If you have followed our story, you’ll know we got our start in this business buying duplexes and fourplexes—ultimately scaling that to 76-units. You can read about how we did that here.
Today, we are in the process of selling off that portfolio and the monthly cash flow we receive from it. Some of my friends have asked why we’re doing this—why are we letting go of monthly cash flows and walking away from the assets that allowed us to quit our job and focus full-time on big apartment communities.
The answer is multi-faceted, and I want to highlight the top five reasons below.
1) Executed our business plan
We didn’t know it when we first bought these, but the same business plan we march towards in the syndication space—fix-up a property, create equity, cash flow and sell it 5 years later—is exactly what we’ve done with our rentals.
Our portfolio consists of B- and C-class properties. After the first couple, we started exclusively buying value-add deals where we made some improvements to the units and charged higher rents. By doing that, we’ve not only created cash flow-but a ton of equity.
2 years ago, we executed a cash-out refinance on most of the portfolio that allowed us to access the equity we had built up to date. It allowed us to buy a few more properties, but also created slightly higher debt payments across the board. If we were to execute another refinance, the properties would barely cash flow, which violates my investing 101 rule. So, when we look at how much equity is on the table today, and what our current returns look like—its simply time to sell. By deploying that capital into a new asset, we can actually receive higher overall returns on our money.
We didn’t realize this at the time, but this is living proof of the apartment model we preach to investors. Better returns is the goal of any investor, but its not the only reason we’re selling.
2) All-in on larger assets
As we continue to scale and buy more apartment complexes, we want to benefit from those elevated returns available from higher unit count properties. Selling our small properties generates capital we can use to invest alongside our investors in our apartments. We firmly believe it’s the best method to generate income and wealth for our families, and its what we preach to our investors and clients. Actions speak louder than words, and we are all in on this business.
3) Economies of Scale
We have written about this before, but a big attraction to the larger properties is the ability to scale and actually create less work and headaches than you deal with on small residential units. By selling our portfolio, we will receive fewer hassles and distractions from the bigger assets than what we deal with on the smaller ones.
A recent example from our 192-unit property really cemented this argument for me: A couple of months ago a car jumped the curb, crashed through our fence took out some landscaping and a couple of A/C units before coming to a stop 6-inches from one of our buildings. Thankfully no one was injured, and it caused a lot of work for our management team. But, as the owner & asset manager we didn’t even hear about this incident until 5 days after it happened; our management company had already sorted things out with the driver’s insurance company, had the A/C units replaced and a bid for the fence and landscaping. Within 2 weeks, everything was fixed as if it had never happened—and it took about an hour of our collective time to remedy. If that had happened at one of our fourplex properties it would have cost us at least two full days of time dealing with the ramifications and coordinating with the property manager.
4) Where focus goes, energy flows.
This is related to the above point about distractions, but its even more pointed. “Where focus goes, energy flows” is a favorite saying of our business coach—and he’s right. The more you focus on something, the more energy you create around it and the more success you are going to find in it. Our rentals have been great. They got us into the business and taught us a ton. But at this point they are not something we spend time thinking about or working on much as all of our time is spent focused on finding, buying and operating bigger deals. It’s not fair to those assets or the residents who live there. More importantly, we want to ensure all our energy and focus remains on Wildhorn Capital and ensuring we are doing the very best for our investors (and ourselves) every single day.
Being a sponsor on a large deal requires liquidity to qualify for the loan. The more post-closing liquidity you can show, the better loan terms you can get. So by selling our portfolio, not only will we have more money to invest in the deals, but we can show liquidity to the lender to ensure we’re getting the most competitive loan terms available. This is a big point: On our most recent acquisition we received a 10-year fixed rate agency loan, and were approved for 5-years of Interest Only payments. This is the maximum you can get, and a big reason we qualified was the strength of our collective balance sheet from the General Partners. Having that liquidity is a big win for our projects and our investors.
I will always look back fondly on this chapter of our lives and investing career. The education was invaluable, the experience unreal. But the time has come. As the saying goes—“Don’t Sweat The Small Stuff.”