Lessons from the bust

We finished selling the Better Dwellings portfolio in December. I have been dealing with getting all of the cash out to the investors, closing the entities, providing a final accounting, etc.

This has, of course, occasioned some thinking about our strategy during 2008-2010, when the world was falling apart. Here are some of the lessons I’m taking away from the experience:

1. Keep dry powder. We were lucky in that I was able to raise a bunch of capital to buy stuff when the market tanked. Lots of people didn’t have any, so they couldn’t take advantage of the buying opportunity. Next time the market goes bad, I’m going to a few of the usual suspects and putting together a small fund to go bargain hunting immediately.

2. Buy when no one else is buying. This we did right… we were buying stuff in Silver Lake for $75-90k / door, which is totally impossible now.

3. Don’t be too picky. I rejected a lot of deals because the numbers were not quite good enough to meet our threshold. Now, I wish I had bought everything that was semi-reasonably priced, because all of those prices went up. If you hit the timing right, the other stuff can work itself out.

4. Focus on acquisitions, not re-positioning. I spent too much of my time improving the properties we had, instead of buying more. Big mistake. When prices are cheap, buy everything. You can always work on improvements later, when there isn’t as much to buy.

5. Never have to sell. Because I was in a rush to sell before the end of the year (for tax and IRR reasons), I allowed one buyer to chip price by a material amount, even though the deal was off-market. This was because kicking that buyer out of escrow and putting the property on the market would have dragged the process past the end of the year, and I didn’t want to do that. So I folded on price when I shouldn’t have.

6. Don’t sell anything if you can avoid it. Even leaving aside the price chip above, I wish I could have avoided selling. When you’re into a newly-renovated property at a very low basis, you are sitting on a gold mine. If you can avoid it, why give up the mine (and pay a lot of transaction fees to brokers and the government in the process)?