JF1403: Apartment Syndication Exit Strategy: Refinance or Sell? #FollowAlongFriday with Joe and Theo
We missed a week of Follow Along Friday, but the guys are back! We’re getting to hear how to decide if you should refinance or just sell your property. Joe has done both and has reasons for doing it either way, depending on your specific situation. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
Today is Follow Along Friday. We’ve got listener questions, and a couple updates… And one big update – one new website section that we have launched. I am very excited about it, because I know it’s gonna add a lot of value to passive investors who are looking to learn more about apartment syndication and investing in apartment syndication. So we’ll get to that, and all the other stuff we normally get to, joined by Theo Hicks, like I normally am on Follow Along Fridays. Theo, how are you doing, my friend?
Theo Hicks: Doing great, it’s good to be back in the country and it’s good to be back on Follow Along Fridays. We missed last week, because I was out of the country, so I’ve got my France shirt on today to represent my recent trip.
Joe Fairless: That’s right, that’s right. Well, welcome back, and I hope you enjoyed everything. Real quick, what was the number one highlight from your trip?
Theo Hicks: Oh, it has to be doing a tour at the Vatican City at 6 AM. There was only eight of us in the entire city, besides obviously people that live there and work there. It was an amazing experience getting to see it before it had 20k, 30k, 40k people wandering around.
Joe Fairless: Wow. That is incredible. You mentioned that to me when you got back, and that’s the way to do it, that’s for sure. Well, what are we gonna be doing on Follow Along Friday today?
Theo Hicks: So as you’ve mentioned, we’ve got a couple of questions from the listeners, and the first one is gonna be probably the main topic of conversation today, which is – as you can tell by the title – the exit strategy for apartment investing or apartment syndicators.
The question was from Johnny – he said that he owns 74 units across two complexes right now, and both of them are built in the mid-sixties. When he initially bought them, about four years ago, he put a five-year loan on it and it’s coming due early next year. His question was should he sell the property and buy a new property, that is newer (he said in the eighties), or should he refinance?
I think it’d be great based off this question to have a conversation around “How do you know when it’s time to sell an apartment?” I know you’ve sold a couple apartments already, so maybe you can walk us through the decision you made to sell… I know you’ve also refinanced a couple properties, so maybe we can talk about why you refinanced as opposed to selling… And then maybe we can even add in there why are some reasons you would do neither of those, and just kind of hold on to the property and not sell, even if it is at the end of your business plan.
I said a lot there, so you can kind of take it however you want. [laughs]
Joe Fairless: Well, Johnny is the listener’s name?
Theo Hicks: Johnny.
Joe Fairless: Okay. To directly address Johnny’s question, the answer is that I don’t know what you should do, because there’s not enough information that you provided in order to tell you what I recommend you do. So there’s your answer, like it or not – sorry! But what I can do to help you out – I don’t wanna leave you just hanging like that – is talk about some considerations, and help talk through some of these things to think about, and then based on where you land on one end or the other, then you can make an educated decision to decide what you should do.
You’ve basically got a couple properties… How many units in total? 72?
Theo Hicks: 74 units.
Joe Fairless: You’ve got 74 units, built in the 1960’s, your loan is coming due, and you’re asking should you sell and buy something newer, or should you refinance? Well, first is understanding what type of marketability your current properties have, and how much equity do you have in them.
What I would do is I would get a broker’s opinion of value for your properties, and determine based on that what would the market be able to bring you from a sales standpoint, and then where does that net you out on your overall profitability for the project.
And then also talk to a lender, or even better, a mortgage broker, and see what you could get with a new loan on the property, and ideally, if you can get a similar amount back out form a new loan… Because again, I don’t know what your business plan was when you purchased them and what you’ve done to execute on that business plan… But if you did a value-add play, then your property is worth significantly more now, four years later, than when you purchased it, because you’ve increased the NOI.
So maybe you can get back all of the money that you originally put into it on this new loan… And I would look to do that most likely, because if you can keep the property and then get what you put into it out of it, and then use that to invest in another deal – well, that’s great, because on a refinance, that’s tax-free money. So you’re getting that money out of the property, because that is your money, and you’re able to redirect it towards another property.
But if the sale does look like it’s the way to go based on what you can get for the property compared to keeping it, then I suggest doing a 1031 exchange. So either way, you’re not fixing and flipping the property in 4,5 years. You’re using this property and you’re keeping it in your portfolio on the refi or new loan, or when you sell, you’re not keeping it in the portfolio, but you are keeping the equity and you’re not paying taxes on it, because you’re doing a 1031 exchange.
