Should I Liquidate my Family's Portfolio?
Family owns industrial and commercial properties that generate significant cash flow (1m annually; 15m+ portfolio value), but I'm considering what other alternatives to this I should consider as my father is looking to "retire" soon. It's a multi-generational portfolio that I will most likely get flack on if I try to even bring up the idea of liquidation, but I can't help but think of other ideas for continued expansion in other ways, specifically development. Currently work in IB and have always been driven to make something more, but not sure I'd like to stay doing IB long term - more so just doing it for the exposure and the business acumen since my family doesn't have that experience.
Tldr: What options should I consider to grow this while still either still maintaining the portfolio or liquidating the portfolio? I've always enjoyed the development side and I'm considering pursuing a smaller subdivision (4-8 houses; 2-3000 sqft houses) in a tier 2 / 3 city since I could also build myself a house on a lot.
Seems like refinance and buying more/developing would satisfy all parties
Since there's no debt on the properties, would I take out an expansion loan and use the assets as collateral?
Exactly. You could go to direct to a lender or a commercial mortgage broker. I am biased since I'm a mortgage broker so take this with a grain of a salt but since you're dealing with fairly high price tag I'd say it's worth it to approach one and ask them to get you quotes. Like other suggested you could build your own model and stress test it but a top-tier mortgage broker will help simplify the process and do this for you.
When it comes to selling, the name of the game is price - if you can demand more than what you expect to gain, then why not. There's so many dumb buyers in this market. Second is opportunity cost; if you're going to pull the money out, what are you going to park the money in. Are you doing this for safety or returns? Can you generate risk adjusted returns on the capital in excess of what you could if it was in the property? What about tax considerations (cap gains, ordinary income, etc.) and intergenerational inheritance planning (possible estate tax)? Do you just want to spend the money? Last comment is that there's usually a compromise. You can probably find an operating partner to take stake and cash out only a portion of your holdings.
Otherwise would just maintain status quo if your view of the business / market is positive.
Not looking to spend the money on myself, just trying to strategize and consider other ways that I can take a $15m portfolio value to $50m+.
Instead of getting rid of assets that generate $1mm annually, why don't you put a manageable amount of debt on it and pay yourself a dividend so you can try to get into development?
Just selling proven assets to try something, unless you're an experienced developer, seems very shortsighted in my opinion.
Right, this is kind of the answer I was looking for. Just trying to figure out the best way to structure it.
I would build a model that gets down to NOI on a monthly basis, by building. Then stress test it a bit to see what kind of interest it can handle. After you see the interest coverage, use that to figure out the principal balance of the debt. If that's too low, you might have to pursue another avenue. If it's enough to start a development (after you build that development model), then I would actually put together a deck with return analyses and share it with your dad. Get his thoughts, he may or may not be interested.
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Considering you work in IB, I would either first move into the real estate industry to learn more, or refi the portfolio. Why sell? You’ll lose an income producing asset you would have for the rest of your life. Also, as it relates to development, go learn on someone else’s dime and than use your capital to do your own deals. No need to stumble with your Capital at risk.
Agreed. Don’t give up mailbox money like that. Refi and do everything you can to learn the industry.
Appreciate the response. What would you say is the best way for me to pivot into development post-IB? Tentative plan is to try and lateral into a RE-focused group at my IB after the first year and then consider other options after the second year. Not too familiar with the employment process, but from what I do know, it seems like the analyst/associate level roles are far and few between at development-specific firms.
Start networking, meeting people, and trying to find openings. Be open to other areas of real estate - say acquisitons at a fund or Life Co., or even investment sales as an analyst or associate. Making the transition is on networking, but you may need to open up to the ‘finance’ roles of real estate with the goal of fully moving to a developer in the next few years.
First just be aware of what goes into the property. Things like management and maintaining the property. It's not for everyone. If you don't like it then figure out the costs of hiring a management company.
Real estate activity's something to watch just like business activity. You can get an idea of an area, whether it's prospering, declining, stagnating etc.
Then get an idea about the portfolio's equity and debt situation. You can always refinance/recapitalize the assets if you need money for something.
And honestly it's up to you. What do you want to do?
