Should I sell or refinance my multifamily property?
February 10, 2022
Everyone's situation and investment goals are unique, so there’s no easy answer to the question – “Should I sell or refinance?” But then again, isn’t making these types of decisions the fun part of investing in real estate? Here's a comprehensive list of what should be considered when conducting your analysis.
In this article:
Are you able to reinvest the entire amount of proceeds from a sale into another opportunity with higher risk adjusted returns?
Even if you've received an attractive offer, is now the right time to sell if you don't have your next investment lined up?
How long will your money end up sitting on the sidelines by the time you actually close on your next transaction?
Who are your investors and what are their goals?
- When do they expect their capital back and what is their targeted hold period?
- If you sold the property now would you be able to return their capital invested and deliver on expected returns?
3. Real estate portfolio
Rather than making an investment decision in a vacuum, you should consider any limitations from or impacts to your entire portfolio.
- Does owning this property still make sense given the performance of other investments in your portfolio?
- Has the composition of your portfolio changed to where this property no longer fits your overall investment strategy?
- Are the other investments in your portfolio stable and performing well, allowing you to invest more capital or take greater risks on this property? Or do you need to pull out equity to recapitalize other investments in your portfolio?
4. Available capital
Do you have the necessary capital to adequately maintain the property and maximize your returns?
If not, might a well-capitalized, value-add investor actually pay you for leaving some meat on the bone?
Are you missing out on achieving higher rents by not having the cash to complete certain capital improvements or renovations?
5. Growth strategy
How important is growing the size of your portfolio?
- Does your growth strategy rely on rolling all your investment gains into larger and larger properties?
- Could you still purchase your next investment property by capturing only a portion of your gain through a refinance?
If you can sell your property for a profit you will be subject to a capital gains tax, which should be factored into your analysis.
- Can you take advantage of a 1031 exchange?
- If you do elect for a 1031 exchange, are you forcing yourself to overpay for the next property or rushing into a poor investment decision?
7. Business plan
How does your investment property's actual performance compare to your inital projections?
- Have you successfully executed a business plan such as renovating units and increasing rents to their fullest potential, or would you be leaving a lot on the table by selling your property now?
- Has the market or environment changed where your initial business strategy no longer makes sense? Is it time to sell and cut your losses or are you able to pivot your strategy and still come out on top?
Where is the market now vs. when you purchased the property?
- Do you feel you are at the top of the market and selling now would allow you to take advantage of inflated asset prices?
- Does it make sense to wait given signs of future growth, which could include:
- decreasing vacancies
- increasing number of transactions with properties trading above asking price, at lower cap rates and high per unit or square foot values
- new businesses moving into the area
- upcoming development or redevelopment planned by the town
- improving demographics
- decreasing crime
- improving school ratings
- Is the property well positioned to withstand a market correction or downturn?
9. Debt prepayment penalties and other restrictions
Most multifamily loans carry a penalty for prepayment or other restrictions related to selling your property.
- Is the existing loan subject to a large prepayment penalty or in a lockout period where you are not permitted to pay it off from selling your property?
- Can your lender waive all or a portion of your prepayment penalty based on the loan type or where you are in relation to the maturity date?
10. Personal situation
Often times there are unique circumstances that can also impact your decision.
- Are you relocation or retiring and no longer able to want to self-manage? If so, can you trust and afford a third-party property manager?
- Is your property an irreplaceable trophy asset, passed down from one generation to the next, and selling is just not an option?
1. Cash flow and returns
How much would your net cash flow after debt service or cash-on-cash return improve from a refinance based on anticipated loan terms?
net cash flow after debt service: rental income less operating expenses and mortgage payment
cash-on-cash return: annual net cash flow after debt service divided by total cash invested
- How significant are the costs of a refinance, such as prepayment penalties, origination fees and closing costs and what impact do they have on your overall returns?
- If there’s a chance you might want to sell the property in a few years, are you selecting the right structure to minimize any future prepayment penalties?
2. Available loan terms
Is now the right time to pursue financing?
Will you qualify for the best loan terms available? Lenders will want to see high credit scores, strong financial wherewithal in terms of net worth and liquidity, and a well-performing portfolio. If you are experiencing subpar performance at another investment property, it may be best to wait until those issues are solved before seeking financing.
What financing terms are currently available in the market? Current interest rates and maximum loan amounts are often the primary focus, and rightly so. However, there are other loan terms that can have a material impact on your returns such as amortization and interest only. Furthermore, other factors such as escrows, reserves, and recourse vs. non-recourse debt should also be factored into your decision.
3. Prepayment penalties
Prepayment penalties in the form of yield maintenance or a percentage of your loan amount based on a declining prepayment schedule can materially impact returns and should be factored into your analysis.
What is your prepayment penalty if you were to payoff your existing loan today?
What prepayment options are available on your new loan, what is the cost and do they provide you with the flexibility you need?
4. Interest rate and cyclical risk
Where is the current market environment and your risk tolerance?
Does it make sense to lock in fixed-rate financing to protect against rising interest rates?
Should you opt for a longer loan term to get through the next market cycle?
If you refinance your property, what will be the tax consequences, if any?
How will your taxable income be impacted?
Will the loan amount impact your property's assessed value and therefore property taxes? While the appraised value of your property from a refinance is not public information, the loan amount may be, and your county could choose to reassess your property at a value at least equal to the loan amount if it is higher than the current assessed value. Each state and county are different so it is worth checking with the local tax assessor’s office and/or a tax professional.
By comparing expected cash flows and returns as well as considering the other factors listed above, you'll be able make the most informed decision on whether a sale or refinance is best for your unique situation and needs.
Whether you’re looking for anticipated loan terms to plug into your analysis, or you’ve already decided on a refinance - reach out to MultiFi today. Our team of expert partners are here to help!
Have questions or feedback? Contact us.
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With nearly 15 years of experience in finance, commercial real estate, and multifamily lending, Chris leads our MultiFi team to provide the best solutions tailored to your unique situation and goals. Chris and the MultiFi team have set out to create the future of multifamily lending, striving to empower borrowers like you with the knowledge, transparency, and expertise to get more out of your multifamily investment.
Prior to launching MultiFi, Chris was responsible for the initial underwriting and quoting of over $26 billion of potential Fannie Mae multifamily production. Chris was also instrumental in launching Berkadia’s Fannie Mae's Small Loans program and Freddie Mac’s Optigo® Small Balance Loans Program. He served as Head of Small Loan Originations, where he managed over $575 million in small loan production, in conjunction with being the Product Manager for Berkadia's multifamily lending technology initiative. Chris's unmatched experience with multifamily financing and innovation gives MultiFi an edge in providing you with the optimal solutions and experience.Read more by Chris Philipps