The last option that I would look at is selling the property and not doing a 1031 exchange, and then reinvesting that into a 1980’s product. And I assume you’re saying a 1980’s product because that’s the type of properties that we talk about on the show, that’s the type of properties that my company, Ashcroft Capital, buys, and that tends to be the best value-add property. I assume you’re talking about it because of that reason, which I agree with, obviously.
So next steps – one is talk to a mortgage broker, see what type of financing you can get on the property and what type of equity you’d get back out if you kept it. Two – talk to a commercial broker and get a broker’s opinion of value; maybe talk to one or two, maybe three, and get a broker’s opinion of value, and see what you could get on the sale, see what the proceeds would be… And then talk to the same broker and say “Well, if I sell this, I need to 1031 exchange it into something else. What have you got?” You still have a window of time to identify that… Even if you decide you’re gonna sell but don’t have the property – that’s fine. But the window does shorten up, so ideally, you have some properties identified prior to even selling it, because then you have obviously a longer lead time to identify what you’re exchanging into. And then the last option, in my opinion, would be to sell and not do a 1031 and put your money into another property.
So those are some considerations that I would take a look at, and that’s the thought process I would take.
Theo Hicks: It’s definitely hard to give him a precise answer, just because we don’t know even how much equity he has in the deal, where this is even at… I’m glad you added that last part, because I was gonna add that afterwards, and say “Hey, you also have to know that you can buy something afterwards, because you don’t wanna just sell it and then have that big lump of cash that you end up getting taxed on if you can’t find a property in time…”, so that’s definitely something important. You wanna make sure that you can buy this 1980’s product in your target market or wherever you’re looking to buy… Because I’m a math nerd, so I would kind of do exactly what you said – I’d break out a spreadsheet, and I’d do basically two scenarios: sell, and then refinance… And figure out how much money I would get from both of those scenarios, and then what I could use that money for and how much money I would gain on both of those scenarios, keeping in mind that by keeping the property you’re also gonna be netting cash from that property and the other one… And figuring out which one’s the best option from a returns standpoint.
Joe Fairless: Conceptually, it’s a pretty simple process, depending on Johnny’s unique situation… Maybe he wants out earlier, maybe he’s looking for longer-term, or maybe the business plan failed on these 74 units, or maybe it was really successful… So there’s all sorts of different variables, but absolutely, create that spreadsheet that Theo would create and just do that analysis.
Theo Hicks: Yeah. It’s kind of a little bit off of Johnny’s specific question, but something along the same lines… Let’s say that he got a five-year loan and this is year two… What types of things do you do in the middle of a business plan to see if it makes sense to sell the property early?
Joe Fairless: Well, we’re constantly talking to brokers… Well, brokers are constantly talking to us, and we’re responding to brokers, and they’re constantly saying “I can get you X, Y, Z conservative, and I can get you X, Y, Z aggressive, for the property.” We had three properties, we’ve just sold one with one investor, and we have two other properties with one investor, and the broker recently came to us and said “I can get you X for these two properties”, and tomorrow I’m writing an e-mail to that one investor who is our only limited partner in these two deals, and I’m letting you know “Hey, you can make a whole lot of money if we sell at this point in time. Conservatively, this is what they can bring, from a buyer’s standpoint, and we’ll make our projections based on that… But just so you know, aggressively, this is what the broker’s also saying that he can get on the open market for these two deals.”
So we’ll base our projections on the conservative broker’s opinion of value, but we’ll tell the investor, “Hey, this is what we’d conservatively get.” So not sure what he’s gonna decide to do, even though it’s the same structure as all of our other deals. Since we only have one investor in that deal, we talk to him more because it’s a lot easier to collaborate with one person versus 125… So we’ll see, but it’s ultimately just getting the broker’s opinion of value on a consistent basis, which won’t really be a challenge once you have relationships with brokers, because they wanna sell the deal, they wanna make the commission… And also being aware, just being savvy about where you’re at with the business plan.
If we were to complete 100% of all of our renovations, then it’s a different buyer than if we were to complete 50% of our renovations. But can we get the same returns that we’re looking for with our investors if we complete 50% versus 100%? So you’re always kind of balancing — first off, capital preservation first and foremost. We wanna make sure we’re maintaining a conservative nature with the deal… But then, assuming that’s taken care of, then what type of returns can we get for our investor now, versus if we held on to it?
