The 4 questions we ask ourselves when deciding whether to refinance or sell

One of the most critical decisions you'll face as a multifamily investor is whether to refinance and hold a property or sell and move on.

In our business, we typically ask ourselves four different questions when evaluating whether we should sell or refinance a property. These are the four crucial considerations that guide every exit decision:

Question #1: Do we have upcoming non-value-add CapEx?

Do we have any upcoming or impending capital expenditures that aren't value-add in nature? For example, do we need to replace the roof in the next couple of years? Do we need to pave the parking lot? Do we need to do any work on the plumbing or electrical?

Oftentimes, these are expenses that do not add value to the property (they don't allow you to charge more in rent or increase your NOI). The dollars you spend on those capex items typically don't translate to an increase in sales price at a commensurate level to what you spend.

In situations like that, it often makes sense for the next buyer to spend the money on those items.

Question #2: What's the quality of the market (and how easy will it be to manage the property moving forward?

Will it be easy to manage the property (and cash in the operating account) moving forward?

Broadly speaking, we're much more interested in holding a property in a B-class area long term than a property in a C-class area because it's going to be easier to manage. It's going to require less time and energy from the sponsors to effectively oversee the property.

It's also easier for us to project what our income and expenses are going to be in the future, which makes it easier for us to manage our cash. In that situation, we probably lean towards refinancing versus selling the property.

Question #3: What are the tax implications of selling?

This is a critical consideration in determining whether we want to refinance or sell.

For example, did we just do a cost segregation report where we took accelerated depreciation? If so, then we likely do not want to sell that property for at least a few years because we're going to have to pay taxes on the depreciation recapture.

Other key tax questions:

Answering these questions is important as we evaluate whether we want to sell or refinance and hold onto the building.

Question #4: Is the property worth more to someone else?

This is a little more abstract, but crucial: Is the property worth more to someone else than it is to us?

What I mean by that is: Do we have scale and operational efficiency in the area that the property is in? Can we manage at a lower cost? Can we renovate the units at a lower cost? Is there a partner involved in the project who is providing a service at a lower cost than what we would get from somebody else in the market?

This is important to ask because maybe the answer is no, we don't have those efficiencies - maybe another buyer has them. The property may be worth more to another buyer than it is to us. Therefore, it probably makes sense for us to sell it to that buyer and move on from the building versus refinance and hold onto it.

Bottom line

Depending on the answers to those four questions, we'll elect to either refinance or sell and move on. However, it's crucial to analyze the various implications of selling a building, as this decision is irreversible.

This systematic approach has served us well across our portfolio, and it's the kind of strategic thinking we dive deep into on episodes of The Multifamily Wealth Podcast.

If you found this framework valuable, you might enjoy our recent episodes where we break down more decision-making processes like this one.