Hold/Sell Analysis - What do you ideally look at?
We are starting to look at a lot of our assets mainly in MF and Industrial as they approach either mid hold periods or towards the end. Is hold/sell analysis simply looking at how my IRR looks to date through hold on my original basis compared to buying it today at X value? If my return is higher on my original basis with what I think I can sell it for, it makes more sense to sell?
Numerically - re-run the model at today's value for whatever your considered go-forward hold period is and see if the returns make sense. Could you get a better return if you sold the asset at today's value and invested the money (net of tax) elsewhere?
This is obviously oversimplifying as there's also qualitative factors - is the asset still a fit for your portfolio and go-forward strategy, is it too big/small or is there too much risk going forward, do you need to free up capital, etc etc
Screw math, absolutely useless in this case.
Simply determine if there is any more value that you can juice from the property by doing value add. If not, sell it to a retired boomer looking for a 6% coupon. Re-invest net proceeds into more lucrative projects yielding 12-14% IRRs.
Repeat.
Second this. Once we believe we can no longer meaningfully increase NOI, we go to market. Holding for longer just opens you up to macroeconomic headwinds.
Would you buy this deal with today's money? That question helps a lot I think
So then how do I evaluate/compare a forward looking analysis to my returns from investment inception plus a sale today?
Calculate your return on equity current deal vs new deal.
Refinancing might yield the same result as selling in terms of increasing return on equity, but less likely in higher rate environment.
The most important thing to consider is can you actually reinvest the capital and make more on your money. If no then hold. It is really that simple.
This seems a little simplistic, no? I mean I get that we can't give answers for every possible scenario, but there seems like a lot of wiggle room on this statement.
If your asset is old and may need meaningful capex in the next few years? Makes a huge difference. Maybe you've got some Class B/C multifamily in a neighborhood that has had increasing crime problems in the time you've held it and you want to get out before you end up with a massive publicity issue. Maybe you've got liquidity covenants that you'll start kicking up against when that next, good deal breaks ground - might be a decent time to get a little more cash on hand.
The point is, real estate isn't just a bond, where the buy/sell/hold comes down a reasonably simple yield calculation. There are a lot of other factors that come into play, and sometimes it makes sense to get out, even at the cost of some foregone returns or a less-than-ideal exit, because there are qualitative factors at play. Maybe you've got too many assets for your asset management team to handle and you don't want to further staff up - time to get rid of the bottom decile of assets. Etc etc etc
No it is actually that simple. Can you actually depoly the capital and make a better return? Yes, then sell. No, then hold. You should take all of the expectd new capex into account in that analysis. But remember that getting money back into the market is not easy if you want to do it smartly.
Assuming the OPs asset is in fact MF there are legit thousands of MF syndicators out there that don't know shit about how to properly buy. So you need to find a good replacement project, lock it up then dump the unwanted properties onto the dumb money in the space. People over complicate this shit. It is simple, buy well, maintain well, and dont over complicate the picture with a bunch of bullshit that doesn't really matter. Throwing out a bunch of what ifs doesn't change the fact that you still need to redeploy capital. Look at what the goals are, then make a decision that aligns with those goals.
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