In some cases, you might get an offer two years into it that is very close to the offer you would get in four years, so then time-value of money, if we 1031 into a new deal, grow the capital with the sale, and then 1031 into another deal – investors make out like crazy, and it’s much better. So it’s just a balancing act, and it’s being aware of your business plan and where you’re at, as well as market conditions and having relationships with professionals in those markets, who give you good intel, so that you can decide what to do with that intel.
Theo Hicks: Okay, that makes sense. So for anyone who’s at the point where they’re ready to sell their apartment community, we talk about how you get to the point where you’re ready to sell, but once you’re actually ready to sell, we’ve got a blog post entitled “8-step process for selling your apartment community”, and it goes through in detail the 8 steps to sell your apartment, and all of the different things that are involved. It kind of starts with what Joe was talking about – be mindful of the market, and make sure that you’ve talked to brokers, gotten that broker opinion of value, and having that conversation with your investors. Then from there you’ve gotta just notify your lender, and so on and so forth… So make sure you check out that blog post when you’re ready to sell, for more details.
Joe Fairless: What do they search for to find that blog post?
Theo Hicks: It’s “8-step process for selling your apartment community.” If you just google that, it’ll show up.
Joe Fairless: Cool.
Theo Hicks: So that answers Johnny’s question, and again, I think that’s a really good question and it can really be applied to more than just apartments, when you’re thinking about selling a single-family, or for me personally, my four units, and when do I sell a four-unit building… So I think some of the information you’ve talked about will help me think about that down the road.
The next question is from Sigrid, and they had a very unique question… Essentially, he lives at a retirement community and he’s a part of the — kind of like the HOA for the resident program at this community, and he wants to put together a resident appreciation event for any type of resident at the community that has done something in service of the community… And he was asking us “What would be a low-cost way to recognize the people at his community?”
The reason why I liked this question is because it’s something that as landlords, as apartment investors or single-family investors, there are different ways that you can do things for your residents to promote their retention. I know that, Joe, your company does monthly events for the residents, so I thought that kind of going over what you do would help Sigrid to have a few ideas of what he can do at his community.
We actually have a blog post on this as well. It’s called “Awesome resident recognition ideas.” I know that Sigrid was specifically asking for low-cost; I’m not necessarily sure what that means… I’m not sure if he means like a $1 or $1,000, so I’m gonna go over this list…
Joe Fairless: I’m guessing closer to $1.
Theo Hicks: [laughs] Yeah, or free.
Joe Fairless: Yeah, right, or free.
Theo Hicks: So here are a couple of ideas of things that Sigrid can do, but also that you can do if you’re managing apartments and want your residents to like living there. This is what we have on the list, and then I’ll go over a couple of other things, as well.
One is to create a community garden. That could even be something that you guys do as a community, instead of just you hiring someone to go in there and do it. It could be an actual event, where people get together and do that. Actually, the neighborhood I used to live in, I know one of the guys in our neighborhood wanted to do that, and it was actually a property down the street from where I live now where there’s a community garden that people all plant their vegetables in, and stuff like that.
So that’s something you can do at your retirement community. You’ve got on here “Five crispy dollar bills.” Paying them is always an option. Of course, you wanna have a Thank You note with that as well; you don’t wanna just drop off a five dollar bill on their front porch, because they’ll be kind of confused. So that’s a solution…
You can do a handwritten thank you card… Here’s one that I like – you can have a portrait drawn of the family; or if it’s a retirement community, it can be a portrait of their grandkids. You can take a picture of one of these people, send it to someone on Fiverr.com, and they can draw a picture for $5. That’s pretty inexpensive – that’s pretty close to that dollar mark – and I’m sure they would greatly appreciate that.
We’ve got “Give everyone a scratch-off lottery ticket with a nice note”, because that way you pay one dollar for a lottery ticket, and who knows, maybe they will hit the jackpot and they’ll reinvest that money into the community.
Another one which is what my real estate agent actually did when we bought our house, which is a cutting board – you get a cutting board and put your contact information on that, or your property management’s contact information on that, so that whenever they’re cooking a nice meal, it’s gonna remind them of you.
Joe Fairless: You know the other reason you get them a cutting board…
Theo Hicks: Why?
Joe Fairless: So they don’t cut up your counters.
Theo Hicks: There you go…
Joe Fairless: It saves your countertops.
