Commercial Real Estate

What Yields a Higher Return: Selling Now, Selling in a Few Years, or Refinancing?

Expertise: Business Management, Commercial Real Estate, Landlording & Rental Properties, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Personal Development, Real Estate Investing Basics
126 Articles Written

How do you determine when to sell your apartment building to maximize the overall returns? I’m going through this decision-making process right now for one of my buildings, and I’d like to share with you my thinking.

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As always, there are multiple factors that go into deciding if it’s right to sell the building now or later:

  1. Have you created most or all of the value there is to create?
  2. How attractive is the future cash-on-cash return?
  3. What do you expect the market to do? Are values likely to increase or decrease?
  4. What yields a higher return? Selling, holding, or refinancing?

Let’s apply all 4 criteria to my situation.

I purchased a 12-unit building with rents far under market. Three years later, income is about 35% higher than before. In my estimation, we created about 95% of the value there is to create.

Future cash-on-cash return is not that great at all; it’s estimated only at about 7% per year. This was planned from the start: I knew the value would be created by raising the rents, not so much from cash flow. Regardless, cash flow moving forward will not be stellar.

Related: Why Property Managers Should Remind Clients to Refinance NOW

The market is stable. It's tough to tell what cap rates will do. On the one hand, as interest rates will inevitably go up, so will cap rates, and valuations will drop. On the other hand, multifamily assets are so hot that the demand may counteract any rise in interest rates. Overall, I think the market is stable. In other words, I'm not seeing any massive upside coming from the market.

What Yields a Higher Return: Selling Now, Selling in 3 Years, or Refinancing?

In order to answer this question we need to consider the internal rate of return (IRR).

I normally don’t talk about the IRR because it’s one of those complicated concepts that tends to confuse investors, and it’s rarely used for simple scenarios like buying and selling something.

But when it gets more complicated, like refinancing something, where capital is invested then partly returned and then ultimately sold, using an average annual return stops working. The reason for that is that your invested capital changes in a refinance scenario.

Let’s say you and your investors put in $100,000 to purchase a building. After you’ve created a bunch of value in 3 years, you decide to refinance and return $75,000 of the invested capital back to the investors. Due to the higher debt service, your cash flow is reduced, but because you only have $25,000 of capital in the deal, your cash-on-cash return sky rockets. In fact, at that point, the cash-on-cash return and average annual return become meaningless.

That’s where the IRR comes in. The IRR takes into account:

  • Capital going into and coming out of the investment, one or more times;
  • Cash flows generated by the investment; and
  • The passing of time.

The passing of time is important because money loses its value over time. For example, you getting $10,000 TODAY may mean a lot more to you than the promise of $50,000 in 5 years, right?

The IRR takes the passing of time into consideration (through some magic I don’t quite understand, but it makes sense).

The IRR is the great equalizer that allows you to compare totally different investments in an apples-to-apples way. You could calculate the IRR of investing in gold versus commercial real estate, and the IRR would give you an intelligent metric for calculating the better investment. It's crazy.

I don’t want to give you a crash-course on IRR, but instead would like to point you to other, excellent articles on the subject here on BiggerPockets (for example, see “Introduction to Internal Rate of Return (IRR)” or just search the blog for “IRR”).

Instead, I’m going to wave my hand a little bit, but I will outline the process in detail.

Your objective with this exercise is to calculate the IRR for each of the different scenarios we described above (sell now, sell later, or refinance and sell later). Once we have the IRR for each scenario, we can more easily compare them to each other.

The first thing you’ll need is a detailed financial model that calculates all of the cash flows from your investment, as well as any proceeds coming from the refinance and the ultimate sale.

This is obviously easier said than done, but I’m going to assume you have built or purchased a financial model to let you model this. If not, build or purchase one. 😉

To demonstrate how to calculate the IRR using Excel and your financial model, you create a table like the one below:


It's a simple table (though the numbers in it can be complex to determine—that's why you need a good financial model!) that shows the initial cash investment, the cash flow distributions, and any return of capital (from refinance or sale). In the scenario above, we're doing a cash-out refinance after Year 3 and then selling after Year 7.

Once the cash flowing into and out of the investment is defined (in Column F), you can then apply the Excel function “IRR()” to that column, and it magically calculates it for you.

Related: The Step-by-Step Guide to Making Offers on Apartment Buildings

Using my deal analyzer, I have modeled these 3 scenarios and determined the IRR for each. Here are the results:

  1. If we sell after Year 3 (after we’ve built most of the value by increasing rents to market), the IRR is 13.25%.
  2. If we hold a couple of more years and sell after Year 5, the IRR becomes 9.54%. Why does it drop? Because the little bit of extra cash flow and the passing of time actually decreases our returns.
  3. What if we refinance After Year 3, return most of the invested capital and ultimately sell after Year 7? This is normally my favorite strategy to boost returns but in this case the IRR is only a paltry 8.94%, the lowest of the three. The reason for that is the low cash flow with this building. After refinancing, the cash flow is even further reduced, putting extreme pressure on the IRR as time passes without any additional upside.

Based on this, the IRR analysis is telling us to sell after we’ve built all of the value, confirming our suspicions from earlier.

