Advice for repositioning an entire portfolio

23 Replies

Hi,

I want to solicit some advice about a move I've been thinking of for a while. I have a small portfolio of single-family homes in the Austin MSA. They have obviously appreciated quite a bit. This has me thinking about selling the whole kit-and-kaboodle and buying properties in a place like San Antonio. What's holding me back is my team in Austin is awesome (my team being: lender, realtor, property manager), and I find the prospect of finding a new San Antonio-based team daunting because...

  1. The Austin team was found/built while I was living in Austin...
  2. ...but since then, I've moved overseas.
  3. The new agency rules re: ratio of investor loans etc.

I think I generally have two ways I could sequence this...

  1. Option A) Start the process of finding/building a relationship with a lender, realtor, property manager... while being up-front with them that I first need to sell my Austin properties first...
    1. Variation A.a: Start 1031 exchanging them as their leases end one by one...
    2. Variation A.b: Forgo the exchange and pay taxes now...
    3. Variation A.c: Try to offload all of them in one shot as a portfolio...
  2. - Option B) Start selling the Austin properties first and figure it out as you go. This will be tougher when doing a 1031 exchange because of time limits, so maybe bite the bullet and pay taxes now.
  3. - Option C) I love my team in Austin, and the portfolio is appreciating and cash flowing modestly. Why change a horse that's working?

That is where my head is right now, and it's not as organized in my head as I would like it.

Question to the group: If you wanted or have repositioned your portfolio, how did you go about it?

Thank you so much for your attention and participation.

Daniel

I agree with Eric's comment: what would be the purpose of the repositioning? Perhaps take advantage of the heat of the Austin market? If so, I think it is a very valid idea to consider.

One idea is that you could always start slow. Instead of repositioning your entire portfolio into San Antonio, maybe you could sell a smaller portion of your rentals. 

#1 you can use the same lender....so there is one of the 3 problems solve.

Check with PM and relator to see if they work in San Antonio or have good contacts there.  Probably answer is no, but worth a shot.

San Antonio is pretty hot too, probably not as hot as Austin, but still hot so can be challenging for 1031.

Yes, thank you. 

Re: Reasons

It's right now less "into SA" and more "out of Austin".

I'm just a little uncomfortable with *how* much the equity has appreciated in Austin. It feels like "dead money" since I can't (directly) buy a cheeseburger with home equity. While rents *have* gone up in Austin MSA, my return on equity has fallen, naturally. I could take each Austin property and turn it into two other properties... except maybe not with the new investor loan ratio guidance...


Re: San Antonio

San Antonio was only an example. 

I don't know anything about SA except there was a 24 hr Mexican place downtown my friends and I would go to when we were bored in the middle of the night and wanted "adventure". If I strip my response of all stupid jokes (example: SA/Austin re: best breakfast tacos):

1. I have a positive impression of the city

2. It seems less "crazy/tech-fueled-price-explosion"-y than Austin

3. It's a real city - i.e. multiple industries, diversified economy (in comparison to smaller locations like Bastrop, NB, SM, etc)

Other than that, maybe the only other reason why I mentioned SA is I lived in South Austin before so there's a comforting (emotional) comfort with SA driven by frequent day trips to SeaWorld with my children. I obviously have to do more research. The only thing I'm certain of is Texas... 

My question was less about the destination city and more about the mechanics of the intersection between, a few properties, 1031 exchanges, building a local team when you're not only OOS but out-of-country.

Re: suggestion of start slow - yes, thank you. I'm sorry that I wasn't clear before: whatever I do would be "slow" (unless I opted for selling the entire portfolio in a package).

Thank you for your replies so far. I appreciate it.



Daniel

@Daniel K. There is a lot to unpack here. For starters, how long have you owned the homes? If they're paid off my answer changes, but I'll assume they're not.  Also, you're in Europe, which makes building a team in another metro harder and communication slower, so here are my suggestions:

1. Don't change anything. Austin appreciated a lot this past year, but so did most other places. So despite selling high, you'd also be buying high. It's important to think on a 10 year horizon and not like it's the stock market and you're day trading. If the deals worked when you bought them, are still working now, and appreciating, let your winners run.

2. Since they're SFH, you might not even need to sell as a portfolio in this market. Just put them all on the market (unless they're on the same street) and if priced appropriately, they'll sell quickly. You can take the proceeds and buy probably a few multi families in smaller midwestern cities that can provide more cashflow if you're concerned about losing a lot of equity for reasons XYZ. Since you're in Europe, it doesn't matter if it's Austin, Alabama or Alaska, you're an out of town investor so you mine as well go where the cashflow is.


If you are trying to sell though, you should take advantage of the exchange so at least identify and solidify a market you're going for. If you have kids, you can kick that bucket all the way down the road to your death and just wipe out that tax liability for them (assuming 1031s are still around).

    Option c. Its an appreciating market and has been an good real estate market since the mid 1980's. Why sell your winners? You like your team. Stick with it. They are making you money while you are in Europe. If you want money from the properties why not do a small cash out refi loan (which is tax free) that makes sense? With that refi, I bet that you could get more than a cheeseburger and could probably get a few breakfast tacos from your two favorite restaurants fedex'd to you overseas so as to continue the debate over who has the best tacos and chase it down with a good German beer or Belgium beer, depending upon preference. 

    @Daniel K. the hardest part about investing is letting the strategy play out. Sounds like yours is working!

