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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
Well, in another harbinger of doom for the real estate market, I read that Sam Zell recently sold off a big, and by that I mean HUGE, chunk of his apartment holdings.
To Blackstone of all people. Why does this matter?
Because Sam is a smart guy. (Just ask him.) And according to him, it is all about timing. Zell sold his real estate firm Equity Office to Blackstone Group for $39 billion during the peak of the market in February 2007. This was just months before real estate credit markets began to plummet.
Now I know what you’re thinking - one in a row does not make a trend. And you’re right. Except that since we haven’t had any sort of normalcy in the real estate market in a decade, it’s those who think outside the box who get rewarded.
And boy did he get rewarded for thinking outside the box and going against “conventional wisdom” back in 2007. It turns out that had he held onto his real estate firm, he would have seen the value decline something in the area of 40%-50% due to the crash in prices.
That’s BILLION with a B…
So his focus on timing and his courage to act while others scoffed saved him, oh, like between $15 and $19 BILLION.
Personally, I tend to pay a whole lot of attention to the guys who put their money where their mouth is. So I’m paying attention to Zell.
It turns out that a couple of months ago, he sold off more than 23,000 apartment units to an East Coast private equity group for $5.4 billion. And his company plans to sell another 4,700 units sometime soon.
And a few months before that, another real estate fund he manages sold 82 office properties worth $1.7 billion. And the fund plans to sell off more properties.
But that’s not all.
In the past, when Zell sold assets, he plowed the proceeds (principal plus profits) back into some category investments. Not this time. Zell isn’t a buyer of real estate right now. He’s returning the proceeds back to his investors in the form of dividends.
And his investors are happy. With dividends.
What kind of upside-down, opposite world do we live in? When dividends are considered better than real estate?
I have no clue. But at the risk of sounding like Chicken Little, keep your ear to the ground and a sharp eye on what’s happening in your market. It’s clear that we have short memories – mostly because the guys who got destroyed in the last crash aren’t around to keep us humble.
I think one writer had some excellent advice. He wrote:
“Perhaps it's time for investors to find out where the real money is and to get out of real estate with their cash intact and live to fight another day.”
What Say You?
What do you think of our pal, Sam Zell? Share in the comments section below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.