WIN194. The Syndication Blueprint (Part 4 of 4): How to Know When It’s Time to Sell a Multifamily Asset

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Chris: Okay, well, here we go. This is the fourth part in our four part series. We started with underwriting and acquisition and then stabilizing or the value add plan and then stabilized or basically continuing operations. And now we are into disposition. Yeah.

So selling the asset. The whole goal of the project, right?

Sean: I mean, is it the whole? Sometimes you keep them forever. Hey, sometimes it's the journey that's important, Chris,

Chris: you know, the journey, it's a lot about the journey and enjoying it.

Sean: Yeah. Gotta remember that.

Chris: Enjoy it.

Sean: But yes, disposition. The point at when you may think of selling or you may want to keep the property. But jumping into it, like how do we know we get to that point? And I actually haven't had a chance to see this part of the process that Southwest sixty eighth deal that we talked about previously in another podcast was already sold by the time I had joined the company. So how do we get to this point?

Is it investor related, market related, timing related?

Chris: I mean, there are many, I guess, triggers or many, I guess, situations where you would want to sell the asset. I would say for us, timing has been a focus of ours. We have advertised a three to five year hold period for a few of our deals, and we want to try and meet that. But it's also very difficult in this current market with the way that prices are and just overall sentiment in the multifamily market. It's making it really tough to sell.

We've been trying to dispose 4633 Southwest Huber for three years now. And we're still in the disposition phase on that asset. And our value add plan is complete. And it's stabilized, and essentially, we're just waiting for the market. The market, if we think of the graph, the market was up here.

We bought Southwest Huber right here, and then it dipped. And I would say we're probably about at the spot where we bought it. But fortunately, we got it at a decent price and we added value to it, so it's worth more. But we want to be able to hit our returns for investors and the asset is still cash flowing. So we're just kind of waiting for the market to meet us at our sale price.

And so that kind of leads into another, I guess, strategy for disposing of assets, and that is just setting a sale price and letting everyone know what that sale price is and then selling it when you hit that sale price. I've heard that that is a phenomenal way to transact, and it keeps the transaction flow as long as your exit numbers aren't ridiculous, you potentially can keep things moving pretty quickly. And potentially you could sell all of your assets all at once on the upturn.

Sean: Yeah, always be ready for it. And then, yeah, it kind of takes us back to that acquisition stage. You're going back to that pro form a seeing what you initially wrote the exit price at.

Chris: And then just have a spreadsheet available for brokers to look at. And like, as we get closer to those sale prices, then have those be an opportunity.

Sean: Yeah. And speaking of brokers, because there's individuals across the market here getting introduced to brokers or meeting folks within the market, how does it typically work in terms of choosing a broker for a deal? Well, for us,

Chris: we are brokers ourselves, but the multifamily marketplace here in Portland is very closed. It's not something that a broker could break into, like an outside broker. You've got to spend years developing relationships with property owners. And for us, since we're buyers, we really value those relationships with those brokers. So of the people who are doing the most sales volume, we want to be choosing them to sell our deals.

But also, we want to spread it around a little bit. And then as well, we also promise if somebody gives us a deal, if we buy them a deal, we're going to use them on the exit side. So on the stuff that we purchase, that we either find ourselves off market or, broker ourselves on the RMLS, that we kind of have those options open. I believe that we're going to list a couple of those on the RMLS. We tried to do that with Southwest sixty eight, but unfortunately, we get a buyer for it.

And so then we used one of our, I guess, basically the broker that we used the most to kind of reward him for giving us so many deals. Cool. So Yeah, with Huber, we have it listed with the broker who sold us the deal. And then with Southwest King, that is something that's on the RMLS. You know, we've had a handful of people give us price opinions on it, probably going to list it on the RMLS, see if we can get somebody who is interested in it.

If not, then we will choose a broker to list

Sean: it for us. Sweet. Thanks for the details there. Yeah, I look at residential all the time, but the multifamily market, I know has like kind of a different kind of space in terms of like that broker. I

Chris: mean, residential is a little bit more of a commodity. Yeah. Where I would say commercial real estate is a little bit more of like a relationship business. And, you know, it's not like you're just buying and trading on eBay. It's more of like, you know, you're, I don't know, what's a good analogy for it?

