Multifamily investments offer many exit strategies. We will explore a few of the common exit strategies in this article. Different investors have different goals when buying multifamily properties. There are investors who want to buy a ‘stabilized’ property. A stabilized property is a property where renovation has been done and there is strong occupancy. The property is 'stable'.
Lenders like to see this because there is less risk to the property. There are some investors that do a ‘value add’ strategy. We like to do a value add strategy where we add value to the property. This is typically done, at least in some part, by renovating some or all of the units. There is more risk with a value add strategy but the returns can be great.
Let’s look at some of the exit strategies for apartment complexes.
Buy and Hold
Some investors like to buy a property and hold the property forever. Some investors look to build long-term wealth and allow the cash flow to be a stream of income. Some investors will purchase a stabilized property. With a stabilized property, there may not be a lot of deferred maintenance or large rehab projects to do. There is less risk in this property. Some investors love this model to build and maintain wealth.
Other investors like to do a value add strategy but still hold onto the property. If an investor finds a property that needs some renovations, they may purchase the property, implement the value add strategy to force appreciation. Instead of selling the property, they can do a “cash out refi”, or refinance the property and pull cash out. The benefit of this is that savvy investors can fix up the property, get their initial investment back at the time of the refinance, AND hold the property and retain the cash flow. The downside of this strategy is that an investor may only get a portion of their initial investment back. It is unlikely that they will receive a return on their investment at the time of the cash out refi. The upside of this strategy is that an investor can get a significant portion of their initial investment back at the time of the refinance AND have a cash flowing property.
Fix and Flip
Many apartment investors like to ‘flip’ apartment complexes. This means they take a property, implement a value add strategy, and exit, or sell the property. There are a few different periods of time that are common to hold onto a property: 3-5 years, 5-7 years, and 7-10 years.
The biggest return of most investments is typically on the sale of the asset. The first year of ownership, the cash flow is a small amount. This is due to doing renovations to the property. More units are usually vacant as the team renovates the units. The length of vacancy is also longer due to the units being renovated. As the rents rise, the cash flow increases.
3-5 year hold
The 3-5 year hold typically offers the best annualized returns for investors, however, it will typically offer the lowest amount of cash flow.
5-7 year hold
The 5-7 year hold will offer a benefit of higher cash flow than the 3-5 year hold, and a higher annualized return than the 7-10 year hold.
7-10 year hold
The 7-10 year hold will offer the best OVERALL returns for a property, however the annualized returns will be lower since the property is held for a longer time. The cash flow of this property will likely be over 10% starting in year 4 or so and will have good cash flow in the latter years of ownership.
While there are benefits to different holding periods and different strategies, we like the 3-5 year hold as it provides the BEST overall annualized return. This allows our investors to build wealth quicker than the other strategies. It requires more work on our part as we are constantly finding new deals, but it helps our investors build wealth quicker.