If you peruse a number of multifamily investment opportunities you will see that some target a sell at a particular year while others a refinance. Today we will talk about the pros and cons to each type of business plan and some of the considerations that should be made.
Pros and Cons to Selling
The reason that most syndicators offer business plans that do not included holding a property for lengthy periods of time is that the high returns they are targeting are typically created in the first few years of ownership through either renovations or better management. Once these improvements have been made the property may continue to increase in value, but at a much slower rate than the initial years of ownership. This means that once this point is reached the investors are better off to have the profit from that investment returned so they can reinvest it in another project whose value is increasing more rapidly. The negatives to selling in a syndication would include the high cost of completing multifamily transactions, the necessity to find another deal to invest in and of course a lower sell price if the current economic environment is not ideal for selling.
Pros and Cons to Refinance
The purpose of a refinance is to return capital (and sometimes proceeds) to investors from a property thereby reducing their risk in that investment and allowing them to go and invest those funds in yet another project. Sometimes a refinance is completed because the busines plan calls for holding the property long term. This means the investor capital will be returned and then the property continue to produce cash flow ongoing. Other times, a property is refinanced because the current economic environment won't offer the investors the best sell price and holding for a few years will likely provide better returns overall. Regardless, the negative to doing a refinance on a property is that a large portion of the profit will continue to be locked into that property and unavailable to investors for redeployment until the property is later sold.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please set up a meeting with us through our Calendly link and subscribe to our weekly blog here.