We often get asked why we favor long-term holding periods vs. selling assets every 5-10 years.
The answer has a few components:
1.) We target supply constrained markets where it’s incredibly difficult to execute construction (historic districts, geographic constraints, etc.) and build new apartments.
Meaning, it’s tough to source product in these locations (let alone ones that pencil).
If we sold every 5-10 years, we’d need to re-enter the market to source the same asset.
Because we intend to be in these areas for extended periods of time, it’s best to retain good properties within them.
2.) We focus on cash-on-cash yield and don’t forecast exits.
-If we receive a Godfather offer, great.
-If not, we’re happy to hold on to properties given our tight buy box.
-Our underwriting, renovation, and management processes are driven by long-term outlooks- we refuse to underwrite future market conditions.
3.) Tax Advantages (not a CPA, do your own homework here*).
-Debt financed distributions (refinances) are tax free (again, I’m not a CPA*).
-Selling will incur capital gains taxes and force redeployment of capital.
-Through opportunistic refinances: we can return (some or all) principal, control the asset, and continue to generate yield without selling.
-A win win in our book.
4.) Longer runway for (potential) growth
-We don’t account for appreciation, but we do seek out walkable A+ locations where young professionals want to live.
-Our thought process: If it’s difficult to add new inventory to the area and if it continues to be a desirable place for people to live- signs point to future growth.
5.) Risk.
-We don’t lose sleep if property values drop.
-We don’t need a certain exit price per sq.ft, and thus, favorable market conditions (though downturns still affect rents and that’s why we ensure the asset can withstand a 20% hit to them).
-We don’t need to sell an asset to fully execute the business plan.
There are many strategies and ways to make money in the space.
This approach cultivates what we hope will become a generational portfolio.