The Age Old Question: SELL and Take Profit or HOLD and Let it Ride?
We recently received an unsolicited call from a buyer asking if we would consider selling our 18 unit apartment building.
Like many investors, this buyer said they are desperately looking to add properties to their portfolio. He said they would be willing to make a very enticing offer.
To quote the Godfather, “An offer we can’t refuse”.
As both investors and commercial realtors, we are well aware of the properties market value. Moreover, when a property is not formerly for sale, our immediate thought was we can probably get an extra couple thousand dollars by providing exclusivity to the buyer.
After punching a few numbers into the calculator, we paused, looked at the potential profit and thought “wow!” perhaps we really should entertain an offer from this buyer.
With a bit more reflection, Hummm… we thought, seems almost too good to be true, better go back to the calculator for a closer look. Let’s see:
- Penalty for early termination of the mortgage
- Capital Gains Tax
- Recapture on the CCA taken
- Legal and Accounting Fees
- Other fractional costs
Even after carefully considering all of these costs, the final amount we would put in our pocket was surprisingly a respectable amount.
Then why, like so many others did we decide to hold?
We’ll speak to our decision in a moment but we offer up the following thoughts for your own consideration:
- Travel your own path, make decisions based on what’s right for you. Too often we are like salmon swimming at the bottom of the rapids. Everybody seems to have a feeling of what they would like to do but nothing happens until somebody finally jumps, then it’s kitty bar the door!
- I heard this saying from an old mentor, not sure whether it’s his or it came from somewhere else, but he told me early on, “You never go broke making a profit”. His point was: if your making money there is really no wrong answer. Sure, you want to be as successful as possible but know your own situation and goals, read the market and make your decision, take or leave your money and move on. Do not get frozen into inaction, potentially missing opportunities simply because you’re hoping to squeeze that last penny out of an asset.
- Don’t make decisions based on what the news or your neighbour says. I recently had a client who just sold an investment property for a significant profit. He then sent me an article about the real estate market dropping by 4%, telling me he was putting his real estate plans on hold and would sit in equities on the sidelines. The stock market dropped 1200 points that day!
- It has often been said that what made Wayne Gretzky so good was his ability to see the big picture. He would go to where the puck was coming to rather than chase it around. Point being, you can’t simply look at a snap shot of today. For instance, what is the value today, what are cap rates today, can they compress further? What are interest rates today and more importantly, where are they headed? If cap rates have little or no compression left and interest rates are on the rise (no matter how slow) what’s the future value for an investment? We are sure the mainstream would say hold but is that right for you?
- Be relentless in your pursuit of scenarios and options. Sure, number crunching is important, but age, legacy, lifestyle, (how about just happiness?) all need to be considered. We recently sold an apartment for a client who made a significant profit; but he could have held and perhaps over a lengthy period of time could have made more. He hated the apartment though. Didn’t like the location, the building or the business in general so in a market where the majority keep holding… he sold, made a tidy profit and is looking for other opportunities.
After weighing the pros and con, we decided at least for the moment, to hold. But it was close!
Most importantly, we considered many issues; market conditions, cap rates both today and tomorrow, interest rates now and tomorrow, our age, our goals, our options to reinvest the profits to make more, our happiness factor, and more all came into play.
Please do not misinterpret this as confirmation that you or anyone for that matter should follow our decision or that holding is the right answer. Rather, take it as an example that we considered carefully a broad host of scenarios unique to us and our situation and you should do exactly the same.
Remember, if you're making money there is likely no wrong answer, just what is the MOST right for you.
What Does This Mean For You?
As previously mentioned, we are both real estate brokers and investors. A split personality of sorts!
As brokers, we often wonder why we’re not receiving more calls from investors looking to sell or at least wanting to explore the options. It clearly remains a strong seller’s market. Demand continues to far outweigh the supply. We see deals on the market for a few weeks or often just days, trading at extremely low cap rates. It’s hard to imagine but we have even seen deals with cash on cash returns of 2% or lower. It certainly would seem, selling should be more prevalent.
As investors we understand the issues at hand, because we live it every day.
- What do we do with the money?
- How much do we actually put in our pocket?
- How can we possibly find new deals that make sense?
- How long will we have to wait to find something new?
- What other options are there?
Since every investor has a unique situation and criteria, we know the decision to sell or hold can be complicated and downright difficult.
If your current situation is such that you are struggling with the sell versus hold decision, we welcome you to call us at M Commercial Realty to discuss.
You can be assured that unlike many other real estate brokers, we get it because we are living in your world. Thus, our advice will be as honest and straightforward as you will find.
Finally, we would like to share with you snippets from two recent articles regarding this topic (follow the links to the full article):
Skyline Apartment REIT’s $173-million sale of 11 Hamilton apartment buildings to Q Management LP earlier this month fits the company’s historical strategy and will fill its coffers for new investments.
“The bulk of our assets exist in secondary and tertiary markets,” said Skyline Apartment Asset Management Inc. president Matthew Organ, adding Hamilton has evolved into more of a primary market since the portfolio was assembled between 2009 and 2015.
“Hamilton has become a hot market and, as a result, pricing has risen to the point where it’s very difficult for us — given our model and returns to our investors — to acquire there.”
Redeployment of capital
Skyline Apartment REIT will redeploy the capital from the sale toward other accretive acquisitions and new-build properties in strong secondary and tertiary markets, though Organ said there was nothing he could speak about at this time.
“We’ve got a couple of medium-sized portfolios that we’re looking at and a number of one-off assets. If most of those things come to fruition within the next four to six months, we’ll probably be looking at acquiring another 1,000 units.”
Value-add, newly built assets and new construction
Much of Skyline Apartment REIT’s growth has come from adding value to its assets, and that will continue to be important.
“The bulk of the assets in the province are 45 or 50 years old, so that’s where the value-add comes in,” said Organ. “You can acquire those types of assets and bring them up to a good standard. They’re absolutely rentable and there’s a huge market for that.”
A self-professed “office guy,” Paul Finkbeiner has learned to love apartments for the steady, predictable profits they churn out for his pension fund shareholder base.
“A lot of my competitors are only waking up to it the last five years saying, ‘Oh these apartments are really good.’ We have known it for the last 20,” said the president of GWL Realty Advisors Inc., one of the country’s largest real estate organizations with more than $17 billion in assets.
An office executive with Trizec Corp. and Brookfield Properties in the early 1990s, he came to know and love multi-residential when he joined GWL as president in 1995.
“Apartments, when I first looked at them, I couldn’t figure out why people didn’t buy them. This is going back, but there was a three per cent vacancy level. In some cases there was a wait list to get in. So why are we not buying more of these things?
“Since then, the apartment asset class has performed best in my almost 25 years here; it has always outperformed the others.”
Inventory problem one downside
The apartment sector, which comprises about 25% of GWL’s asset base with about 15,000 units, has one significant downside.
“You can’t buy a lot of it because a lot of the private guys know how good it is,” said the GWL chief. “We have bought a fair bit, but you need to build it now.”