Like, do feel like residential is just, you know, the market's pretty easy to break into. You know, maybe some neighborhoods are harder than others because there's really experienced people in them, but you could potentially just break into it. Yeah.

Sean: I mean, like the, maybe an analogy is the stock market because the numbers have to work as well, right? And a little bit, we talk about NOI and that hitting the right, being at the right space for the numbers to work for it to justify the sales price.

Chris: I'm just talking about like more of like a closed where, you know, there's high barriers to entry. I'm talking for like an outside broker. Outside broker. Somebody who isn't coming in with either a) like a national brokerage with a ton of resources to try and steal business from the other brokers, or a company like ours, we aren't multifamily brokers. And to be able to buy multifamily real estate in Portland, we need to be able to transact with the who are or the brokers who are getting most of the deal flow.

And so to do that, we essentially have to play nice and guarantee that we're going to be a relationship for these other brokers, because basically, they won't sell us a deal. And I've had times where we've been the best offer, but we don't get the deal. And that's a rough one. Yeah, it's tough. That has probably happened to us like 10 times.

Part of it is and it's just a very hard market to break into. I mean, if you look on our Stark deal, we weren't the best offer, but we still got it. So you know, that actually feels really good after putting in the experience. Yeah, I don't have a good analogy of like, I do kind of feel like the residential market is like eBay. You just buy and sell.

Yeah. Like it's just, know, there's a commission, and essentially, you have to do is pay the fees, and you're in the market, Yeah. Wheeling and And, you know, multifamily and commercial is just very different. Like, there's gatekeepers and high barrier century.

Sean: Yes. So still getting the rundown on how that all works, but let's talk about getting to disposition. What gets an asset ready for disposition in terms of you know, financials and operations? Maybe I'll talk about the operations piece, because that's a

Chris: something we've been focusing on

Sean: something we've been focusing on and talked about, you know, the Southwest King opportunity. There's a space where, I mean, curb appeal is a

Chris: thing, obviously. And there's, know, like, whether it's you're leasing a unit or you're trying to sell an asset to an investor, the first impression matters a lot. So what do the photos look like when somebody sees them? And then also, the investor is looking at financials. Like, what financials do look like?

A lot of times, an investor is going to see, like with our deals, is that we've already kind of taken the low hanging fruit out of the investment, and it's operating pretty well. And so essentially, who's going to be buying that, they're buying a pretty well running asset. And that is a little most of the times, an investor is going to want to see upside. Especially, yeah, and if there's not as much upside, most of the units have been remodeled, there's not very, so there's a thing called rent premium. It's what rents are currently at.

And then if you do some value add, what's the premium that you could get? Kind of like a high watermark for leases that have been signed. So people are looking at rent premium a lot to see, Okay, if we do a little value add here and upgrade the property, what can we get out of it? Yeah, in terms of operations, like we're trying to limit our CapEx cost because we don't want to be investing a ton of CapEx. I mean, obviously we want the asset to be running as best it possibly can.

And then if there's CapEx items, then I really feel like, okay, we should note those CapEx items. Let the new buyer know that, hey, there's value add opportunity here, and there's rent premium to be garnered. And honestly, when I said the first impression, having a property that doesn't look perfect, because then you can sell that upside story. It's like, hey, do paint, do some landscaping. We're able to get it operating at this level in its current condition.

And with a little bit of paint and a new property management company, maybe some signage, it's possible to juice it up a little bit better. Yeah. And now here's a word from our sponsor.

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Sean: Yeah, but in terms of property, think, you know, an operations side that we talked about curb appeal a little bit, but just the, you know, I think landscaping is an aspect which, know, the first thing you see is landscaping. And you see the curb? And can you see the curb?

Chris: It's not seen curb, it's how is it supposed to be appealing?

