Should You Sell or Refinance Your Multifamily Property?
As investors shift their strategies toward a longer-term horizon, holding properties and refinancing into a permanent loan is the most compelling investment option. Here’s why.
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As the Federal Reserve continues to increase interest rates to curb inflation and slow down the economy, apartment investors are forced to reevaluate strategies and contemplate how to best capitalize on current market conditions. As a result, property owners face one major question: whether to sell or refinance their assets.
Although normally refinancing might present the option to obtain a new loan with better terms — including lower monthly payments, shorter prepayment periods, or switching from a variable- to a fixed-rate loan — higher mortgage rates are making it more difficult to lock in these opportunities. And if you’d rather sell your property, it may be more challenging than you expect, as outlined further below.
The Mortgage Bankers Association in its latest forecast revealed that total commercial and multifamily mortgage borrowing and lending is projected to fall to $766 billion this year, down 14% from the $891 billion recorded in 2021. Multifamily lending alone is expected to represent $455 billion of the total volume in 2022, down 7% over the record $487 billion registered last year.
Recalibrating Investment Strategies
Due to substantial demand for rental housing across the country, driven by population growth and housing shortages in most markets, property values have grown dramatically over the past couple of years, increasing the appetite for multifamily investment. Thanks to bidding wars across the nation, the apartment market quickly turned into a seller’s market.
SEE ALSO: Multifamily Mortgage Calculator
However, amid today’s economic conditions, sellers are compelled to adjust their expectations as buyers simply can’t afford to pay the prices they could’ve paid one year ago. This is prompting many property owners to hold onto their assets and shift their strategies toward a longer-term horizon.
Selling a property for a lower price and then moving to another with a higher rate simply doesn’t make sense. Furthermore, if property owners had already locked in a long-term fixed-rate loan before rates started climbing, the best strategy to embrace may be a wait-and-see approach.
When it comes to owners facing near-term debt maturity, the decision to sell or refinance is far more pressing. Nonetheless, while refinancing a property might not provide the same benefits as it did six months or a year ago, locking in longer-term fixed-rate loans can help owners shield themselves from further rate increases.
Developers who plan to hold their projects instead of selling will also likely refinance their properties to swap their adjustable-rate mortgages for permanent loans. For those planning to accelerate refinancing plans, life companies, banks, and credit unions might provide the best options, as these lenders often offer early rate locks to protect clients from increasing rates.
Additionally, savvy investors looking to hold their properties for a more extended period might consider taking a cash-out refinance to tap into equity accumulated over the years. The highest-quality properties with the most attractive amenities will have an easier time keeping occupancy levels elevated to ensure consistent cash flows during economic volatility. A cash-out refinance allows owners to invest the extra cash into property upgrades to make them more attractive to renters and ultimately turn them into a strong hedge against inflation.
Related Questions
What are the benefits of refinancing a multifamily property?
The benefits of refinancing a multifamily property include the ability to adjust loan terms, potentially lower interest rates, and access to cash-out refinance options. Adjusting the loan term might provide the option to choose a longer-term, fixed-rate loan to avoid economic uncertainties in the future and lower your monthly payments. A refinance might also allow you to shorten your loan term in order to pay the property off faster. Qualifying for a lower rate now might save you thousands of dollars throughout the lifespan of the loan. A cash-out refinance might allow you to tap into the equity you have accumulated over the years, replacing the old funding with a new loan that is larger than the amount needed to pay off the old note, as explained by Forbes. The difference between the two loans can be kept by the borrower and used for property upgrades or investing in another asset.
What are the risks of refinancing a multifamily property?
There are a few risks to consider when refinancing a multifamily property. Firstly, if you had already locked in a long-term fixed-rate loan before rates started climbing, you may not be able to get the same benefits as you could have six months or a year ago. Secondly, if you are facing near-term debt maturity, you may not be able to get the best terms for your loan. Thirdly, if you are taking a cash-out refinance, you may not be able to get the best terms for your loan. Finally, if you are refinancing to swap your adjustable-rate mortgages for permanent loans, you may not be able to get the best terms for your loan.
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What are the advantages of selling a multifamily property?
The main advantage of selling a multifamily property is that it can provide investors with a large lump sum of money. This can be used to reinvest in other properties, or to pay off debts or other expenses. Additionally, selling a multifamily property can provide investors with the opportunity to diversify their portfolio and reduce their risk. Finally, selling a multifamily property can provide investors with the opportunity to take advantage of capital gains tax benefits.
For more information on the advantages of selling a multifamily property, see The Pros and Cons of Multifamily Investing.
What are the disadvantages of selling a multifamily property?
The disadvantages of selling a multifamily property include:
- Low liquidity: Unlike stocks or bonds, you can’t simply click to sell an apartment building, and, even if you could, you might not get the price you want. Multifamily properties often take several months to sell, and closing can be a time-intensive process. Source
What are the tax implications of selling a multifamily property?
When selling a multifamily property, investors may be subject to capital gains taxes. Capital gains taxes are taxes on the profits made from the sale of an asset, such as a multifamily property. The amount of capital gains taxes owed depends on the investor's tax bracket and the amount of profit made from the sale. Additionally, investors may be able to take advantage of tax-loss harvesting, 1031 exchanges, or Opportunity Funds to reduce their capital gains taxes. The Pros and Cons of Multifamily Investing and Capital Gains Taxes for Multifamily and Commercial Real Estate Investors provide more information on capital gains taxes.
What are the tax implications of refinancing a multifamily property?
Refinancing a multifamily property can have a variety of tax implications, depending on the type of loan and the terms of the loan. Generally, the interest paid on a loan used to purchase or improve a rental property is tax deductible. However, if the loan is used to refinance the property, the interest may not be deductible. Additionally, if the loan is used to take out cash from the property, the interest may not be deductible. It is important to consult with a tax professional to determine the exact tax implications of refinancing a multifamily property.