I’m thinking about selling most of my small real estate investments and buying one larger piece. And I’m also thinking about buying outside of my South Florida “neighborhood.”
Right now, most of my investment property is in South Florida. Prices here are at an all-time high, but there are plenty of indications that they will be coming down soon. And if we have another hurricane season this year like we’ve had the past two years, values might plummet. If I sell now, I have a good chance of selling at the top.
Until now, my partners have been doing the management work for a reasonable percentage (5% to 10%) of the revenue. Some of them want out. Managing a bunch of small properties is a lot of work. If you are just getting started, the work is well worth it. It’s an investment that will pay you back many times over. But for me … I simply don’t have the time to do it.
Managing a lot of small properties requires very good administrating. You need to be sure all the contracts are in place, all the partnerships are updated, all the forms are being filed, and all the insurance is paid for. I own about 30 small properties. That’s too much for me to keep track of.
But there’s another reason that I’m thinking of selling.
At lunch today, BM told me that he is moving his real estate interests to Atlanta. (I’ve written about him before. He’s a friend who has an uncanny knack for business, including real estate.) EP, my partner in some big development deals in Florida, is looking at land in the Southwest. So is Justin Ford. And they are all reporting better numbers in those places: lower prices and higher returns.
For example, Justin says you can get multi-unit properties in parts of Austin, Texas not far from downtown for just 10 times rent … sometimes far less. If you know where to look, you can even find 24-unit apartment buildings in similar areas with cap rates of 10%, sometimes better. At those numbers, you can cash flow while the market continues to appreciate … thanks to rising jobs and population and the fact that Austin hasn’t gone through the inflation that the bubble markets on the coasts have.
Justin has also found good deals in Atlanta, Raleigh, and hurricane-free Jacksonville Florida, to name just a few of his favorite emerging markets.
Getting out of my little deals makes sense. Getting into new deals in up-and-coming markets also makes sense.
I just sold a condominium that I paid $289,000 for three years ago for $465,000. It was rented the entire time, and I had little trouble maintaining it. (It was new and was managed by AK, an expert). But I can’t imagine it going up in price much more over the next four or five years. Taking my money off the table feels right.
I’ve also learned that you make your big money in real estate by getting involved in big deals. As Frank McKinney pointed out at our last Wealth-Building conference, doing a small real estate deal is almost as much trouble as doing a big one. The big difference: You make a lot less money.
Of course, that’s Donald Trump’s message too. But I’ve never wanted to be another Donald Trump. I’m happy making good money without taking on too much risk. I also like keeping a low profile.
I don’t mean to imply that my small property purchases were a mistake. On the contrary, I think they were fantastic. I got into a business I knew nothing about without risking a great deal of cash. I learned my lessons gradually and managed (thanks in part to good timing) to make a lot of money at the same time.
Now, it seems sensible to transition into medium-sized holdings in other parts of the country: apartment complexes of 50 units or more or decent-sized (25,000-plus square feet) commercial deals.
I’m telling you this in case you have a number of smaller properties and are thinking of trading up … or if you are getting into real estate for the first time.
There is an arc to business development that has been part of every business I’ve gotten myself into: I take a long time getting started and then I move like crazy for three or four years. Then I consolidate, getting rid of the weaker stuff and focusing on the stuff that works. There are other ways of developing wealth through business – maybe better ways – but this works fine for me.
I’ll let you know how things are progressing in future issues of ETR.[Ed. Note: Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]