Theo Hicks: That’s a good point. And then the last thing on this list is to partner with a local restaurant to offer them free food or discounted food. That’s something that you literally just go there and ask if they wanna do that for you, and obviously, they’re gonna wanna do that because you’re gonna be referring hundreds of people to their restaurant.
Joe Fairless: Now, I’ve done that before personally; I created business cards, and on the business card – it wasn’t my business, it was a resident… I forget what I called it; actually, it was just a resident card, that’s what it was… And I said “I’m a resident of XYZ property” and you show that to local business owners and it got you discounts.
So I personally went to these local businesses and talked to them about giving the residents at this property discounted stuff. It probably had about a 15% success rate on converting the local businesses, but from that 15% it resulted in referrals from that business to our property. So we would get referrals from these business owners if their employees would live at our property. It wasn’t even a pipeline until I made that connection… And they loved it.
One of them was Dickey’s Barbecue, by the way, so props to Dickey’s… And I actually met Mrs. Dickey, and had a couple conversations with them… But separate from that, it was Dickey’s Barbecue, which is a franchise; it was a franchise owner I was working with… And they got lots more business, lots more people eating barbecue coming from our property, and they loved it. And in turn, once they saw the success, they started referring people to us, and their employees to us, and we started getting employees living at our property.
So if you do that one, expect not to get a lot of conversions, because people are gonna be confused about what you’re doing, they won’t have the authority to say “Yes, I’ll do this thing”, or just too much red tape etc. But with some entrepreneurial company who’s in your area, they’re gonna love it, and they’ll also in turn, once they see some new business resulting from this, they’ll start sending people your way.
Theo Hicks: It sounds like this strategy might work a little bit better for smaller local family-owned restaurants, instead of going to McDonald’s…
Joe Fairless: I think so, yeah…
Theo Hicks: You’ll have a much harder time doing it at McDonald’s; it’s better with local ones… On a very similar example, Joey, my friend in Cincinnati – you know how the Mormons will go into neighborhoods and they’ll talk to you at your front door…? He did this – it was a year ago, I think – and then he happened to buy a property, and when he went to visit the property, he noticed that the church across the street is the church that those Mormon boys came from.
So he went across there and talked to the person that was in charge of the Mormon boys that come in to do their mission, and he mentioned that he bought a property across the street… The guy was like, “Oh, that’s great! We just have two new people coming in, and they’re looking for a place to live. Is it available?” He was like, “Oh, of course it’s available.” So now he’s got a consistent pipeline, because those missions last about a year or two and then they’re gone… So he’s got a consistent pipeline of residents to move into his apartment, and he was saying how they pay the first month and the last month and the security deposit all up front, just super smooth…
I thought that was a little bit different than partnering with a local restaurant, but… Partner with like a local church, or something.
Joe Fairless: Yeah, absolutely. It’s a win/win.
Theo Hicks: So now back to Sigrid’s specific question… A couple other things that I know you guys do for your monthly resident appreciation events are things that are — you kind of get creative and do holiday-themed events. So for Valentine’s Day have a Valentine’s Day card-making station in the clubhouse… So it’s somewhere they can just go, they’ve got markers, and cards, and they can write their Valentine’s Day cards.
Same thing around Christmas time, a gift-wrapping event where you supply wrapping paper, and everyone comes in there and wraps their gifts.
You can have like a Halloween costume party. That will get a lot of people involved. So kind of just being creative and thinking about what time of the year is it and then providing some sort of event or gift that way.
Joe Fairless: Yeah. Ultimately, it’s about creating a sense of community and having the community be stronger together, so that people want to live there and bring their friends, because when they bring their friends and family, then they’ll live there longer. They want to be around those who they enjoy being around, and if it’s a close commute, i.e. the building next door, then to hang out with their friends and family, then that’s gonna be pretty amazing for them. They’ll stick around longer and you’ll make more money.
Theo Hicks: Exactly. So Sigrid, we’ve provided you with a lot of different examples of things that you can do at your community. And again, if you want the list that I just discussed, the blog post is “Awesome resident recognition ideas.” If you google that, or if you go to JoeFairless.com and search for that, you can read that blog post. We go into a little bit more detail than we did on this show today.
So those were the two listener questions. As you mentioned at the beginning, we’ve got an announcement to make… We’ve got a new resource that we’re very, very excited to launch, and it actually just launched today.
Joe Fairless: It got launched like three minutes — not three minutes ago… But 23 minutes ago, or something. What’s the URL?
Theo Hicks: BestEverPassiveInvestor.com.
