Reader Question: My dear wife and I embarked on our real estate investing career in 2009 in Central Maine, and over the course of three years amassed 13 buildings totaling 51 units. We turned a slew of low-quality, run-down buildings into desirable blue- and white-collar communities.
One of Kenneth’s duplexes.
Now our properties have a reputation as among the best places to live in the area. My wife and I want to retire and divest our real estate portfolio. Sure, we could hire a manager and live off the income from our portfolio, but we’ve set our sights on being as “responsibility free” as possible.
There’s always something to worry about, but I’d rather fret over what percentage to keep in stocks vs. bonds than whether or not our tenants are being taken care of, how the economy is in the area, or if new fire codes will require us to take on a $20,000 upgrade.
To make a sale “worth it,” we’d need to get a good price. Our current asking price nets the buyer a 7% CAP rate. Many savvy investors want 9%, 10% or even more. Most buyers in the area where these buildings are located tend to buy as cheaply as possible. This leads me to think I need to find an absentee buyer from another area. What steps can I take to sell our properties for an attractive price? — Kenneth L.
A 5-step strategy to sell a real estate investment portfolio
Monty’s Answer: Hello Kenneth, and thanks for your question. To qualify my answer a bit, I have never seen the properties, examined financials or spoken with you.
My answer is based on 50 years of brokering all types of property with all types of owners and my ownership of most every type of real estate, except REITs. The qualification here is that I am not sure my suggestion will work.
You defined the problem well in your question: “Savvy investors want 9%, 10% or even more return.” Investor-buyers from everywhere tend to buy as cheaply as possible.
While you did not pose the question this way, the real question is: “How can I find an investor to pay a 7% CAP for my 9% CAP property? I think the answer is: “You can’t.”
Here is a five-step strategy to consider:
No. 1 – Quit looking for investors
Inside of one of Kenneth’s duplexes.
Start looking for people seeking a home in which to live.
It happens to generate income to help pay for the home.
Homebuyers tend not to be as concerned about the “return” as they are about “can we be comfortable here?”
In reviewing your property website, this strategy takes advantage of your past improvement philosophy.
No. 2 – “Unpackage” the units
Focus on the attributes each separate building offers that appeal to a homeowner rather than an investor. Establish a plan to sell them the way you acquired them — over time.
Do this to reduce your capital gains tax liability and to avoid flooding the market with this concept, as many homeowners should not own a property that contains tenants.
No. 3 – Change your marketing tactics
Team up with the local housing authority. You are a writer — design a homeownership class that includes the advantages to a home with income and teach it. Learn about the different programs that help people find homeownership. It could titled “Attributes of homeowners with tenants.”
Consider engaging a residential real estate agent who specializes in first-time buyers to get your property exposed on the MLS and handle showings and negotiations. It has to be an agent who buys into the concept. Get endorsements from homeowners who have tenants in the building. Talk to your tenants about buying the building they live in. Make a list of other outreach opportunities, like colleges.
No. 4. – Redesign the Annual Property Operating Data (APOD)
Turn it into a simple “cost of ownership” form designed around the financing available for your units. Here is what your home costs, here are the expenses to operate it, here is the monthly payment, and here is what you earn each month living here. Oh, by the way, here are your duties to maintain this earning level.
No. 5 – Wildcard entry
I am certain there are additional thoughts to contribute, but I ran out of time. I would bet money you can think of many other tactics if you like the idea.
You are emotionally invested in the business, which is part of why you were able to build it so quickly.
It may be easier to find a homebuyer seeking ownership than an investor willing to pay a premium.
I hope this information is helpful, Kenneth. Ask me if there are other questions.
Respectfully,
Richard Montgomery
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