Sell all, buy crypto, become billionaire, launder Chinese money, become trillionaire
If the properties are free and clear and you want to get into smaller developments, just get a line of credit for up to $2-3mm and start building. I wouldn't sell, but just build off of it
Pm. I can send model to help
This is a pretty awesome and rare opportunity for you to learn the business at a very granular level with almost no risk. The properties are performing, so there isn't an immediate need to do anything. Spend a couple years and poke into every facet of operations that you can; learn the accounting and tax treatment laws, how operations and staffing works, why insurance premiums are priced the way they are, what it costs to do capex work, etc. This kind of hands on, ownership level experience is nearly impossible to find, especially when you consider that you don't have to proactively do anything to keep the ship afloat.
Maybe, after a few months/years, you figure out that the family assets are being mismanaged a bit and you add some value. Maybe you don't, but in the process of managing everything you find other opportunities and go back to the original plan. At the very least, you'll be able to build a network of consultants and contractors and brokers in your area/asset class who you'll then have a relationship with if you do your own deals later on - hard to overstate how important those can be, just looking people up in the proverbial phone book and asking them to do hundreds of thousands of dollars worth of work is one of the way you sink an asset.
All in all, I think planning to sell right now sounds like killing the goose that lays the golden eggs. No one can see the future, of course, but it's hard to imagine a portfolio of industrial assets losing a ton of value over the next 24 months or so, so you really don't gain much by exiting now, whereas there is a ton of personal, qualitative value you can extract by moving into an operations position.
Thanks for the insight. Only problem is that the properties are located in an area that I’d like to move away from. Makes it more difficult to justify retaining the current properties because of that.
Echoing the recommendation from others to refinance instead of sell. You don't pay any taxes on loan proceeds unlike a sale and can likely get an interest rate in the 3%'s if not lower.
If you pull out $10MM (65% of the $15MM value) from a loan, that empowers you to build or buy almost $30MM of real estate using the same 65% leverage. You just tripled your portfolio value / AUM without paying capital gains taxes and with your tenants paying the loan payments for you.
Obviously a loaded question to ask, but what areas specifically should I be considering to invest that 30m+ in? Trying to understand what expansion areas will provide the greatest return while still maintaining that hedge-adjusted risk profile.
Like any investment, it comes down to your comfort on the risk-return spectrum. Ignore the "sell versus finance versus xyz" noise and ask yourself what you'd do if you already had the money.
You can break it down to "What am I comfortable buying?" (aka property type) and "What work am I comfortable doing?" (aka project type).
As for property types, people generally consider safer bets to be on housing (single family, duplexes, apartments, etc.), industrial buildings, and buildings on NNN retail leases (7/11, chick-fil-a, etc.). Hotels, shopping centers, and office buildings are generally more risky with exceptions of course.
If you're entirely new to real estate, then building a property from the ground up is probably too risky and intensive, especially with your day job continuing. On the other end of the risk spectrum, buying reliable existing ("core") assets is the least risky but comes with the lowest returns. In the middle is buying existing property that need to be renovated and then either sold/flipped or leased to new tenants at higher rents. There's no right answer as to which is best.
If none of that is appealing, still take out $10MM (or less) and throw it into a an S&P index fund and (hopefully) make the delta between the interest rate and whatever the market generates.
Do NOT liquidate your family's portfolio/life-savings(?) unless you strongly believe your properties are about to fall off a cliff. This may come off a little harsh (not my intention), but the fact that you are asking a forum full of mostly college students and young professionals what you should do with your family's wealth tells me that you have no idea what you are doing. As others have already stated, you should work in real estate for at least a couple months to a year (given that your family is already in real estate, most of your learning will be through them) before gambling your family's capital. Real Estate isn't rocket science, but knowing how things "work" in the industry is very important such as knowing what lenders look for in a project/borrower, how the appraisal process works, permitting process, etc... I highly suggest that you work for a small to mid-sized firm (work for a company that is 1-2 levels above your family's) because the work you do there will be much more relatable to your family's portfolio and you can quite possibly replicate that firm's strategy with your family. If you work at a place like Related/Tishman, you will work on huge projects that is completely unrelated to your family's scale.
