) and your entire year's cashflow is gone. That's not the case with apartments. You get 1 vacant out of 20 units and you're still fine even if you have a 75% Loan to Value mortgage.
Got it that's super helpful and makes a ton of sense.
- Investor 路 Johns Creek, GA 路 Member since 2017 路 463 posts 路 488 votes6y
@Kalen Jordan Syndicator here. A few reasons: 1. IRR is higher when selling quickly. Most of these syndications are flips. Investors also would like their money back more quickly. I usually use cash out refinance instead of sale to maximize profits. 2. The sale is the most profitable point for syndicators due to the promote system.
- Rental Property Investor 路 Phoenix/Lima, Arizona/OH 路 Member since 2012 路 4k+ posts 路 4k+ votes6y
Originally posted by @Kalen Jordan:
So far my takeaway is that there is not much consensus on this question 馃ぃ馃槶
Haha
Kalen, this is where we enter the danger zone on BP. This is a big site and there is a lot of "advice and opinions" here. Opinions, as they say, are like ******** - everyone's got one :)
That said, it seems to me that there is a consensus. I doubt there is any daylight between Todd, MIchael, and myself. We are sponsors and operators, and we seem to agree on things.
Others disagree with us. You have to decide who you will listen to...
Originally posted by @Ben Leybovich:
Originally posted by @Alina Trigub:
Ben,
Bobby pretty much explained what I meant. If one eats into every word, then you can turn black into white and white into purple.
Yes, I could have been a bit clearer in what I meant but most people don't major in philosophy and concentrate on the main points.
In summary, while there some some markets that I like, I will not go into every single market during the uncertain times. If I can find an asset that is undervalued and buy/re-position it with the plan to hold on for a while in a place that is indicative of continued strong economy I will.
Originally posted by @Ben Leybovich:Originally posted by @Bobby Larsen:
@Ben Leybovich
Generalizing here to possibly explain Alina鈥檚 point but true for the most part, If you invested in a property in 2008 on a 2-5 year strategy your return was probably in the -100% to 5% annual realm. If it was a 10 year strategy, it was probably in the 0-10% annual realm.
If someone is uncertain in the market, a longer term hold mitigates some of that risk. Actually, part of the beauty in a long term strategy (10+ years) is that you can factor that there will be a recession at some point in your hold and therefore reduce the need to time the market. It also allows you to always be a market buyer whereas if you鈥檙e trying to time the market, there should be periods of time that you鈥檙e not buying.
Not quite. The "ability to hold" if necessary is what minimizes the risk, not holding itself.
Why would you hold into uncertainty? Most MSA's may not quite be in hyper supply but are getting there. Not all, but most. This is likely what Alina is referring to as uncertainty. And if this is the case - take profits and de-risk.
In other words, if her major premise is - I am not sure about tomorrow, then why would she want to stick around to find out? Makes no logical sense. Take the money and run.
And, of course, if she is willing to stay in, this is indicative of a bullish attitude toward the future, and all this talk about the economy is just lip service.
I'm just trying to figure out exactly what Alina's perspective is here.
Bobby didn't explain anything in any way that makes much sense to me. Now, we all know that I am not the sharpest tack in the box, but I would like to better understand.
Think of it this way, Alina.
You are driving on the freeway at 70-miles per hour. You become aware of some trouble in the next lane over on the right - what looks like a drunk driver drifting and swerving all over the place. You have a choice to make at this moment - stay in the lane as you are, or take evasive action. You obviously cannot control the driver next to you, so those 2 are your only choices. What do you do - stay as you are in the same lane at the same speed and hope for the best, or take evasive action?
Let's translate this into RE.
You are putting people's money into deals. You are the fiduciary. You are the driver. You are admittedly concerned about the state of the economy, as per your prior comment(s). You are the driver - what do you do? Stay in the same lane, be concerned but do nothing and hope for the best, or take evasive action?
I would think that if you are really and truly concerned, you will take evasive action. Sell now and take profits. On the other hand, if you are not selling, this tells us that you are not really concerned.
It's really just a very basic syllogism -major premise, minor premise, logos kind of thing.
I am still at a loss to understand what your position really is, Alina. Want to give it another shot?
I'm not Alina and I don't want to speak for her, but one potential angle that one can take is that a 7 to 10 year holding period might be relatively safer than a 3 year holding period at this moment in time because a good syndicator will secure a 13 year term loan at a nice low rate and will be able to ride out the next down cycle. On the other hand, a 3 year investment with a 5 year term might be in trouble because the dip could very occur at right around that time.
