Posted by alvin on May 22, 2008 at 11:48:23:
i agree 300%
we use NNN with our land trust and owner financing deals so it eliminates the landlording headaches and property management. we look for buyer’s who’ve been turn down that have an owner’s mentality versus that renter’s mentality
NNN all the way. its commonly used in commercial real estate, why not incorporate this in your residential properties.
You’ll Never Sell Your Real Estate Business - Posted by Alan Brymer
Posted by Alan Brymer on May 15, 2008 at 15:19:07:
Here is something I’ve learned over the years that I wish I had realized when I was starting out–that real estate is not so much an investment as it is a business. Once I realized this, I learned the following things about exit strategies I thought I’d share:
Businesses, like real estate, can be planned, built, finished, and sold for a profit. But what if you own a business that buys and sells real estate? It’s not the same. The best you can do is sell the real estate that you’ve bought, and that’s the end of it. No one will buy your business and pay you several times your current yearly profits, as they would other businesses. Stinks, doesn’t it? I’ll go into the details of why this is, but also offer this self-coined truism as a consolation prize:
“You’ll never sell your real estate business, so you might as well automate it.”
I. Other Businesses’ Options and Exit Strategies
Other industries have it good, or at least some of them. If you were to start a company that, for example, sells chairs, you would make your initial investment and get to work. You’d test ways to find people who buy your chairs, and you’d develop relationships with retailers who buy from you in bulk and resell your chairs to the public. Once you make enough money to survive, you grow the business by reinvesting profits, borrowing, or raising capital.
Then you get bigger, sell more, make more, and before you know it, you have a track record of several years. You could now sell your business to someone else. But, of course, the more profitable your company is, the more someone will pay for it. Each industry has its own rules of thumb, but for the most part a buyer will offer you a multiple of your company’s yearly earnings (hopefully several times).
Other things besides earnings can increase your company’s sales price, such as systemizing it. If you can show a buyer how your company runs itself without you (the owner) having to do anything, you can imagine how much more attractive it will appear to them. Who wouldn’t want to own business that spits out money year after year without much work? It’s worth paying more for.
People and companies who buy businesses also want to buy something that is scalable. This means that they should be able to grow it without having to hire a ton of people. Law firms can’t do this, because each attorney can only bill so many hours, and in order for the firm to make more money, they will have to hire more attorneys. Compare this to a software business where people can download the products from a website-you could potentially sell hundreds or thousands more copies per year before you have to hire someone new.
So, selling it gives you a lump sum of money that you can use to start a new business, invest somewhere and retire on, or whatever. Most businesses don’t sell because they wouldn’t sell for a substantial amount, but it’s still many entrepreneurs’ dream to build a business, sell it for a huge amount, and get the heck out of Dodge. I know a few people who have done this, and I am insanely jealous.
II. Why Real Estate Investment Companies Are Different
The reason I’m jealous is because not all business types are able to do this. Some businesses rely so much on the owner and their specialized expertise, that it would be hard for a new owner without that same expertise to jump in and make it work. Like a law firm. Or a doctor. Or, regrettably, a real estate investment company that flips and/or holds property.
The best that we can hope for is to sell whatever assets we’ve accumulated. For doctors and law firms, those assets are customer lists, supplies, and maybe the building they are in. For us investors, it’s our properties and that’s it. Our companies are only (perceived to be) worth whatever we can sell our properties for.
I think that an investment company is scalable. I can picture a company that buys and sells 100 houses per year and only has a tiny office of staff. But when is the last time you’ve heard of a real estate investor selling their business? I haven’t. It just doesn’t happen. Instead, we’re just looked upon as individuals with real assets that we could sell off, and I doubt any investor would pay market value for them.
III. But at Least You Can Automate It
You can even write systems for your real estate company and get it to the point where it practically runs itself without you. But no one cares. So, if you can’t sell your company, you might as well make life as easy as possible and systemize it for your own benefit. Map out who does what, write the systems, and hire the right people to run them for you and give you reports.
And, if it’s creating cash and equity profits year after year anyway, this may not be such a bad thing. You just need to know what you’re getting into. So while individual houses have multiple exit strategies, your investment business as a whole has two:
Sell off all of your properties and liquidate the company.
Own the business forever-keeping your properties, maybe buying more, maybe selling some.
I opt for #2, but encourage you to make your business as easy as possible to manage for your own sake.
Re: You’ll Never Sell Your Real Estate Business - Posted by Brian_Wa
Posted by Brian_Wa on May 19, 2008 at 12:10:47:
This is one aspect about Real Estate investment that I don’t like. What I’m doing now is trying to make as much money as possible via flipping houses and once I have a good amount of money (like $3 million cash), I will strike out and look for some sort of business where you can sell the business (once it matures) for a huge amount of money. Of course I will always invest in real estate cuz it’s my bread and butter.
Brian
One of the advantages of RE biz… - Posted by JT-IN
Posted by JT-IN on May 18, 2008 at 17:33:02:
When you are ready to kick back… assuming that you are interested in liquidating, is it can be dismantled… selling them one at a time, and maybe for more money that way too…
Having owned a number of businesses that I have subsequently sold, I can think of a one of them that afforded that possibility… (well, maybe the payroll company, but it was easily sold in one piece anyway; thanks ADT).
Try parting out any other business like you could do with sf real estate. The liquidation value on most businesses is horrible, while in RE it is in fact better, or can be, depending on some factors.
I suppose that the above only applies to one who has accumulated rentals, as opposed to a flipper, but most people do both, if they flip props.
While you draw parallels with other businesses, and think that RE inv is some how a less than envious position to be in, compared to a law firm or other business where so called good will exists… have you tried to leverage that good will…? Pretty dang tough. Even in today’s market RE has mkt value that is easily ascertainable and can be leveraged much easier than many other businesses that you compare to in your examples…
Just the way that I view things…
JT-IN
Maybe it’s just me … - Posted by Chad (MD)
Posted by Chad (MD) on May 18, 2008 at 16:52:36:
…but I don’t follow your logic. I agree with you that it would be difficult to sell a real estate investing business because of its lack of automation. But if you were able to sufficiently automate it – by writing detailed policies and procedures and job descriptions – so that the business could be run without you, wouldn’t you then be able to sell it?
you really want to automate your business? - Posted by David Krulac
Posted by David Krulac on May 18, 2008 at 06:48:35:
then try NNN and/or ground lease.
Re: You’ll Never Sell Your Real Estate Business - Posted by ken in sc
Posted by ken in sc on May 16, 2008 at 05:16:17:
I know of two people who have basically automated their RE businesses. Both, interestingly, are into owner financing. They have a staff and system to sell the houses and manage the notes/payments. And they have systems to acquire new properties when needed. I doubt they could sell these businesses easily though. I have thought a lot about what you say, and belive you are basically correct. So, if one has a REI business, then one must work it and take the profit and invest that into something that can run itself, knowing that they wont sell the business for a big check one day. Nothing wrong with that, as long as one enjoys the ride and has a plan to get assets that can run themselves and earn income without the owner working for it. So, rather than the business owner using profit to keep building the company up to a saleable level, the profits are extracted to other areas and made into assets the can earn income and be sold. Just an extra step to the same thing.