Wondering whether to keep or sell a small asset? How do you make that decision? Recently BAM founder and CEO, Ivan Barratt, created a video explaining his theory behind selling vs. holding a small asset. We share the simple formula he uses to make this determination in today’s edition of the BAM Blog…
At $300 million assets-under-management and with over 90 employees, BAM has grown exponentially from the company Ivan Barratt began in his spare bedroom. He started his own investment portfolio with a single duplex! So when it comes to knowing when to sell or hold an asset, Ivan has developed a pretty solid, yet simple strategy. (To watch Ivan’s video, click here.)
Ivan looks at return on equity instead of cash-on-cash. At its most basic level, return on equity is net income (all cash inflows minus all cash outflows and reserves), divided into the actual equity you could expect if you were to sell today (not including transaction costs, Realtor fees, etc.) The example Ivan gives is:
If you had $100,000 equity in a duplex, and that duplex generated $2,400 a year, your return on equity would be only 2.4%. In this example, Ivan notes that your money isn’t working hard enough – and a lot of people find themselves in this situation right now. Market conditions have improved, there is forced appreciation as a result of physical upgrades, rents are going up: the amount of equity is substantial but the return is low. This is a great indicator that it’s time to sell smaller assets and start buying bigger apartments.
Real estate investors nationwide are experiencing it every day and Ivan’s formula really takes the guesswork out of it. Simply take your crude cash flow, divided into the amount you’d actually walk away from the closing table with if you sold the asset. Ivan’s own rule of thumb is if an asset isn’t generating at least 10-15% return, your money isn’t working hard enough for you. As Ivan points out, thanks to tax code changes in 2017, you can now recycle that capital into a much larger deal, legally avoid taxes, and not have to do a 1031 exchange (which is often complex and fee-heavy).
Ivan has one client prepared to walk out with $1 million after selling a small multifamily asset in Florida that was barely generating 5% returns. It doesn’t make financial sense to have equity locked up in a deal like that. Ivan’s point: in real estate, size does matter. Smaller deals are more susceptible to supplier cost increases, resident turnover, physical damage, and other issues. Larger assets bring bigger reserves for when issues arise, more flexibility if residents move, better (on-site) property management, and greater economies of scale.
Want more info on multifamily investing? Go to investments.barrattassetmanagement.com and sign up for an account. Once there, under “offerings” you’ll find a free library with articles and videos featuring Ivan and his insider knowledge and insight, as well as a ton of info on BAM, its team, track record, and offerings.