Sean: Yeah, because it takes getting past the curb to get into the property 100%. But those, whether we're taking those preventative maintenance pieces along the

Chris: way

Sean: and supporting the property, I think allows people to get to the doors and inside and want to go check out the units and maybe take a little deeper look at the financials, which the financials are very important, right? And we kind of talked about that in the previous episode a little bit, but in terms of financials and like that being a part of it, we're getting to disposition where based on the pro form a, there's some cap rates that we take a look at.

Chris: Mean, yeah, that's exactly what was going into my brain is we have to talk about cap rates.

Sean: We do. What? Here we are. What are cap rates? What is

Chris: the cap rate? The cap rate, oh my gosh. It's not

Sean: operating income over.

Chris: Divided by cap rate equals price. Yes. So it's or net operating income divided by price. Equals the cap rate.

Sean: Yes. Apologies there. Put on the spot and Well,

Chris: I mean, it's kind of like a simple equation. E equals MC squared or force equals mass and acceleration. So you just got to do a little algebra and you

Sean: got it.

Chris: But the problem with that all is, what net operating income are you talking about? That's a big deal. There are probably 12 different net operating incomes when it comes to looking at an asset for sale. You've got the actual numbers, you have scheduled rent numbers, you have pro form a numbers, you have the numbers that the bank is going to look at, and then you've got your pro form a numbers. Maybe not 12, but it's about five or six.

And so you know, each of those net operating income numbers comes with a different cap The worst, well, unless the market is declining severely, If everything's flat or, you know, yeah, I mean, most of the time, the worst is going to be the actuals in terms of how the property has been operating, unless it got juiced up by a lot of concessions a year ago, and they found good tenants who just wanted good concessions, and they're a year into that, the lowest revenue should be a year ago, because rents have slightly increased in the past year, you know, and I mean, have also, you know, are the highest that they've been for a little while. So looking at that, so scheduled rents for this month should be higher than the average of the last twelve months. And so scheduled rents, that's another way to look at it. That's generally how the bank is going to look at it, but they will also put some overlays on what they think expenses should be. The bank members are, I would say, slightly more optimistic than actuals or the schedule.

Well, yeah, I guess there's a sixth one in there, which is going to be basically what the real estate broker puts in their advertisement. Because that is, they will use a mix of actuals, and these are market averages, and this is what you should expect in the city of Portland. And yeah, so I mean, there are just so many different cap rates to look at. And so I would say the cap rates, the ones that only matter, are the actuals, at least for me, or the actuals, and then what the bank wants, and then what you actually think you can do. And so what you actually think you can do is what I call the pro form a cap rate.

Oh, and there's a seventh one, is after your value add, what do you think the cap rate's going to be after your value add? And so, yeah, like knowing what is going into the net operating income number is essential to being able to underwrite the deal and also essential to being able to sell the deal.

Sean: That was a lot. It was more than I thought, to be honest. And again, still getting up to speed on Map rates are just it's

Chris: just a moving target. I don't think it's the best way to look at a deal. I honestly think that a price per door, knowing what, being able to add or subtract based on location, amenities. Based on washer, dryer in unit or not, one bedroom, two bedroom, three bedroom unit size, and just kind of being able to like keep in your head, like, okay, we got 900 square foot with washer dryer, that's going to command a little bit higher than a six fifty square foot, two bedroom without washer dryer, and then you can adjust for location. Like if one is just prime location and then the other is way deep in suburbia.

You make your adjustments. And so I honestly think that that's the best way to arrive at a price and then just knowing what you're willing to pay for something that's operating quite well versus something that is not operating well, but you think that you can add value to it.

Sean: Yeah. So there's pieces outside the numbers too. An example, like,

Chris: I know to look at

Sean: a deal and you underwrote the deal. And then once we saw it, there were some things that kind of led some questions like, hey, what would market rents actually look like based on this property and the amenities offered? It caused us to look at it a little bit differently.

Chris: Yeah, and walk from the deal. Yeah, because that was I don't think that that one's sold yet.

Sean: Yeah, and that was under contract initially on it. Sometimes you get to back to the acquisition stage when you take a look at the numbers, get into it and then you can change your mind. So that occurs, but timing, talking about timing, we obviously have a plan for deals. You talked about a three to five year kind of hold period that's advertised, but sometimes, you know, things pop up and maybe the timing is right. So as we think of the future and disposition of deals, how do we balance timing of exiting versus the planned pro form a, the event where we target hold period?