I specifically used a 13 year term loan because a syndicator that I really like has secured a loan for precisely that period.....13 year term loan at 3.87% for its upcoming QOZ fund. I would think that a 13 year term loan, as long as the LTV is reasonable, would provide some security against any potential upcoming downcycle in the RE markets.
But aside from the anticipated length of the deal, the far more critical factors are to evaluate each deal with cautious skepticism and also closely evaluate each sponsor's track record and especially how they performed during the last real estate cycle (sorry, but that eliminates 99% of syndicators here on BP, despite there being some very talented ones here).
- Rental Property Investor 路 Phoenix/Lima, Arizona/OH 路 Member since 2012 路 4k+ posts 路 4k+ votes6y
Originally posted by @Tony Kim:
Originally posted by @Ben Leybovich:
Originally posted by @Alina Trigub:
Ben,
Bobby pretty much explained what I meant. If one eats into every word, then you can turn black into white and white into purple.
Yes, I could have been a bit clearer in what I meant but most people don't major in philosophy and concentrate on the main points.
In summary, while there some some markets that I like, I will not go into every single market during the uncertain times. If I can find an asset that is undervalued and buy/re-position it with the plan to hold on for a while in a place that is indicative of continued strong economy I will.
Originally posted by @Ben Leybovich:Originally posted by @Bobby Larsen:
@Ben Leybovich
Generalizing here to possibly explain Alina鈥檚 point but true for the most part, If you invested in a property in 2008 on a 2-5 year strategy your return was probably in the -100% to 5% annual realm. If it was a 10 year strategy, it was probably in the 0-10% annual realm.
If someone is uncertain in the market, a longer term hold mitigates some of that risk. Actually, part of the beauty in a long term strategy (10+ years) is that you can factor that there will be a recession at some point in your hold and therefore reduce the need to time the market. It also allows you to always be a market buyer whereas if you鈥檙e trying to time the market, there should be periods of time that you鈥檙e not buying.
Not quite. The "ability to hold" if necessary is what minimizes the risk, not holding itself.
Why would you hold into uncertainty? Most MSA's may not quite be in hyper supply but are getting there. Not all, but most. This is likely what Alina is referring to as uncertainty. And if this is the case - take profits and de-risk.
In other words, if her major premise is - I am not sure about tomorrow, then why would she want to stick around to find out? Makes no logical sense. Take the money and run.
And, of course, if she is willing to stay in, this is indicative of a bullish attitude toward the future, and all this talk about the economy is just lip service.
I'm just trying to figure out exactly what Alina's perspective is here.
Bobby didn't explain anything in any way that makes much sense to me. Now, we all know that I am not the sharpest tack in the box, but I would like to better understand.
Think of it this way, Alina.
You are driving on the freeway at 70-miles per hour. You become aware of some trouble in the next lane over on the right - what looks like a drunk driver drifting and swerving all over the place. You have a choice to make at this moment - stay in the lane as you are, or take evasive action. You obviously cannot control the driver next to you, so those 2 are your only choices. What do you do - stay as you are in the same lane at the same speed and hope for the best, or take evasive action?
Let's translate this into RE.
You are putting people's money into deals. You are the fiduciary. You are the driver. You are admittedly concerned about the state of the economy, as per your prior comment(s). You are the driver - what do you do? Stay in the same lane, be concerned but do nothing and hope for the best, or take evasive action?
I would think that if you are really and truly concerned, you will take evasive action. Sell now and take profits. On the other hand, if you are not selling, this tells us that you are not really concerned.
It's really just a very basic syllogism -major premise, minor premise, logos kind of thing.
I am still at a loss to understand what your position really is, Alina. Want to give it another shot?
I'm not Alina and I don't want to speak for her, but one potential angle that one can take is that a 7 to 10 year holding period might be relatively safer than a 3 year holding period at this moment in time because a good syndicator will secure a 13 year term loan at a nice low rate and will be able to ride out the next down cycle. On the other hand, a 3 year investment with a 5 year term might be in trouble because the dip could very occur at right around that time.
I specifically used a 13 year term loan because a syndicator that I really like has secured a loan for precisely that period.....13 year term loan at 3.87% for its upcoming QOZ fund. I would think that a 13 year term loan, as long as the LTV is reasonable, would provide some security against any potential upcoming downcycle in the RE markets.
But aside from the anticipated length of the deal, the far more critical factors are to evaluate each deal with cautious skepticism and also closely evaluate each sponsor's track record and especially how they performed during the last real estate cycle (sorry, but that eliminates 99% of syndicators here on BP, despite there being some very talented ones here).
