Multifamily Acquisitions: Know Your Exit Strategy Before Buying

Strategy with pen

For this post, we are backing into how to buy multifamily properties by starting with the question; how do you decide when to sell a multifamily asset?

Sell, sell, sell!  That’s my favorite Jim Cramer button.  The Mad Money talk show host has a myriad of sound effects at his disposal, but for some odd reason, that’s the only one I seem to hear.  It always catches my attention.

How many things do you buy with the intent to sell- even before you buy?

Every multifamily property we own is for sale.  Now, there is not a “for sale” sign on the curb with blinking lights.  But it is for sale.  Every asset class has an end game strategy to sell.  Excluding short-sellers,  the objective is to sell the asset for more than you paid for it.  The question is, when and for how much?  Tie this in with a present value analysis (time value of money), and we can estimate our return on investment.  Of course, some of us are better estimators than others.  Some are lucky (I don’t believe in luck, but I do believe the best prepared seem to be luckier than those that are not prepared).  My objective here is to ask you to “pause and ponder.”   The market doesn’t care whether or not you need to sell.   But the cyclical nature of the multifamily market does provide certain opportunities to sell.  Are you listening to these signals?

If every property you own could be sold for twice what you paid for it the question is; is it for sale?

Next question: if a cold call came to your phone asking for a selling price of your apartments, do you know that number?  If not, how long would it take you to get back to a potential buyer?   The point is that in the open marketplace, there are always some buyers that need to buy.   If one happens to walk into your door, are you prepared?

So why is this blog on selling multifamily assets under the heading of acquisitions?   Because I want you to think about a sale of the asset acquired – even before you buy it.  What will market attributes attract the next buyer?

How much rent growth do you need to meet IRR targets Internal rate of return:  The internal rate of return on an investment or potential investment is the annualized effective compounded return rate that can be earned on the invested capital.    Can addressing deferred maintenance bring the asset back to the market at a higher value?  How soon and at what costs?

 Our company acquires apartment assets for a long-term hold.  We seldom buy anything that we would not want to own ten years into the future.  With that said, we track the value of assets under management well and know our markets.   Whereas we are not actively seeking to sell, we know the current market value of our assets.  Therefore, if an unsolicited offer comes in the door, we are in a position to respond.   And quickly.   When opportunity knocks, it seldom knocks loudly.   Nor does it stick around forever while you decide whether or not to open the door.

The better you know the intrinsic value of your multifamily assets, the better prepared you are to make them work for you.   Sometimes that means selling and re-deploying proceeds even if taxable (not often, mind you, but it could happen).

Success requires preparation

There are no shortcuts.   How do you prepare?   Know your markets.  Read.  Be yourself.   Read great books.   Network.   Find like-minded people.   Remove pride.   No faking it.   Be willing to say, ” I don’t know.”    Believe in yourself and your skillset.

John Wilhoit is the author of the best selling book on rent roll analysis: How to Read and Rent Roll. See also the companion guide to measuring the quality of rental income: Rent Roll Triangle.  Find JW’s Podcast here.

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