How do we adjust accordingly?

Chris: Yeah, well, I would say part of it is the returns we're trying to achieve. So having those strike prices, or I guess not strike prices, but targets for our sale price, and just having those out there. And then after we've hit our time frame, if we haven't hit those targets yet, then I think that we want to look at selling at a lower price and accepting the fact that, hey, that one might not have been the best deal that we've ever done, and that's Okay. You're not all going to be home runs.

Sean: Yeah, sometimes weird things happen within the market, which

Chris: Or maybe sometimes your analysis on a property or an area was incorrect. And

Sean: Yeah. Or changed based on the local economics or larger macroeconomic factors. So interesting. Talking about once we close on that, how do you walk investors through the waterfall and how they're getting paid? Or what does that typically look like once we

Chris: That's a good question. That was a good thing that we're not experts at. We've only done it once. The waterfall is based on an internal rate of return. An internal rate of return is a way to calculate annual continuously compounded returns based on the time value of money.

And I mean, essentially, the way that we have Excel and we're using the IRR calculator, but we take all of the cash flows that have come in each quarter, assign a date to them, and then we're plugging in the projected net cash flow from the sale on that future date, and then trying to figure out what the IRR is. And I mean, the way that our waterfall works, and this is, we explained this prior to acquiring a deal and before anybody signs up, it's in all the operating agreements. But Uptown Syndication is a general partner, and then our limited, our investors are limited partners. So limited partners receive 100% of returns up to 7%. And so essentially, Uptown's indication is general partner.

It's not taking any it's called promote or any percentage from that area. And so from zero to 7% is like, we don't want to take anything out of the deal if our investors aren't making 7%. From 7% to, and this number varies based on the deal. I want to say it's probably somewhere around 15% IRR. Are a little higher, just depending on the deal.

That is an eightytwenty split. And then basically, we hit a home run and we've held a property for I mean, we're looking at least five years holds for all of our deals right now. So earning 15 plus percent per year is not a bad return. Really good, I'd say. But I think it actually would beat the stock market if we were returning that right now.

I mean, the stock market has for, been on I think the last three years or 20 plus percent, but 2022 was not. 2022 was a down year and 2021 was nice. But essentially, 15% every year, I think, rivals that. And so the deal that we did do and sold last year at 68, you know, rivaled the stock market, which I feel like is pretty good. But above 15% is a fiftyfifty split with general partners and our limited partners.

And so that's the waterfall.

Sean: Yeah. Yeah, and I know typically in the beginning we do webinars, curious just do we typically do like a completed deal webinar? I know we added, we have a, you know, speak to

Chris: the traffic. We did not do a completed deal webinar for sixty eight.

Sean: I think we should do that for next week.

Chris: Yeah, definitely for the next one. I mean, problem is with sixty eight, we put it up for sale in 2023 and it closed in June 2025. And so when do you do the completed sale webinar? Yeah. I mean, yeah, obviously we do it in June.

Yeah. But we, I think we had sent out maybe 15 or 20 updates. Yeah. Because we were in contract and then we were out of contract and then we were in contract and then we were out of contract. In contract, out of contract.

I think that happened five times.

Sean: Yeah.

Chris: And so like, at that point I was just like, okay, we're, you know, if we accept an offer, we're not gonna, you know, tell anyone until they've made it through the due diligence period. Yeah. And yeah,

Sean: that makes sense. And then kind of led to the next final question I had was around like, based on that last deal, anything to do differently? It sounds like that, I bet when you got that first offer was so excited.

Chris: Oh, was above asking price and we were stoked.

Sean: Yeah. And

Chris: then like kind of the market started getting worse and then they ended up dropping out. We were super bummed because we were gonna have huge returns but yeah, anyway, it was fine. Yeah. You know, like the, this is an area where the acceleration, like we're gonna, like, I feel like if we do publish our strike prices for our deals and get them out to brokers, you know, I think that that is an opportunity for us. They can look at our deals and kind of pick and choose which ones they think will be good buys or

Sean: not. I mean, it's interesting in some of the areas like seeing a lot of growth out near in a Cornelius property. And I'm like really impressed with that area of Oregon and how it's growing very quickly. I'm like, wow, there's a lot going on here. A lot of investment is going on here.

