Selling versus Refinancing a five unit multi-family

9 Replies

I'm curious to find out what criteria experienced investors use when deciding whether to refinance or sell a multi-family property. I saw a few older posts along similar lines, but nothing recent. I have a five unit multi-family property in Maine that I've been rehabbing for the past year. This spring I'm planning to either sell or refinance, and I've got feelers out to run the numbers on each option. When do you decide to sell rather than refinance? If you sell, do prefer to use a broker, an auction service, or try to sell by owner? Thanks in advance for any replies!

Hi @Lisa Cutshaw and welcome to BP!

A good rule of thumb is to assess your return on equity. Even after you refi, you're still sitting on approx 20-25% equity sitting in the property. What will your return on that equity be, if left in the property or if you sold it and put it somewhere else?

As far as  how to sell it, it depends on whether you have the time, resources, connections and desire to spend selling it, or whether you want to give this over to a professional. The last couple of auctions I've monitored all went for less than the seller was expecting. That is probably highly dependent on the market and property, so I can't really tell you to do or not to do it.

Good luck!

I would try to sell here first and save some money. Where is it? I know people always buying. I don’t think there are any rules as it really depends on your mood and goals. It also depends on your plans and needs for the money. Are you going to 1031 or spend it?  I’ve bought things similar to what I recently sold just for a change. As long as it supports your larger plans it can all work.

@Simcha Davidman Thanks! I've been around BP for a few years learning what I can, and finally decided it was time to go for the Pro membership. Grateful for your input. It's a good point about the return on the equity.

@Michael Picher Sounds good. If I decide to sell it will be in the spring after I finish the current renovations. The property is in Farmington in central Maine. It's about half a mile from the University of Maine Farmington campus. Let me know if you're interested in any more details.

@Ed Emmons Good point. The building is in central Maine. I would probably 1031 it if the proceeds justified the expense and effort. Either way, I would use the cash from the sale to invest in a bigger property.

It all depends on your long term goals. Are you looking to build and scale a passive income portfolio?

Or, simply buy, rehab, and sell for a profit?  

Next, what would you do with the cash? Are you able to reinvest at a higher return after you factor in all the selling costs, income taxes and depreciation recapture?

The latter becomes a mute point if you are doing a 1031 exchange. Just make sure you are exchanging into something better. I've seen a lot of 1031 deals go south as people rushed to hit deadlines and ended up with a dud.

Refinancing offers the best of both worlds. You keep a tax favored cash flowing asset while freeing up more cash for reinvestment.

I’m a buy, rehab, refi and hold forever investor since it takes so much work finding the right deal and rehabbing it to a condition where it requires minimum property management.

Currently, I’m in the process of refinancing two 8 unit multi’s that I’ve owned for the last 6 or 7 years. Despite receiving numerous unsolicited offers, I can’t imagine trying to find a new deal in this market that would replicate my future returns.

There is a lot of stupid money in my neck of the woods right now! Thanks to these buyers, sales comps are plentiful. This make refinancing a breeze.

Oh, the refi proceeds are going straight to cash reserves as I build up a large opportunity fund. Plus, my bankers like seeing a cash hoard on my balance sheet.

@Cory Binsfield Thanks! I appreciate the insight into your thought process. I feel like that's one of the great strengths of BP. We can all get a better understanding of the many ways a similar situation can be approached. I've got a couple of scenarios worked out in my head to help guide which choice to make under different contingencies. Now it's a matter of seeing how things work out. For me, there are certain criteria that would make it worth selling, but if a refinance came in with a big enough chunk of equity available to cash out, that would be the way to go.

@Lisa Cutshaw consider the CAP rate and the interest rate for your refinance. If the CAP rate is near or lower than the interest rate on the refinance, then it is probably time to sell. If your CAP rate is a bit higher than the interest rate, then it is probably worth hanging onto. If you do decide to sell, then strongly consider working with an real estate broker who has experience and a track record with multi-units to avoid numerous pitfalls.