Why I’m Selling My Portfolio

Hey all, Mo here –

From my last email, I told you I sold my 22 unit. Today, I have a signed purchase and sale agreement to sell my 14 unit.

This is a meaty email.

In this email, you can find:

1. Why am I selling?

2. What do I think of markets?

3. New strategies?

4. What’s next?

Why am I selling?

This is a good point. Why am I selling? Does it mean I don’t believe in real estate as a wealth creation strategy?

Absolutely not, I love real estate as a long term wealth builder. However, if you’ve added value to a building, when can you get liquidity?

This is in the event of a refi or sale.

You need to understand that “adding value” to an apartment building is a lot of work. It is such a pain in the ass to negotiate with residents, renovate a unit, then evict 5 months later. My clientele is C- to C+, so these are tenants making around AMI household between 30-45k in household income (HHI).

The nicer an area, the higher HHI, the more expensive rents are. Real estate is all about location, location, location.

However, I do not want to own in the nicest areas if it’s priced like a Class A area. I like to buy in Class B and move upmarket, but I’m a bit hedged from the institutions and playing to the higher end, but still subinstitutional space.

My advantage is the fact that I have good apartments, good basis, and good rent to price ratio in a smaller MSA’s suburbs. Costs are okay and insurance isn’t rising at the rate of California, Texas, and Florida. Florida costs may have gone 2x in insurance.

I like the Midwest, but the downside is that everything is so fucking old. Owning a building that uses galvanized steel plumbing is always a risk that something will break. You can’t really stop it unless you redo plumbing in every single unit which is a pain in the ass.

It’s all about location

My market is the tertiary suburbs of Cleveland. There are a bunch of little towns that no one knows of and it’s boring, working class.

Cashflow is great there, but the appreciation isn’t as high as Phoenix, Columbus, or Nashville.

I want to keep a good portfolio of Cleveland but also factor in growth too. If I buy closer to city center, I can have growth in rent.

I want to buy in better locations within Cleveland but also expand to Columbus. Columbus has a lot of the things I like in a location.

Large state school, diversity of industries, huge growth in manufacturing and R&D with technology. Intel is building a $2bn plant in New Albany. There’s a highway that connects Columbus with Cleveland and that’s where I’d want to buy.

The path of progress is a good place to be to capture future appreciation. One way to tell is looking at where investment dollars are being allocated.

If you see municipal bonds being raised, are the funds being used to expand transit options and highways? Hmm, might be a good idea to buy where a new highway is being placed…

When transit centers are developed, most of the real estate increases in value. I’ve observed it in NYC, San Francisco, and elsewhere in the Bay Area.

So I’m hoping that new cities pop up in between two large cities and there’s new developments, little downtowns, and there’s a growing MSA which attracts investment dollars. So that’s where I plan on going. Further south towards Columbus and buying better locations in Cleveland.

What Do I Think Of Markets?

Yesterday, J Pow said they anticipated 3 rate cuts in 2024. We’ve allegedly hit a “soft landing” which is what JPow wanted.

Is he right? Who knows.

If rates decrease, prices may be jacking up as soon as possible. Mortgages are very expensive right now and rates going down leads to high mortgages and bank revenue.

There’s also the argument that prices rarely go down. From an average consumers point of view, most of the time, prices don’t go down. All these corporations jacked up their prices during COVID and the consumer is accepting they are being robbed.

However, this isn’t true with commodities like oil, mortgages, gold, silver etc. The price fluctuates and usually lowest pricing wins.

Prices in real estate tend to be a lagging indicator. Some renters are squeezed out and can’t afford the payments. Right now, there are a lot of concessions on apartments.

Rents are falling for the first time in 3 years.

NOI drops and real estate owners may have borrowed when values were high and interest rates were low. They may still be underwater despite the announced rate hikes. Some people are screwed regardless.

I don’t have a crystal ball, but I think it’s going to be pretty bad for a little while more in CRE. If rates drop, does inflation rise? If inflation rises, then are rates going to hike up again?

It’s hard to tell regardless. I need to be buying if deals make sense.

New Strategies?

There’s always room for optimization. I’m glad I got my start in multifamily, it’s a very solid foundation of CRE in the United States. Every one needs a place to stay and there is a housing shortage. There’s also a large liquidity pool available for multifamily real estate.

However, the drawbacks with my asset class is that it’s so capital intensive. It is NOT passive by any stretch of the imagination. Even though we have property managers, it is a business and we need to outlay capital when a renovation needs to happen or if we pay contractors.

Sometimes, the money is late or the unit isn’t producing any revenue.

NNN Retail or industries makes a lot of sense from a $ and passivity sense. I like the NNN aspect cause the tenant handles most of the maintenance and everything inside. You have to handle common area maintenance (CAM) but can bill the tenants back.

NNN lease as we’ve said in the past is a akin to “mailbox money”. With industrial, it’s usually single tenant occupying a lot of space so it’s reasonably manageable.

Retail is different because you have multitenant or one tenant risk. Imagine if you owned a Rite-Aid and they declared bankruptcy… how would that impact your value?

A Single Tenant lease is backed by the credit of a company. Choose wisely.

Multi-tenant retail seems particularly interesting. It’s an art and science to figure out correct tenant placement and mix. You don’t want multiple coffee shops cause they’ll cannibalize each other.

Follow Strip Mall Guy and my friend Kevin Fickle. I am learning a lot directly and indirectly from follows like them.

I’d like to own NNN retail in Ohio. It seems complimentary to my multifamily in Ohio and can use economies of scale to just hire my own crew to manage retail.

I’ll still be buying multifamily but I want to add retail to that. If you are interested in NNN retail too, email me, let’s chat.

What’s Next?

Honestly, who knows. I first need to figure out what my strategy for life is and that includes real estate.

I wrote a book called The Mo Money Manifesto and I have illustrations for it. It’s made me a few hundred in revenue already and I want to launch it in paperback.

Stay tuned with the next edition. Email me if you have any topics for it.

Thanks,

Mo