Sell or Refinance: A Real Estate Decision Framework

At this point, you’ve owned your property for some time and feel it is time you get paid for all of the hard work you have had to put in over the years. The great debate in Real Estate, to Sell or Refinance?

While I am sure you were hoping for a direct answer, it ultimately depends on a number of factors. To simplify how we approach making this major life decision, we look at the five factors that impact how we take out Equity out of the deal.

                           Sell or Refinance: A Real Estate Decision Framework

To help you get to a decision you feel confident in, we are going to look at the five different factors that will play a key role in our decision making. Know that each factor should and will play a different level of importance for every investor.

I would encourage you to rewrite the list below on a separate piece of paper in a manner that represents what is most important to you at the top and least important at the bottom.

                                                      - Five Factors -

              Time Spent / Energy Spent / Future Cash Flow / Cash Need / Rates

Time Spent -

On the separate piece of paper you started above, we want you to rank your time spent on a scale of 1-10. Consider your time closely. How long do you spend on maintenance, tenant turnover, management, financial reporting, annual compliance?

Example: A “1” would mean you take a minimal number of calls per year and review the financials at regular intervals.

A “10” would mean you spend every minute of time awake working on or thinking about your investment.

Use your own judgement on where you fall on this spectrum and jot it down.

Energy Spent -

Depending on the project, this factor may be top of the list for me but came in at a close second on the overall scorecard. As you did above, consider not just the time you spend on the property, but the energy you spend to get things done.

Example: A “1” like above, would likely mean minimal time or effort on the project to not only keep things running, but running profitably. Phone calls are with managers and meetings are with accountants and attorneys to talk strategy.

A “10” would mean you are exerting a lot of effort to keep things running smoothly. Challenging tenants, constant leaks, or issues with local government can be mentally and physically draining and may constitute a 10.

Use your own judgement on where you fall on this spectrum and jot it down.

Future Cash Flow -

If you are considering a Refinance, you should entertain the first steps at a minimum to know exactly where rates are today and what your projected payments will be after the completion. 

Although this is never perfect, it will give you an idea of what you will potentially pay in the future but even more importantly, what you will make! Use this information to see how much you will still make on your investment

Before you do any math! Let’s set the scale parameters so we don’t cheat ourselves.

For this section's scale, we will use Monthly Revenue Goals Per Unit as our metric. Here is our MRGPU Scale for you to put into context.

Example: A “1” would mean we make $1,000 per unit per month.

A “10” would mean we are breaking even or even losing money per unit. This would ultimately mean the rent I collect will NOT cover my bills to run the property - Mortgage, Interest, Taxes, Insurance, Operating Cost, ect.

After looking at your initial Refinance numbers from the bank, you should know roughly how much you should expect to make yearly which you can break down to monthly.

Use your own judgement on where you fall on your own spectrum and jot it down.

Cash Need -

This section will be incredibly brief.

Ask yourself, does refinancing get you the cash you need after fees and expenses? If yes, “1”.

Ask yourself, does selling get you the cash you need after fees and expenses? If yes, “10”.

If both a Refinance and Sale get you the cash you need, answer “5”.

Rates: Current and Future -

This for me is last and is almost never a factor I truly consider when making investments or changes to my investments. Time, Energy and Monthly Cash Flow Per Unit are enough for me to make a decision 9 out of 10 times.

For many people struggling to get over the rate environment, it is because they have likely only bought a single family residence where rates directly affected how much you needed to work and earn to pay back your debts.

When investing, rates still can play a role but you can find profitable deals in any market.

That being said, let’s try to rank this factor -

Example - A “1” would mean rates are <4%

A “10” would mean rates are >10%

Use your own judgement on where you fall on your own spectrum and jot it down.

Now that you’ve prioritized your Five Factors and had the opportunity to fill out your matrix you should have a score between 5 and 50. Simply put -

Low Score = Refinance

High Score = Sell

I really do wish with certainly I could say, a score of 24 and below you need to Refinance. At 26 and above you absolutely need to Sell but life always comes with a bit of uncertainty. My priorities may not align with your priorities. My Real Estate Investment goals may not mesh with yours and so on.

What I do hope is that if you are truly struggling to make this decision, this gives you a framework to channel your thoughts and help you get a bit closer to making that big decision.

Either way, good luck! You’ve worked hard to this point and deserve the ability to tap into your Real Estate equity.