I am really having trouble understanding the confusion here. Let me break this down one more time:
1. I always underwrite a 10-year hold. This is not because I intend to necessarily to stay in the deal for that long. But it's because I want to know that if all hell breaks loose, I can.
2. What we underwrite is separate from what we execute. We are there to maximize risk-adjusted returns, and doing so requires responding to market conditions. This is not a static thing. Thus, if the market tells us to stay - we stay. If it tells us to sell in 1 year as a proven value-add - we sell. If it tells us to finish re-positioning and sell TK - we do that. We do whatever we believe has the highest chance of maximizing risk-adjusted returns.
Thus:
Going into a deal without having underwritten an ability to stay in for the long haul is stupid. We may need to stay and there has to be a way to do it. However, staying in the face of what we believe is escalating risk is equally stupid.
We are in a great environment to sell in 2020. If you think the times will get worse, then why wouldn't you sell and de-risk? Maximize profits and move onto a deal with more meat on the bone and lower risk profile. And if you think the good times will go on, and you can further optimize returns, then stay.
Does this help?
- Developer 路 Cincinnati, OH 路 Member since 2018 路 1k+ posts 路 3k+ votes6y
Originally posted by @Tony Kim:
I'm not Alina and I don't want to speak for her, but one potential angle that one can take is that a 7 to 10 year holding period might be relatively safer than a 3 year holding period at this moment in time because a good syndicator will secure a 13 year term loan at a nice low rate and will be able to ride out the next down cycle. On the other hand, a 3 year investment with a 5 year term might be in trouble because the dip could very occur at right around that time.
I specifically used a 13 year term loan because a syndicator that I really like has secured a loan for precisely that period.....13 year term loan at 3.87% for its upcoming QOZ fund. I would think that a 13 year term loan, as long as the LTV is reasonable, would provide some security against any potential upcoming downcycle in the RE markets.
But aside from the anticipated length of the deal, the far more critical factors are to evaluate each deal with cautious skepticism and also closely evaluate each sponsor's track record and especially how they performed during the last real estate cycle (sorry, but that eliminates 99% of syndicators here on BP, despite there being some very talented ones here).
I don't know why a syndicator will risk his/her investors' money by getting a 5-yr term.
Even though I do value-add and I like to exit in 3-5 years, I get the longest term possible (10 years or even longer). I plan for the worst - which is - what if I am forced to hold longer than 3-5 years? If the only way I can make money is to hold it short term or hold it long term (meaning, I have no flexibility either way), then the deal is not worth the risk and I move on.
I guess I am part of that 1% you mentioned then since I've been investing since 1999 and actually made money during the 2008-2009 Great Recession.
Originally posted by @Ben Leybovich:
Originally posted by @Tony Kim:
Originally posted by @Ben Leybovich:
Originally posted by @Alina Trigub:
Ben,
Bobby pretty much explained what I meant. If one eats into every word, then you can turn black into white and white into purple.
Yes, I could have been a bit clearer in what I meant but most people don't major in philosophy and concentrate on the main points.
In summary, while there some some markets that I like, I will not go into every single market during the uncertain times. If I can find an asset that is undervalued and buy/re-position it with the plan to hold on for a while in a place that is indicative of continued strong economy I will.
Originally posted by @Ben Leybovich:Originally posted by @Bobby Larsen:
@Ben Leybovich
Generalizing here to possibly explain Alina鈥檚 point but true for the most part, If you invested in a property in 2008 on a 2-5 year strategy your return was probably in the -100% to 5% annual realm. If it was a 10 year strategy, it was probably in the 0-10% annual realm.
If someone is uncertain in the market, a longer term hold mitigates some of that risk. Actually, part of the beauty in a long term strategy (10+ years) is that you can factor that there will be a recession at some point in your hold and therefore reduce the need to time the market. It also allows you to always be a market buyer whereas if you鈥檙e trying to time the market, there should be periods of time that you鈥檙e not buying.
Not quite. The "ability to hold" if necessary is what minimizes the risk, not holding itself.
Why would you hold into uncertainty? Most MSA's may not quite be in hyper supply but are getting there. Not all, but most. This is likely what Alina is referring to as uncertainty. And if this is the case - take profits and de-risk.
In other words, if her major premise is - I am not sure about tomorrow, then why would she want to stick around to find out? Makes no logical sense. Take the money and run.
And, of course, if she is willing to stay in, this is indicative of a bullish attitude toward the future, and all this talk about the economy is just lip service.
I'm just trying to figure out exactly what Alina's perspective is here.
