- 3 keys to Site Selection
- The 5 steps to success in developing Multifamily
- 5 Construction Essentials
- Stabilization- The Play that sets you up for long term success
- Disposition
Today’s Blog is about selling a new apartment building, and is Part 5 on our series on Development.
Selling your brand new property that you just worked so hard to develop and build may feel like selling off your dream Lamborghini or giving up your first born for adoption; but selling as a brand new property will provide you the best possible payoff ever. With a sale you can actually get the Lamborghini!
Now that you have found the land, developed the property, built the units, leased all of them and put in place a great property management, it is time to consider the timing and how to get the best value.
1. Timing – 90 for 90
- Multifamily lenders will require a Seasoning period of 90 days, once you reach and surpass 90% occupancy. This is considered the level of stabilization. Even if the buyer is paying cash, they will be looking for the stability of the project, which a benchmark of 90% occupancy is considered stabilized.
- Keep in mind, With the record setting demand for rental units, this actual occupancy for many owners is close to 97% in many areas, which is about as close you can ask for, given the needed time to turn a unit between tenants.
2. Pricing
- With the acceleration in rents and real estate pricing, the pricing you expect should be forward looking, with expectation of what it will be when you go to market, versus what it has been in past. This is not ‘traditional’ valuations, but in a rapidly rising environment is how you set record pricing. The market will tell you what it will accept, and with intense competition, the property can be bid up to levels above any surrounding record.
- With a brand new product, once stabilized, is often the best time to sell to maximize value. This is because there is no wear and tear on the building, your tenants will have all recently moved in, and your appeal the highest with a full life left on all improvements.
- The buyer can also benefit from the most depreciation, as you can share all your records with their cost segregation expert to make sure they benefit from the full depreciation write off of all site improvements. Do not overlook this value add to your buyer!
- You may be tempted to do a private sale given the high demand for apartments, but that strategy limits exposure and may miss your strongest buyer. Make sure your are working with a Broker who specializes in Multifamily and has a book of business. They can bring competing offers that drives up your price, and results in a much higher bottom line.
3. Payoff
- Once you have a solid buyer locked up- be sure you check on your options in a 1031 Exchange. You may decide it is better to pay the tax now, but if you do want to delay the tax, careful planning is key. Construction 1031 exchanges are possible, but given the difficulty in completing projects within a 180 required timeframe, it would be advisable to exchange into a value add project, or just land to make sure you are in the safe zone.
- If you are paying the tax now, make sure you discuss with your accountant whether you are treated as a ‘Dealer’ or as a ‘Investor’. A ‘Dealer’ pays taxes as part of his regular ongoing income from building/selling real estate as inventory, where an investor would be taxed on the increase in value as lower tax bracket capital gains. Here is a simple explanation of the difference.
Now that you have sold your amazing new building, is it time to go car shopping?
Anytime your are ready for analysis of your real estate value, call us for a free consultation.
Let’s drive toward your profitable future!
