Refi vs Sell small multifamily after value add?

[Terry Zannella]

Hi there,

I’m looking for some advice on how to determine whether to (a) Cash out Refi or (b) Sell, in order to reinvest profits after a successful value add on 2 diff 4-plex’s.

Details:

I own 2 near identical 4-plex’s in Phoenix, Arizona. One street apart from each other in an older neighborhood with a lot of similar properties. 1st Building rehab is complete/re-rented (higher rents), and the other rehab will be complete soon (1 - 2 weeks). I also have interested tenants for the 2d building. Contractor has been completing work as scheduled.

Purchase Price: $275k ea Down
Payment: $69k ea (25%down)

Purchase costs: $8k

Out of pocket costs: $77k ea

Current Mortgages: $205k ea

Renovations: $65k ea building

ARV: $550k-$575k ea based on comps

New Rents: 4k per 4-plex per month (1k ea unit)

Actual Expenses: 1.2k per month (Mgmt, Vacancy, Maint, Capex, utilities, landscape, taxes, insurance)

NOI: 33.6k (2.8k per month x 12)

-I can Sell at $550k (a buyer recently made an offer at that price), a separate 1031 buyer is supposed to provide an offer early next week.

or

-I can Refi (local lender who I do business with and knows the property details will offer terms up to 80% LTV, ~4% fixed, 10 year balloon, 25 year Am). I verified this info 2 days ago.

*Same lender above will loan on replacement property, similar terms, if I sell and purchase another property.

My thoughts:

-C Class properties (that I like), good tenants (all paying), good location, good property manager & good lender make me consider Refi and look to purchase another 1-2 properties in same neighborhood and repeat.

—Refi both at 550k ea (assuming they appraise), 75% Cash out Refi = 825k minus 410k mortgages - 130k rehab - ~10k refi fees = $275k to buy more RE

*Neighborhood comps for un-renovated 4-plex = approx $450k ea

or

-Selling and locking in profits from both buildings then 1031 into 1 larger commercial property may offer chance to scale up to larger property (with another value add).

—Sell both at $550k = $1.1M minus 410k mortgages - 130k rehab - 88k (approx 8% commissions/fees) = $472k to buy more RE

Concerns:

Refi: With 4-plex valued with comps instead of NOI, I'm at the top of market for them right now, which means minimal room for further value add/appreciation and now might be great time to sell, though I am happy with Cashflow.

Sell: What can I find as a replacement? I have a great realtor who consistently has off market properties, but can I find one that makes sense within 1031 window? Will any efficiencies of 1 bldg offset costs of having 3-4 separate 4-plex’s?

I tried to keep this brief and include relevant details, let me know if I’m missing anything.

I appreciate any thoughts or insight into how you would make a decision.

Thank you.

Terry