Bobby didn't explain anything in any way that makes much sense to me. Now, we all know that I am not the sharpest tack in the box, but I would like to better understand.
Think of it this way, Alina.
You are driving on the freeway at 70-miles per hour. You become aware of some trouble in the next lane over on the right - what looks like a drunk driver drifting and swerving all over the place. You have a choice to make at this moment - stay in the lane as you are, or take evasive action. You obviously cannot control the driver next to you, so those 2 are your only choices. What do you do - stay as you are in the same lane at the same speed and hope for the best, or take evasive action?
Let's translate this into RE.
You are putting people's money into deals. You are the fiduciary. You are the driver. You are admittedly concerned about the state of the economy, as per your prior comment(s). You are the driver - what do you do? Stay in the same lane, be concerned but do nothing and hope for the best, or take evasive action?
I would think that if you are really and truly concerned, you will take evasive action. Sell now and take profits. On the other hand, if you are not selling, this tells us that you are not really concerned.
It's really just a very basic syllogism -major premise, minor premise, logos kind of thing.
I am still at a loss to understand what your position really is, Alina. Want to give it another shot?
I'm not Alina and I don't want to speak for her, but one potential angle that one can take is that a 7 to 10 year holding period might be relatively safer than a 3 year holding period at this moment in time because a good syndicator will secure a 13 year term loan at a nice low rate and will be able to ride out the next down cycle. On the other hand, a 3 year investment with a 5 year term might be in trouble because the dip could very occur at right around that time.
I specifically used a 13 year term loan because a syndicator that I really like has secured a loan for precisely that period.....13 year term loan at 3.87% for its upcoming QOZ fund. I would think that a 13 year term loan, as long as the LTV is reasonable, would provide some security against any potential upcoming downcycle in the RE markets.
But aside from the anticipated length of the deal, the far more critical factors are to evaluate each deal with cautious skepticism and also closely evaluate each sponsor's track record and especially how they performed during the last real estate cycle (sorry, but that eliminates 99% of syndicators here on BP, despite there being some very talented ones here).
I am really having trouble understanding the confusion here. Let me break this down one more time:
1. I always underwrite a 10-year hold. This is not because I intend to necessarily to stay in the deal for that long. But it's because I want to know that if all hell breaks loose, I can.
2. What we underwrite is separate from what we execute. We are there to maximize risk-adjusted returns, and doing so requires responding to market conditions. This is not a static thing. Thus, if the market tells us to stay - we stay. If it tells us to sell in 1 year as a proven value-add - we sell. If it tells us to finish re-positioning and sell TK - we do that. We do whatever we believe has the highest chance of maximizing risk-adjusted returns.
Thus:
Going into a deal without having underwritten an ability to stay in for the long haul is stupid. We may need to stay and there has to be a way to do it. However, staying in the face of what we believe is escalating risk is equally stupid.
We are in a great environment to sell in 2020. If you think the times will get worse, then why wouldn't you sell and de-risk? Maximize profits and move onto a deal with more meat on the bone and lower risk profile. And if you think the good times will go on, and you can further optimize returns, then stay.
Does this help?
Hey, I'm not sure why your taking such a cross examination like tone with me but you're preaching to the choir here..well, for some of your post at least. Your original point of contention was not with me. There is definitely no confusion on my part. And I don't agree with everything you said but I think the obvious common ground is that your financing terms are important. The example I used was a QOZ fund...so a sponsor generally cannot exit at an opportunistic time. But yeah....OBVIOUSLY a sponsor should exit when the economics would compel them to do so. Not exactly groundbreaking stuff here...
Originally posted by @Michael Ealy:
Originally posted by @Tony Kim:
I'm not Alina and I don't want to speak for her, but one potential angle that one can take is that a 7 to 10 year holding period might be relatively safer than a 3 year holding period at this moment in time because a good syndicator will secure a 13 year term loan at a nice low rate and will be able to ride out the next down cycle. On the other hand, a 3 year investment with a 5 year term might be in trouble because the dip could very occur at right around that time.
I specifically used a 13 year term loan because a syndicator that I really like has secured a loan for precisely that period.....13 year term loan at 3.87% for its upcoming QOZ fund. I would think that a 13 year term loan, as long as the LTV is reasonable, would provide some security against any potential upcoming downcycle in the RE markets.
But aside from the anticipated length of the deal, the far more critical factors are to evaluate each deal with cautious skepticism and also closely evaluate each sponsor's track record and especially how they performed during the last real estate cycle (sorry, but that eliminates 99% of syndicators here on BP, despite there being some very talented ones here).