Joe Fairless: BestEverPassiveInvestor.com. That website’s for you if you are considering investing in apartment communities passively; that website is for you if you currently are investing in apartment communities passively, and you would like to learn about additional questions, you could ask sponsors when you’re considering investing with them, or in their opportunities. It was created because there is a need for it, and there isn’t anything like it out there.
I’ve had a couple investor conversations where afterwards they say “This sounds great! And while I wait for a new deal that you have, is there a resource or a place you recommend I go read or look at or listen to that has information about how I can think about and be prepared to invest in apartment syndications?” and the short answer is there wasn’t one. Now there is, so we’ve got this website, BestEverPassiveInvestor.com. It’s broken out into three categories. One is identifying if active or passive investing is the right approach for you, so which one is it – passive or active? So that’s one – knowing yourself and your goals.
The second is terminology. I went cross-eyed, you I’m sure went cross-eyed, and Samantha also went cross-eyed on this, because we got into the details on all the different terms for apartment syndication… And even if you’re an active apartment syndicator wanting to actively put together deals, BestEverPassiveInvestor.com is gonna be useful for you, because we have listed out all the terms that you need to be familiar with, and defined them on this website, and in a lot of cases given examples, and in most cases given a blog post or other resources you can click and read more about for each of these terms.
I don’t know how many terms we did, but…
Theo Hicks: 64.
Joe Fairless: 64 terms, with examples and some additional resources. And then the third section is questions to ask the general partner… And not are there questions to ask the general partner – we don’t leave you hanging – but also thoughts about how to think about what type of answer you’re looking for… And then again, additional resources to read more about that particular thing.
The word that comes to mind is “Congratulations!” [laughs] Like, congratulations, we now have something out there that is gonna be incredibly useful for passive investors who are looking to read more on this stuff, active sponsors who want to learn the business and learn about the types of questions they will be asked by passive investors, and then people who are currently investing, just maybe sharpen up on some terms, or whatever you wanna do.
I’m very excited about that, and congrats to our team and congrats to everyone who gets to check this stuff out, because this is gonna be very useful, and it’s much needed.
Theo Hicks: Yeah, I actually think at my last meetup group someone mentioned that – they were asking me how they wanted to passively invest in apartment syndications, and they know I work on a team that does that… And she wanted to ask me a bunch of questions, and I was like, “Well, lucky for you, we’re actually coming out with an amazing resource here the next couple of weeks, that are gonna answer questions you have, and probably answer questions that you didn’t realize you even have to ask…” I’m looking forward to sending that link to her so she can educate herself on that.
That’s great. Again, that is BestEverPassiveInvestor.com. To wrap things up, Joe… Everyone who’s listening, make sure you guys go and subscribe to the podcast on iTunes.
Joe Fairless: Guys and girls.
Theo Hicks: Guys and girls… Every single week.
Joe Fairless: I know, I know [unintelligible [00:26:05].06]
Theo Hicks: There was actually a Facebook comment about that last week, too…
Joe Fairless: And you know who commented on it…
Theo Hicks: You.
Joe Fairless: A female.
Theo Hicks: Oh yeah. I think she’s the one that actually posted it.
Joe Fairless: [laughs]
Theo Hicks: I think it was Caroline.
Joe Fairless: Yeah, I think it was Caroline.
Theo Hicks: So guys and girls, please subscribe to the podcast on iTunes and leave a review for your opportunity to be the review of the week, which we’ll read live on the podcast. This week’s review came from LalaMeme5. The title of their review was “Fave and straight to the pony.” I think they meant “Straight to the point”, but I like “Straight to the pony” better.
Joe Fairless: [laughs]
Theo Hicks: And they said: “This is the first real estate podcast I subscribed to, and it has been hard for others to beat it as my favorite. Joe is straightforward, asks great questions, and there really is no fluff. Who has time for fluff anyway? Great tips, questions and interviews. Thanks!”
Joe Fairless: What was it, LalaMeme05, or something?
Theo Hicks: Yeah.
Joe Fairless: Thanks for that, I appreciate it, and I respect your time and I appreciate that you have identified that I respect your time… So thank you for taking time out of your day to write a thoughtful review.
Everyone else, Best Ever listeners, please write a review. That will help us continue to get high-quality guests on the show, and help you make more money, help you learn business models and plans and ways to save money and ways to make money and all that good stuff.
So thanks so much for listening today, and looking forward to talking to you again tomorrow.