A Unique Approach
While stable and growing cash returns are important, the safety of your invested capital is even more critical. Sterling Legacy does not just focus on cash returns—we utilize a unique approach to build a solid foundation that prioritizes capital preservation suitable for tax-efficient wealth transfers.
Our capital preservation strategy starts with purchasing properties that produce immediate cash flow combined with conservative leverage. We also focus on properties that limit cash outlays for additional improvements or capital expenditures. This strategy is designed to withstand recessions and adapt to changing environments.
Testing an asset’s performance under various conditions is vital to cash flow-based investing. Our sensitivity analysis adjusts potential cash flow for items such as base rent, concessions, vacancy, property taxes, financing leverage, and interest rates. Generally, the assets will be underwritten with low to moderate levels of debt which provides a safe margin to preserve positive cash flow.
Adherence to a defined strategy and well-capitalized business plan further supports reliable and growing cash flow. We determine working capital necessary to support the initial ownership period based on a detailed first year budget which includes extraordinary cash flow needs, paid-in-advance insurance policies, utility deposits, and fiscal year property tax payments.
If the property condition report suggests that maintenance or capital improvements are required, additional equity will be secured upon acquisition. With this forward-looking approach, quarterly cash-on-cash returns are better preserved.
Our approach has enabled the team to acquire more than half of the firm’s properties by circumventing the traditional marketing process. Our conservative underwriting, combined with long-standing industry relationships and market reputation, assures brokers and sellers of our ability to seamlessly and expeditiously close transactions.
While we adhere to a buy-and-hold approach, it pays to be nimble and opportunistic if market dynamics change. If the team determines that a disposition is prudent, a 1031 exchange could preserve the tax basis while moving equity to another real estate investment.
In the event that a longer hold period is warranted, a subsequent financing may create a cash distribution without disposition of the asset.
Finally, an accumulation of properties in one region of the country may permit a portfolio sale at terms better than an individual asset sale.
Capital preservation is not simply about buying high-quality assets. Our strategy involves top-down research in order to define the appropriate states and markets that are best suited to stable investment returns. Next, we evaluate expected asset class performance, inflation protection, available financing, and depreciation benefits.
Finally, our exhaustive due diligence evaluates local market fundamentals, historical asset performance, and the condition of the property. We thoroughly review each component before purchasing the property.
