November has been a very productive month for us. We are under contract for a 163-unit property in Peoria, AZ and it is scheduled to close early next year.
We are also making enormous progress at Haven on Thomas and are ahead of schedule. We have only owned the property for 10 months and we are more than 60% complete with renovating the 104 unit community. Once we finish the renovations, we plan to sell the property and outperform our projections.
This month we’ll discuss why we choose to sell our properties instead of holding them indefinitely.
Why Do We Sell Instead of Hold
6 Properties Owned, 4 Properties Sold
Many people have asked us, “After doing all that hard work and renovating the property, why don’t you just enjoy the cashflow and buy and hold?”
Our short answer is that we can get higher returns in the long run by selling the property after renovations.
The business plan has always been to sell our properties within 3-5 years of ownership, after renovating all the units. Some properties we sold after renovating all the units, others we sold while we were still in the process.
One of our strengths is that we have an in-house interior renovation company, which allows us to quickly renovate properties without compromising quality. One of our properties even won the Best Renovated Property award from the Arizona Multifamily Association (AMA), a prestigious award in the industry.
The high-class renovations in our properties have attracted buyers with strong offers, prompting us to sell the property and maximize profits. Then we’ll roll the profits into another property and aim to do it again.
In commercial real estate, the value of the property is directly correlated to the net operating income (NOI). The more units we can renovate, tenants are willing to pay more for rent which increases the NOI. The more we increase the NOI, the higher our property is worth.
After we completely renovate all the units and charge market rents, there is no more value to add. This creates a “sweet spot” to sell the property and optimize the returns. As shown below, the sweet spot is to sell in Year 3.
There are three primary reasons why we sell in the sweet spot:
- We can maximize returns by continuously selling in the sweet spot, rather than holding onto the property.
- The NOI increases the most when we’re renovating units. After that, it’s a slow trend upward of yearly rent increases.
- Let’s say we can cashflow 8% a year. Alternatively, we can sell for an 80% profit after 3 years. That’s 10 years’ worth of cashflow in 3 years. After we sell, we find another property to renovate again.
2. If we hold perpetually, we will need to do another CapEx (capital expenditures) cycle. For example, after 10-15 years our newly renovated units are not so new again. In time, the roofs, water heaters, HVAC equipment, appliances, and windows need to be replaced again. Also, our renovation scheme may be out of style.
3. The longer we hold, we are exposing ourselves to changes in the real estate market.
- We quickly experienced during the start of COVID in March 2020 when we wanted to sell a property.
- If it’s a good market, we should sell and look for another value-add deal. When times are rough, we’ll hold the property and enjoy the increased cashflow caused by higher NOI.