Cashflow Vs. Neighborhood

Multi-Family and Apartment Investing
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Cashflow Vs. Neighborhood

Mike Stonesifer
Investor · Superior, WI · Member since 2017 · 5 posts · 0 votes

Keep a strong cashflowing property or get out of a declining neighborhood to redeploy the capital?

I have a 9-unit multifamily property that is currently cashflowing very well. However, the neighborhood it is in has been trending downward in terms of the number of homeless residents in the area. I am debating whether to sell it and redeploy the capital, or keeping it as it cashflows well each month.

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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
3d

Mike, I’d look at this less as “good cash flow versus bad neighborhood” and more as “what return am I getting on the equity I have tied up, and what risks are increasing around that return?”

If the 9-unit is still producing strong cash flow, I wouldn’t rush to sell just because the area feels weaker. But I would start watching the things that can eventually hit the numbers: tenant demand, rent growth, delinquency, turnover, insurance, vandalism/security costs, maintenance, and whether buyers are starting to demand a higher cap rate for the area.

The other piece is return on equity. If you bought years ago and now have a large amount of equity sitting in the property, the cash flow may still look good while the return on that equity has quietly become pretty low. That is where selling and redeploying can start to make sense.

From the tax side, I’d also look at depreciation recapture and suspended passive losses before deciding. A sale can free up suspended passive losses in some situations, and a 1031 can defer gain and depreciation recapture, but I would not let the tax strategy force you into a weaker replacement property.

For me, the question is: is the property still compensating you enough for the neighborhood risk and the amount of equity you have tied up?

Feel free to DM me, I’d be happy to send over a few resources that might help with sell-versus-hold and capital redeployment planning.

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  • Charles Seaman
    Apartment Syndicator · Charleston, SC · Member since 2017 · 519 posts · 631 votes
    4d

    @Mike Stonesifer Have you noticed the number of homeless residents starting to impact surrounding properties in the area? If so, it's probably time to sell it and deploy capital elsewhere. While it might not be impacting your property today, it's only a matter of time before it does if surrounding properties are already suffering the consequences. At the very least, it'll make it tougher to push rents and attract quality tenants.

    Before making any rash decisions, it's probably wise to determine what other investments will allow you to generate the same monthly cash flow so that you can consider your options.

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    • Mike Stonesifer
      OP
      Investor · Superior, WI · Member since 2017 · 5 posts · 0 votes
      4d

      There is some impact on surrounding properties. That is a good point to consider down the road how my ability to get good tenants and strong rents might change. I think matching my current cashflow would be a challenge with the capital redeployed, but I could probably get close after some time.

      0Reply
  • Caleb Brown
    Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes
    4d

    I'd be leaning on selling. If you delay then you might hurt your ability to sell and price. Not sure if you can 1031 and find something else . I would start exploring that now to get an idea

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  • Divin KanyamaBusiness Member
    Accountant · Seattle, WA · Member since 2025 · 136 posts · 36 votes
    3d

    @Mike Stonesifer Strong cash flow is valuable, but the neighborhood trend should be part of the return calculation.

    The question is whether the current income still looks attractive after factoring in higher vacancy risk, tenant turnover, insurance, repairs, security, management issues, and potential resale challenges. If those risks are increasing, the cash flow may not be as strong as it appears on paper.

    A useful way to look at it is return on equity. If the equity in the property could earn a similar or better return in a stronger location with less risk, selling and redeploying may make sense. If the cash flow is still strong enough to compensate for the added risk, holding could still be reasonable.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    3d

    Mike, I’d look at this less as “good cash flow versus bad neighborhood” and more as “what return am I getting on the equity I have tied up, and what risks are increasing around that return?”

    If the 9-unit is still producing strong cash flow, I wouldn’t rush to sell just because the area feels weaker. But I would start watching the things that can eventually hit the numbers: tenant demand, rent growth, delinquency, turnover, insurance, vandalism/security costs, maintenance, and whether buyers are starting to demand a higher cap rate for the area.

    The other piece is return on equity. If you bought years ago and now have a large amount of equity sitting in the property, the cash flow may still look good while the return on that equity has quietly become pretty low. That is where selling and redeploying can start to make sense.

    From the tax side, I’d also look at depreciation recapture and suspended passive losses before deciding. A sale can free up suspended passive losses in some situations, and a 1031 can defer gain and depreciation recapture, but I would not let the tax strategy force you into a weaker replacement property.

    For me, the question is: is the property still compensating you enough for the neighborhood risk and the amount of equity you have tied up?

    Feel free to DM me, I’d be happy to send over a few resources that might help with sell-versus-hold and capital redeployment planning.

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5241 Reviews
    WebsiteView Page
    TaxMD™ | AI-Powered Tax Planning
    WebsiteView Page
    1Reply
  • Mike Stonesifer
    OP
    Investor · Superior, WI · Member since 2017 · 5 posts · 0 votes
    3d

    The advice about looking carefully at my return on equity is something I will need to think carefully about. Thinking about what the increasing risks are for the property is too, but one challenge with that is trying to understand where the city will go with some of their policies that affect these neighborhood issues.

    Overall, we still are able to get good tenants and fairly strong rents for our building, but there are additional maintenance and security issues that come up with where this building is located, and also concerns about selling it down the road.

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  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    2d

    I agree with the advice regarding evaluating the ROE. Have you run any numbers to see if sales prices are starting to go down in the area.? If so then I'd consider selling (via 1031 exchange if possible)

    312-681-7487
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  • Mark UpdegraffBusiness Member
    Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 683 votes
    1d

    I’d separate two questions: is the property still producing an adequate return today, and is the exit deteriorating faster than the cash flow is compensating you?

    We operate in Rochester, where performance can change materially block by block. I’d start tracking the things that turn a “declining neighborhood” from a feeling into numbers: applicant quality, delinquency, turnover, vacancy days, rent growth, vandalism/security, maintenance cost and what buyers are requiring for cap rate.

    If several of those start moving the wrong way together, the good cash flow can become a lagging indicator.

    I wouldn’t sell solely because the area feels rougher today. I’d establish the tripwires now that would cause me to sell, so I’m not making the decision emotionally two years from now after the exit has already gotten worse.

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    • Mike Stonesifer
      OP
      Investor · Superior, WI · Member since 2017 · 5 posts · 0 votes
      9h

      That is a good point that cashflow can be a lagging indicator, and to not use that as the primary factor for if a property should be kept or sold. Once I get a better feel for what the building could sell for, I'll be able to run my numbers and decide what the best call will be for this property.

      0Reply
  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
    22h

    Explore your options to sell!

    You never know what someone else might be willing to pay.

    [email protected]248-209-6824
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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    3h

    @Mike Stonesifer

    @Ashish Acharya put this well. You're not in a position to have to make an urgent decision now, but you want to consider the implications of either option. You don't want to give up a good-performing property, but you also don't want to start bleeding cash flow with potential vacancies.  One caution, though: the condition of the neighborhood sometimes doesn't negatively impact cash flow.  It can add cash flow, but through a different utilization of the property - lowering rents for fewer empty days on the market can be a trade-off, Section 8 opportunities,  and ultimately the full cycle to a future trendy gentrification play.  It's just not as simple as homeless =bad rental.  There may be some hidden opportunities

    If you do ultimately decide to sell the property, you could consider doing a 1031 exchange, which allows you to defer all of the capital gains tax and depreciation and reinvest it into another investment property/properties. This is how many investors scale their portfolio and reach markets with better cash flow and appreciation potential.

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