I don't know why a syndicator will risk his/her investors' money by getting a 5-yr term.
Even though I do value-add and I like to exit in 3-5 years, I get the longest term possible (10 years or even longer). I plan for the worst - which is - what if I am forced to hold longer than 3-5 years? If the only way I can make money is to hold it short term or hold it long term (meaning, I have no flexibility either way), then the deal is not worth the risk and I move on.
I guess I am part of that 1% you mentioned then since I've been investing since 1999 and actually made money during the 2008-2009 Great Recession.
Michael, you have strong vertical integration, a very long track record of success, are intimately aware of the market in which you invest, have a loyal group of repeat investors that fill up your deals quickly, and have consistently shown professionalism and maturity (as seen by your willingness to help and build other up in this forum). You are in the Top Gun when it comes to syndicators, IMHO.
- Multifamily investor 路 Boston, MA 路 Member since 2017 路 281 posts 路 521 votes6y
@Kalen Jordan if we need 5 years to return, say, 15% IRR but I can do it in 3 years, then it makes sense to sell early (especially since you can never be 100% sure how much you can sell it in 2 more years). This way, you can take the profits and reinvest them faster. I do agree that holding for the longer term makes sense sometimes, and more and more investors have asked me to find a deal we will all hold and never sell. Definitely something we are considering, in addition to 3-5 year hold period.
- Developer 路 Cincinnati, OH 路 Member since 2018 路 1k+ posts 路 3k+ votes6y
Originally posted by @Tony Kim:
Originally posted by @Michael Ealy:
Originally posted by @Tony Kim:
I'm not Alina and I don't want to speak for her, but one potential angle that one can take is that a 7 to 10 year holding period might be relatively safer than a 3 year holding period at this moment in time because a good syndicator will secure a 13 year term loan at a nice low rate and will be able to ride out the next down cycle. On the other hand, a 3 year investment with a 5 year term might be in trouble because the dip could very occur at right around that time.
I specifically used a 13 year term loan because a syndicator that I really like has secured a loan for precisely that period.....13 year term loan at 3.87% for its upcoming QOZ fund. I would think that a 13 year term loan, as long as the LTV is reasonable, would provide some security against any potential upcoming downcycle in the RE markets.
But aside from the anticipated length of the deal, the far more critical factors are to evaluate each deal with cautious skepticism and also closely evaluate each sponsor's track record and especially how they performed during the last real estate cycle (sorry, but that eliminates 99% of syndicators here on BP, despite there being some very talented ones here).
I don't know why a syndicator will risk his/her investors' money by getting a 5-yr term.
Even though I do value-add and I like to exit in 3-5 years, I get the longest term possible (10 years or even longer). I plan for the worst - which is - what if I am forced to hold longer than 3-5 years? If the only way I can make money is to hold it short term or hold it long term (meaning, I have no flexibility either way), then the deal is not worth the risk and I move on.
I guess I am part of that 1% you mentioned then since I've been investing since 1999 and actually made money during the 2008-2009 Great Recession.
Michael, you have strong vertical integration, a very long track record of success, are intimately aware of the market in which you invest, have a loyal group of repeat investors that fill up your deals quickly, and have consistently shown professionalism and maturity (as seen by your willingness to help and build other up in this forum). You are in the Top Gun when it comes to syndicators, IMHO.
Thanks Tony. It's a track record built over 20 years and the key is continuing to adapt to changing market conditions and be willing to grow.
- Contractor 路 Evansville, IN 路 Member since 2019 路 142 posts 路 208 votes6y
Sell before all the unpaid mechanics lien mature and can be foreclosed, lol
Multifamily is chock full of non paying owners. I've never understood why those guys never pay their contractors. Can anyone enlighten me? Mom and pops pay better than corporations, why is that?
- Investor 路 Twin Falls, ID 路 Member since 2010 路 7 posts 路 5 votes6y
So, if you invested $50k into a value-add deal, and it's now worth $100k, you have to look at your cash-on-cash return. Let's say it's at 10% after the value add ($5k per year). Sounds like a nice return, BUT, you actually have $100k in equity at this point, so you're actually only making 5% on your money. If you can cash out and invest it into another deal with 10% cash-on-cash, now you're making $10k per year, and getting a true 10% return on your money.
That's just another way of looking at, what others have said, is "maximizing your ROI." Of course not all deals are created equal, so you have to look at them individually, and also consider what alternatives may be available in the market at the time.
Yes, the deal sponsor makes a significant amount on the sale, but it's often the best scenario for passive investors as well.
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