My Family’s Perspective on Asset Management

I got into the business of real estate managing my family’s portfolio of properties. I think the question most people have as to how things work for us is how and why do we decide to sell and purchase something else.

First, I’m just going to pick one of their properties to use as an example. It is a property that is roughly worth $5 million. This property generates $156000 per year. The yearly debt, including insurance and property taxes are roughly $60,000 per year.  The yearly net is about $96,000. The current equity amount is roughly $4 million.

The question is, could this $4 million generate more than $96,000 elsewhere? First, in order to properly exercise the 1031 exchange, we would need to purchase a building that is worth 5 million or more. Another insider note, there’s a low likelihood that a lender will give you a loan that is more than 50% of the value of the property. That immediately puts us in a position of looking at properties valued anywhere between 5-8 million dollars. This is what we get to spend.

Next, take a look at what is available and whether or not any of these properties generate a net greater than $96,000. This part consists of a lot of time crunching numbers, calling to see how negotiable some of these sellers are and what if any value could we add to the property. Oftentimes we like the properties where we can add value because we find that this generally increases the value of the property disproportionately to the rental income. If I translate this, it’s code for we want to purchase at a high cap rate and sell at a low cap rate. Generally the more turn key a property is, the more likely we are to be able to sell the property for a lower cap rate. A turn key property takes off a lot of pressure for future owners.

We’re not looking to take any action right now. However, if we were, there is currently a property listed for $6,195,000 that generates $427,903 per year. If we were to look at this property, our expenses yearly would be about $230,000 between mortgage, taxes and insurance. this means that we would generate a net of almost $200,000 per year. This would more than double our $96,000 net. Did I mention that this property has been sitting on the market for a bit, this same owner took a haircut on another property he sold less than a year ago and he has already had one price reduction? Once I incorporate the specifics of the seller, I wonder if we could more than double our net and get it closer to $240,000 because we negotiate the price and get a smaller loan.

This is what can make real estate such a fascinating prospect for the opportunity to create passive income and build multi generational wealth.