The investment horizon for every property or deal is different. Having a business plan with a five-, seven-, or ten-year hold duration is required, but the plan needs to be reviewed and evaluated several times a year. Given the unique micro plus macro-economic factors that influence rents, property values, interest rates, and cap rates, we need to constantly evaluate the business plan to ensure returns can be maximized.
How to Buy
When we look at buying a property, we evaluate the metropolitan statistical area (MSA) (aka local market around the target property) for major economic indicators like population growth, job growth, rent growth, historical occupancy rates, etc. Having a great property in a great location with solid economic fundamentals is required to have a sound investment. It provides a secure place to protect investor capital and a high probability to generate cash flow and investment returns. We want to purchase properties in locations where people want to live and where they love living in great apartments.
Hold an Asset
When we evaluate holding a property, we look to see how much value we have left to force appreciate through value-add opportunities and/or income and expense optimization. We also look at the current loan terms for the debt on the property to see if a refinance would benefit the property and help improve returns. Refinancing debt can be a good way to return some (or potentially all) investor initial capital. Plus, if you can secure a lower interest rate, you can reduce the monthly debt service payments.
However, it’s important to note that not all loans can be refinanced at any given time like a single-family primary residential loan. In the multifamily space, loans are either longer-term agency loans (roughly 10-year terms) or shorter-term (roughly 3-5 years) private loans from banks or life insurance companies. When you have a longer-term loan, it typically has prepay penalties (which can be six to seven figures depending on debt amount) if you pay the loan off early before the end of the agreed-upon term. When you have shorter-term loans, typically the early payoff penalties are less and often you can refinance a property when it makes financial sense to do so.
When to Sell
When we evaluate selling a property before the end of the initial hold period, we look at several factors. One major factor is the potential sale price of the property and what returns will be produced if the property is sold early. Another important factor we evaluate is the current performance of the property compared to the business plan. This process involves figuring out if we maximized the potential value of the property and the property cash flow as it is currently. Also, we compare the future property value appreciation if the remainder of the hold period and business plan are completed versus a potential new investment opportunity with a new business plan. The evaluation process to sell a property is one we take seriously, and we spend a lot of time evaluating before making a decision.
Closing Thoughts
The buy, hold, and sell process takes many factors into consideration and many hours of evaluation. We look at each property several times a year to ensure we are making the best decision for the property and investor returns.