If the cash flow were better in this building (like at least a 10% cash on cash return), this scenario could look quite a bit different. Most likely, refinancing (Scenario #3) would produce the highest returns. This would make your investors happy because they get all or most of their investment back and you get to hold on to the building for as long as you want.


Deciding to sell a building is never easy, especially if you’ve grown accustomed to the income. It also depends on what kind of lifestyle you want: if you want to maximize returns, you’re constantly crunching the numbers and buying and selling accordingly. On the other hand, you may prefer the more passive route and be less transactional (and busy!), but perhaps not squeeze the highest returns out of your investments.

What are YOUR criteria for deciding when to sell a piece of property?

Leave me a comment below!

Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment building deals with a special focus on raising money. Through his investment company, he controls over $30MM in performing multifamily assets all over the United States and has raised over $8MM. In addition to his own investing activities, he’s helped students purchase over 2,000 units valued at over $87MM. He’s the author of the best-selling book Financial Freedom With Real Estate Investing and the host of the popular Apartment Building Investing podcast Apartment Building Investing podcast.
    Frankie Woods Investor from Arlington, Virginia
    Replied about 6 years ago
    Michael, thank you for this excellent example illustrating the power of IRR! This should truely be used by every investor! Creating my own tool now to take advantage of this!
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied about 6 years ago
    Sounds good …!
    Kyle Hipp Investor from Appleton, Wisconsin
    Replied about 6 years ago
    Michael, I prefer option 3 as a general rule and I believe that the numbers here could be flawwed. If you take that loan out and use the proceeds to go to Vegas for a weekend then they might be accurate. However, if you like me would reinvest that capital into another profitable venture then the IRR should be much higher. By investing in another property, you should be able to at the very least match the cash flow lost in the first property and work that property to maximize value.
    Josh H. from Kansas City, Missouri
    Replied over 3 years ago
    Kyle, That’s a great observation, however, I think the important thing to do here is to keep in mind that you are evaluating your IRR on a project basis, the item at hand. Not a potential opportunity cost. Without getting into the weeds, I think a good exercise might be for you to model out the projected IRR of another project you are looking at then comparing the two. Additional things to keep in mind could include your WACC, resource allocation, etc.. Good luck! Josh
    Cindy Larsen Rental Property Investor from Lakewood, WA
    Replied over 3 years ago
    That makes sense to me Kyle, but I think you would then have to expand your model to include both investments. I’m going to go refresh my knowledge of IRR. Thanks Michael. BTW where do you find an IRR calculator that helps you determine all the numbers that feed into the IRR calculation? Can you give us a pointer to one? Thanks, CJ
    Tammer Fakhry Investor from Bridgewater, New Jersey
    Replied over 3 years ago
    Cindy IRR is an available function in Excel
    Larry Turowski Flipper/Rehabber from Rochester, NY
    Replied about 6 years ago
    Excellent post! I’ve just been learning about IRR myself and this really helped clear things up. As Frankie commented above, this is really something every investor should understand. So many investors insist on one invesent strategy over another, just waving their hands when it comes to actual analysis. For instance, those who insist on holding and never selling because that builds “true wealth” vs “making you rich,” seem to have no understanding of IRR.
    Shane Pearlman Rental Property Investor from Las Palmas de Gran Canaria
    Replied about 6 years ago
    Nice post Michael, The one thing I don’t see in this formula is the time value of money depending on reinvestment rates. If you are comparing a 10yr time horizon, what other opportunities exist that will provide returns? If the market is overheated and you get a great profit on sale, but there is no next deal for 2-3 years and you shove the funds in a bank account at 0.5%, then it may or may not actually exceed the cashflow.
    Tommy DeSalvo Real Estate Agent from Cincinnati, Ohio
    Replied almost 6 years ago
    One thing I’m not quite understanding about real estate syndication. For option three, or any option where you refinance and then pay off the initial investors, who then owns the property? Is it you (the real estate syndicator)? Is that what you meant when you said “you get to hold on to the building for as long as you want.”?
    Josh H. from Kansas City, Missouri
    Replied over 3 years ago
    Tommy, this could depend on a number of things, including the Operating Agreement.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied almost 6 years ago
    It depends. Let’s say you give the investors 70% of the building with you owning 30% as the syndicator. If you refinance and pay back the investors, they still own 70% of the building. The only difference is that their risk is off the table and they’re less likely going to pressure you to sell the building since they already have most or all of their investment back. Hope that helps.
    Mike Dymski Investor from Greenville, SC
    Replied over 3 years ago
    Great article Michael. For value add deals, the IRR will most always look best the period right after the value add and will decline subsequent to that due to the passage of time. Our analyzers can be set up to calculate the sales and/or refinance proceeds (and the resulting IRRs) for each year into the future. That tool helps decide when to sell and pushes the investor to execute the value add and refinance (or sale) quickly to maximize the IRR. IRR can suggest flipping value adds in many cases. Holding a renovated, stable, property with $0 cash invested though is also attractive. Sounds silly, but thinking in terms of infinite returns helps drive that home. Nice article.