During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, Kagan, and Bennett discussed Beyond Fix and Flip: Embracing Buy & Hold Investing for Sustainable Real Estate Profits. Here’s an excerpt from the episode:
Moses: Yeah, absolutely. So, I guess maybe to differentiate the way that we’ve done it and the way that ReSeed is doing it from the way most people do it. Let me talk first about how most people do it. So, the normal real estate private equity model is kind of an IRR driven fix and flip model. So, it’s buy things that you can quickly lipstick, use as much debt as you possibly can, do a rip and run type renovation, raise the rents, and then immediately sell it on. And all of that is driven by the economic structure of the deals and crucially, by the fact that at least at an institutional level, the LPs, the capital partners are not paying taxes, either they’re pension funds and endowments. And so, for them, maximizing IRR absolutely makes sense.
What’s weird is that that business model has propagated down through the sub-institutional market, where the capital providers are just like normal rich people in family offices who do pay taxes. And so, operating as if taxes don’t exist is like really crazy. I can’t say that I had that insight when I first started doing real estate deals. We basically bought and renovated a bunch of apartment buildings, sold them, and then I had the very unfortunate experience of looking at the tax returns that we had to file [Tobias laughs] in the year that we sold them.
Jake: Hold on a second.
Moses: Yeah. What the F do we just do? And so that and a couple of other considerations led us to a model where we think more in terms of indefinite or permanent hold investing, where we buy stuff in good locations, in supply constrained areas, we gut renovate the buildings to make them really nice, rent them out to tenants who we’ve selected who are in general pretty high-quality people, manage them ourselves, distribute the capital, and then refinance to pull out some or all the capital you invested, and then just distribute operating free cash flow as that appears each quarter.
So, in some ways, it’s a very simple model. It’s actually like what just like rich families have done for a really long time. But it surprisingly at least is fairly revolutionary for private real estate operators.
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