Is It Time to Trade Your Older Multifamily Property?

Question

Owning a multifamily property for years can be rewarding, but what happens when major repairs start eating into your returns? Between roof replacements, HVAC systems, plumbing issues, and unit renovations, an older property can quickly become more expensive to maintain than you expected.

Sometimes, the smartest move is not to keep renovating. It may be time to sell and put your capital to work somewhere else.

A Forbes article on 1031 exchanges in multifamily real estate explores how investors can exchange one qualifying investment property for another while deferring capital gains taxes.

So, how do you know when it is time to make a move?

Look at your upcoming capital expenses, cash flow, and the property's long term potential. If major renovations are approaching and another investment offers a stronger opportunity, it may be worth exploring your options.

A 1031 exchange generally requires identifying a replacement property within 45 days and completing the acquisition within 180 days. The rules are specific, so planning ahead with qualified tax and real estate professionals is essential.

And remember, a newer property is not automatically a better investment. Understanding its condition, renovation needs, and potential returns is just as important as evaluating the property you are selling.

The bottom line: Successful investing is not just about holding properties. It is about knowing when to hold, when to sell, and where your capital can work harder for you.

Divin Kanyama · Answer

Good framework, @Jorge Abreu. I’d add that age alone is not the reason to sell—the decision should come from comparing the property’s forward-looking return with the return available elsewhere.

Build a realistic multi-year hold model that includes deferred maintenance, unit turns, insurance and tax growth, vacancy, financing, and the opportunity cost of trapped equity. Then compare it with a sale scenario after transaction costs, taxes, and the risks of the replacement asset. Sometimes completing known capital work creates better value than trading into a newer property at a lower yield.

A 1031 exchange can be useful, but the tax tail should not wag the investment dog. Line up qualified tax and exchange professionals before closing, understand the deadlines, and avoid overpaying simply because the identification window is running out.

Jorge Abreu · Answer

@Denise Supplee Absolutely! It really comes down to the numbers and the property's potential. Sometimes investing in the right improvements can create more value than selling, but it’s important to look at the bigger picture and what that capital could do elsewhere. The key is making a decision based on long term returns, not just the age of the property.

Ryan Brown · Answer

Good topic, Jorge. My take is that if the property is cash flowing at all, I'm not sure right now is the time to sell it.

Multifamily values have come down a good bit from where they were a few years ago. If you sell now, you're probably selling at a lower number than you would have gotten then, and possibly lower than you'll get in a few years. And if you 1031 into something newer, you're paying today's prices for the replacement and usually getting a lower return for the nicer building.

There's the debt side too. A lot of people holding older buildings have loans at rates they'll never see again. Selling means giving that up and financing the next one at today's rates, and that can wipe out whatever you were hoping to gain from a newer property.

If the roof or HVAC is coming due, I'd rather refinance, pull some equity, or set aside reserves and get the work done on a building I already know than rush to find a replacement in 45 days. Hold it, keep it cash flowing, and wait for a better market to sell.

There are exceptions. If it's losing money every month or the big repairs are more than it can carry, the math is different. But if it's paying for itself, I'd be in no hurry to sell right now.

Max Comperatore · Answer

Jorge, Ryan's cash flow filter is the right starting point, but older Class C/B math usually breaks on capex, not vacancy. For 1970s/1980s stock, I underwrite $1,200-$1,800 per unit per year for recurring roofs, chillers, and plumbing. On 100 units, that is $120k-$180k of annual drag before the next surprise. If NOI is $700k, that is a 17%-26% hit, and DSCR can fall below 1.20x quickly.

Now layer debt. Refinancing at a 7.8%-8.2% constant means a $5M loan costs roughly $390k-$410k per year. You trade old low-rate debt for today's constant. If capex-adjusted NOI drops to $520k, coverage gets tight, which is structural risk, not a temporary miss. A 1031 defers recapture and capital gains, but it does not give you a basis step-up. You trade tax friction today for a lower depreciable basis and new acquisition costs.

Compare yield on cost to ROE. Your 1985 buy may show 8% yield on cost, but on today's equity, ROE might be 4%-5%. A newer asset at a 6.5% cap with $600/unit capex can win on total return even with a lower headline yield. Run the sell versus hold model at the property level, not the portfolio level.

What capex number are you using per unit, and does your DSCR still work after a refi at today's constant?

Eric Fernwood · Answer

Hello Jorge,

We’re seeing many multifamily owners exploring ways to improve returns or diversify their portfolios. We’ve helped clients complete numerous 1031 exchanges involving multifamily properties. In nearly every case, they replaced one property with multiple investment properties.

New clients often ask what to do with an underperforming property. My answer depends on two key factors: how the property performs and how much equity it holds.

There are four options to consider:

• Cash-out refinance
• Sell and pay the applicable taxes
• Hold and reevaluate later
• Complete a 1031 exchange

Cash-out refinance

Sell and pay the applicable taxes

Hold and reevaluate later

Complete a 1031 exchange

I created the diagram below to help compare these options and identify which may best fit your goals.

Working with a local investment team experienced in 1031 exchanges is another key to success. Even small mistakes can jeopardize your tax deferral.

This month, for example, we’re helping a client exchange one multifamily property for two or three single-family homes. The client owns the existing property through one entity but wants to purchase the replacements through another. Because this could jeopardize the exchange, we’re strongly encouraging the client to resolve the ownership structure with a qualified intermediary and tax advisor before proceeding.

Hope this helps.

Denise Supplee · Answer

An older property isn't necessarily a property you need to get rid of. Sometimes putting money into a good property is still the better choice. I'd look at what those upcoming repairs are going to cost, what the property is producing, and what I'd realistically be able to do with the money if I sold it. Then compare that with the taxes and costs of selling and buying something else. The age of the property is only one part of the decision. The numbers have to tell you whether it's time to move on.

Drew Sygit · Answer

If everyone follows your advice and gets rid of their older properties - who's left to buy them?

Jorge Abreu · Answer

Great question! There will always be investors looking for value add opportunities. What one investor sees as a property to sell, another may see as an opportunity to renovate, increase rents, and create value. It all comes down to the investment strategy, the numbers, and who's best positioned to execute the business plan!

Lorelai Germain · Answer

One thing I’d add is the difference in certainty between the two investments. With a property you’ve owned for years, you have actual history on maintenance, vacancy, collections and operating costs. With the replacement property, much more of the projected return is based on assumptions. I’d want to compare not only the expected returns, but how much uncertainty sits behind each one.

Jorge Abreu · Answer

Absolutely! There’s real value in knowing a property’s history and understanding how it performs through different market conditions. A replacement property may look great on paper, but projections don’t always tell the whole story. Evaluating both the potential returns and the risks behind those numbers is essential before making a move.

Is It Time to Trade Your Older Multifamily Property?

Is It Time to Trade Your Older Multifamily Property?

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