And so, you know, they worked through some challenges in the value add deal there, but I'm like, wow, this is, I think this is going to turn out to be a great deal. So

Chris: one of, I guess, one of the difficulties too is in calculating our exits, I guess just with the way the market has been going. Some of the deals that we entered into, we projected higher or lower expenses. So if the expenses are higher, the net income is a little bit lower, and then, you know, we actually are ending up paying less of a preferred return. So there's a larger preferred return accrual based on that exit price. But I mean, in the end, we underwrote that exit price probably based on a higher NOI than what we're actually getting.

And so if we're not paying the preferred returns, we probably need to lower those target prices just because the net income's lower. And then also, the deals that we bought in 2021, 2022, 2023 even, we bought those off of much lower cap rates. And we projected sale prices off of so the way that we underwrite is we underwrite cap rates are going to be a half point higher. So like if we bought something at a 5% cap rate, we would project a 5.5 rate cap rate exit, but unfortunately, cap rates have gone up probably one and a quarter points. And so that's another thing to look at just when we're swagging our exits.

Yeah, yeah, yeah.

Sean: So a couple of deals we have available for sale, getting ready for sale.

Chris: We have one that is on the market. Yes. We have one more that we are in process of prepping or being on the market.

Sean: Yeah, and continual learning. And I think, yeah, you speak to some things on potentially what we can do differently as we get to the disposition of these newer assets getting ready for sale or that have been ready for sale. And I think, yeah, we'll have to take a look at adjustments and then that leads into future deals as well and how we underwrite maybe differently as things change over time.

Chris: Yeah, and I mean, with the changes in the market, it's harder to make a deal pencil right now if we project a half point increase in cap rates because they've so violently, since the cap rate expansion has been so volatile, it's tough because a lot of, like, I would say two years ago, we were at 4.5% cap rates. And there's still a lot of sellers who are like kind of anchored in right And now we're

Sean: like probably a little closer

Chris: to six. And so to buy something at a six and then project that we're going to exit at six and a half, when we're barely able to get a seller to sell, and it just makes it tough. Yeah, but I guess as cap, like where we're at and then where sellers are anchored as they kind of converge a little bit, that is going to make it a little easier to transact. And so I would say that that is part, one of the issues of why it's so difficult to sell a deal right now is that the volatility of the cap rates and just, yeah, the expansion of cap rates.

Sean: Yeah, and the numbers penciling. It doesn't necessarily work. Well, great. Well, thank you, Chris, for sharing some details on Disposition. Know, continual nuggets come from each of these conversations, and hopefully the listeners have them as well.

Chris: Any other final thoughts to share? I mean, I guess in closing, deals have to transact. And so we're getting into that period where there is going to be more transactions done. And that's, you know, and some transactions beget more transactions because of ten thirty one exchanges, and then the deal flow is going to accelerate. And, you know, I would say last cycle, once we reached that point of where deals started to have to transact, prices actually went down.

And so I think we're still in a buying opportunity. It's going be hard to sell until we can kind of like dig our way out of this buying opportunity. And then the people who buy well below the market will want to sell when we get back up to where the market was you know, year or actually like two or three years ago. So yeah.

Sean: Buyers and sellers need to converge. We'll see what happens. Hopefully it's soon.

Chris: It's it's gonna have to

Sean: be the

Chris: sellers willing to transact at lower prices for the most. Okay. Thank you all. Thank you. Take care.

Bye bye.

AJ: Thank you for listening to this episode of the Real Estate Professionals Investing Podcast on WIN, your community of investing knowledge for growth. We hope that this episode has increased your knowledge and added value to your path to freedom. If you would, please take a second to rate us so that we can get more great investors to interview. If you or someone that you know wants to be on, please visit westsideinvestors.com and fill out our form to be on the show. Thank you again, and enjoy your day.