Welcome to The Real Estate Venturist. Every other week, this newsletter will give you a behind-the-scenes look at what it’s like to be a real estate entrepreneur. As always, this is not investment advice and merely my opinion.

When the Best Move is to Move On

Selling a property is hard to do. There is a long-held belief that real estate always appreciates over time. It’s not a straight line, but in hindsight, it can look that way. And there are countless examples of owners who have successfully done just that—held long enough to win. Those are my favorite investors to talk to. They’ve been through numerous cycles, watched submarkets evolve, and seen the industry become increasingly institutional. They seem to have figured the game out.

Because of this belief, and the success of long-term owners, selling can be an afterthought. If the market goes up in the long-term, why sell now? Many wait to hit their underwritten sales price. Others sell when returns meet their IRR or equity multiple goals. Still others say, “If the returns are good today, they’ll be even better next year.” The market always goes up, right?

Not always. The apartment market as a whole feels more volatile than it used to. Sunbelt markets like Raleigh or Nashville never used to trade like boom-and-bust San Francisco. The South had steadier, less volatile performance. It wasn’t heavily traded and cap rates were higher. Cash flow was king. San Francisco, by contrast, ran on demand surges caused by the latest tech innovation coupled with a constant lack of supply. This resulted in bets on future appreciation. Now, this same boom-bust trend seems to be spreading to more markets.

Unprecedented capital has poured into more regions, amplifying both booms and busts. Instead of hyper-demand in Silicon Valley, we saw hyper-supply in the Sunbelt. Fuel to the fire on either side results in explosions—and falling values. That stalls transaction activity. Buyers may want to buy, but sellers hold out, convinced that “real estate always goes up.”

When to Sell

Different investors sell for different reasons. If I bought a property with my own capital, I might never sell, unless I needed the cash. The IRR would be irrelevant, and I'd only be concerned with the cash flow and the dollar amount of the value increase. That mindset also makes me a difficult buyer to compete with. If I really like a property, I can ignore logic and pay whatever price (and low cap rate) it takes to win the deal.

Professional investors have different goals. We want to achieve at least the stated return we pitched to investors. Some GPs focus on IRR, others on net investment multiple. Both are valid, but each tells a different story.

A quick sale can make an IRR look great. For example, if I pay $100 for an asset and sell it a year later for $120, my IRR is roughly 20%. That sounds great when compared to a 12-15% IRR goal. However, my net investment multiple is 1.20x (your $100 back plus $20 profit). That doesn’t sound great when the expectation is generally between 1.6x-2.0x over a 5-year period. The holy grail is achieving both: high IRR and high net multiple. We achieved this in Silicon Valley from 2011 to 2016.

When we sold those assets, the decision was easy. Our returns exceeded the underwriting. Also, time was on our side. The market wasn’t changing against us and we were able to wait to find the right buyer who would maximize our value. Waiting worked.

When Waiting Doesn’t Work

The pandemic and its aftermath (rapid demand declines, submarket struggles, inflation, rate increases, and hyper supply in the Sunbelt) taught us that timing is everything. If you played the multifamily market like a meme stock trader in 2021-22 and were able to get in and out, you came out ahead. Most buyers from that window are still waiting for better days. But should they?

It depends. If the property doesn’t have too much leverage, it cash flows, and all capital needs can be met without asking for additional equity, then yes. If the answer to any of these is no, then perhaps selling should be on your radar. Now, not every property is ready to be sold. Some need higher occupancy or a few months of stronger operations first. Yet sometimes a seller just can’t wait.

Maybe a life event forces a sale. Maybe the investment fund has run its course and is liquidating all assets. Maybe a particular market or submarket just isn’t returning anytime soon to what it once was. Or you decide that any return is better than no return, and that your capital is better used elsewhere. These situations rarely produce underwritten returns, but they’re valid reasons to sell. Professional investors can’t be sentimental about their investments.

Waiting may be right for some. But for many, moving on is the better play.