As for what you should do with your family's portfolio/wealth and how to grow it...i have no idea since I do not know your situation, family's expertise, or market...but I can offer my thoughts:
1.) I highly recommend that you do no liquidate nor refinance the portfolio. Do not liquidate for the reasons stated above ^ and do not refinance because you have no plans for the capital and even if you did have plans for it, how much/how fast can you deploy it? Once you refinance, you have to pay interest on the proceeds. Instead, get a line of credit. This way, you only pay interest on the funds you draw.
2.) Development is risky and requires a lot more expertise. A family friend of mine had a dispute with her GC over what finishes to use (she wanted high quality finishes and the GC wanted dirt cheap dog shit)...the GC walked out on the job halfway through. Now with more reputable GC's I wouldn't expect a walk out, but quite possibly conflicts over terms, change orders, cost overruns..etc... There will definitely be unforeseen construction costs and problems that arise (a developer's primary job is to problem solve. Problems come up everyday...nothing is ever smooth). I do appreciate that your expectations for development are much more realistic (4-8 houses) rather than the typical "I will develop 100+ units by 30" that we get on this site, but even the 4-8 units scale is difficult. If you are in a high COL area, then finding developable land at a price that leaves you any profit is difficult and if you are in a low COL area then supply may be high so vacancy rates may be high or sell out prices may be low. Once again, I don't know your situation and market, but my point is that development is risky, capital intensive, and not a very reliable source of income (just because you find a project this year doesn't mean you will find one next year). This is also another reason why I suggest against liquidating and refinancing. That cash flow will be vital for paying for overhead (salaries) and soft cost/working capital.
3.) Sorry about all the doom and gloom regarding development, so here's a ray of sunshine. Since your family has a decently sized portfolio, they must have solid experience in terms of construction/property management. Perhaps you can gain more experience by adding value to your current portfolio? Maybe there are some properties that need some renovations that can justify higher rents (assuming you do this when leases turnover). This is a great way to gain experience in project management/construction/financing and add value with little risk and it allows you to start building a reliable development team (architect, engineers, attorney GC, etc..). Furthermore, you mentioned that your family owns industrial properties. If these are in areas that are "gentrifying" or will gentrify in the future, they could be great redevelopment opportunities. When multifamilies start going up, industrial assets are first to be redeveloped.
4.) I already touched on this point in my first paragraph, but I want to reiterate that you should really consider working for another firm that is relatable to your family's scale and ideally in the same state. You have capital to invest and i assume some expertise from your parents. What you need is a strategy that matches your capabilities. A strategy isn't a one off deal that went really well. It needs to be decently repeatable and reliable. If you read some of my posts, I was (and still am) in a very similar situation as you. My family is in real estate and has some capital to invest. What I needed was a strategy and arguably even more difficult, convincing my parents of the strategy. I ended up working for a mid-size developer for only 6 months and pretty much learned 95% of the job in the first 2-3 months (financing, permitting etc...not rocket science...but very important knowledge). I ended up learning a decently repeatable strategy from my previous firm (acquiring 3-4 unit properties, doing a cosmetic renovation, renting them out to create a stream of fixed income)
5.) Last point, I promise. Know your market/product, know your market/product, know your market/product. I cannot stress this enough. If you do not know your market/product, you will either lose a lot of money...or make money due to luck..but you can only be lucky for so long. I was looking at a 3 unit property a couple months back. The seller bought the property 3 years ago for $800k and hired an architect to draw up some plans with the intention of completing the renovations. Based on my calculations, the renovations will likely cost about $500k-$600k, but comps show that each unit is only worth $500k post-renovations. $1,500,000 - $75,000 (cost of sale) - $800,000 - $600,000 = $25,000 and that's not even including soft costs (financing, permits, engineers, etc...). I found out that the seller is actually from another country and likely doesn't know the market very well. Had the seller done their homework 3 years ago, they would have known that the 3 unit property was only worth ~$600k at the time. Now they are asking for $900k just to break even on their cost of sales and architect fees. They are going to lose money. Investing is finding a needle in a haystack...but you have to know what is hay and what is a needle.
There are PE funds that focus on this type of deal. Not saying that would be favorable for you, but this has definitely been done before.
bro if im balling on 1mm annually ill be fucking bitches and traveling the world for at least a few years before I try any of this selling bullshit
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