    Hold what you got. Read- Good to Great-getting the “right team on the bus” is the most important part. You sound like you have that already and will waste a lot of time giving up what you’ve built in one MSA to recreate in another MSA....while you’re overseas.

    To your question: Option D: cash out the most appreciated house and use that for dry powder to acquire the next rental your awesome team finds.

    @Daniel K. this is a tough time to be a 1031 buyer in San Antonio. I have several clients working through those at the moment. You can certainly pick up properties, but picking up several in a short time is going to be tough. If you are set on selling, I would suggest Variation A.a. Howver, have you considered cash our refinancing in order to put your equity to work? Depending on how large your portfolio is, there are SFH portfolio loan options help make this work. Here is one example: https://arbor.com/arbors-singl...

    @Daniel K. whats your return on equity? That's always my question when I'm thinking about selling. If I can take that equity and make a significantly better return then I'll sell. You could also invest in commercial properties or invest passively with others.

    @Daniel K.  

    Keep your Austin properties. If you really want to buy some properties in San Antonio, you can cashout refinance and pull out of some cash from your Austin properties.  But in the long run, there's no way that San Antonio investments can beat your Austin investment, no matter how good  San Antonio's cash flow may sound on paper, not even close.

    From my own experience as an OOS investor  for almost 10 years, my take is for OOS investing to be successful, appreciation is much more important than cash flow. I know most people do not agree with me on this point. But as properties are aging, repair costs will add up, plus property management fees, most of your cash flow will be gone.  If you invest locally and manage them by yourself, that's another story.

      

     

     

    So you want to take something that's been working well, is a well oiled machine, appreciating nicely and throwing off cash flow at the same time. You are thousands of miles away and want to reposition into other houses in another metro where you dont have the team and you are still thousands of miles away. 

    WHY?!

    The only reason to sell is if you decide you have had enough of rentals and want to reallocate your funds to a different asset class. No point at all selling these and buying another market. All markets are running hot now. You may get a good price in Austin but over pay elsewhere. Then add in transaction costs on both ends and there is no point to it at all.

    If you want to buy in San Antonio just start buying there with other funds and see how it goes.

    @Daniel K. Sounds like a refi of existing portfolio solves your problem without the burden of transaction inefficiencies. Give this some deep thought and I suspect you’ll realize this is the right solution for your objective.

    Run the projected returns (IRR) for the alternatives and the numbers will speak for themselves. Make financial decisions with financial analysis.

    Daniel, It's not such a bad idea to take some money off the table in a high-flying CRE area and reinvest in an area that might have more growth potential. You should consider taking full advantage of the 1031 exchange benefits while they're available.

    Taking the strategy of some of my existing clients (and as you already suggested), consider selling all of them as one income-producing portfolio. Income-producing SFR portfolio assets are highly desirable lower-risk investments in this market, especially for retired individuals seeking consistent cashflow. In fact, you may introduce your entire awesome team to the buyer as part of the sale and bring even more value to them.

    Perhaps consider employing the 1031 exchange funds to acquire one or more MF properties (which is more easily managed in one location), or one or more NNN retail properties (no management) with a corp credit tenant that guarantees the lease, and executes a nice long-term 10 to 20-year lease, providing you the option for the same financing. Think CVS or Walgreens or a Bank.

    You’ve done well.  You’ll continue to do well.  Obviously, not your first rodeo.

    Terri

    @Daniel K. Careful you don't cut the flowers and water the weeds - especially with a good team in place.  

    Check with your lender to see if you can refi all of your debt onto one house and have the other ones free and clear.  Then maybe you can stick a heloc on those for a rainy day or a sunny opportunity.  

    Great problem to have - good luck.  

    Originally posted by @Kiley N. :

    @Daniel K. Careful you don't cut the flowers and water the weeds - especially with a good team in place.  

    Check with your lender to see if you can refi all of your debt onto one house and have the other ones free and clear.  Then maybe you can stick a heloc on those for a rainy day or a sunny opportunity.  

    Great problem to have - good luck.  

     Love the quote "Careful you don't cut the flowers and water the weeds".  I'm going to have to borrow that one ;-).

    What about repositioning into commercial? I like NNN better for overseas investors anyway, it will be a step up from a portfolio of SFR.

    Thank you, everyone. There's a lot of food for thought here that I'll have to chew through!

    @Ronald Rohde - certainly an interesting idea. I have to admit, I'm a bit intimidated by the commercial world. The only commercial brokers I've dealt with were for corporate relocations and I certainly don't have the capital to buy a class A office building. Any tips on getting started? Loop.net? Is there a name for the type of commercial broker who deals in "small" properties?

    Daniel

     

    Originally posted by @Daniel K. :

    Thank you, everyone. There's a lot of food for thought here that I'll have to chew through!

    @Ronald Rohde - certainly an interesting idea. I have to admit, I'm a bit intimidated by the commercial world. The only commercial brokers I've dealt with were for corporate relocations and I certainly don't have the capital to buy a class A office building. Any tips on getting started? Loop.net? Is there a name for the type of commercial broker who deals in "small" properties?

    Daniel

     

    Commercial is definitely a more complex process. You don't need a class A to make it worth it, I do think you need a lower cap rate to effectively be hands off. Anything with a higher cap will require more decision making. Loop net is okay for viewing properties and practicing your underwriting.

    There are younger, hungrier brokers or divisions within MM or colliers who do smaller buildings.