Exit Strategy for Multi-Family

[Edgar Garnys]

Hello BP Community!

I am reviewing the performance for one of my multi-family investments and noticed that the yearly taxes are going up over 50% as the assessed value has gone up (most likely due to overall market appreciation). This would cause my cap rate to go down from the low 8% level to the high 6% level. My annual ROI % would get cut almost in half as net annual cash flow was relatively low in the first place (less than $100 per door). The rents are already at market rates and I am afraid that I can't push them higher to offset the higher tax expense. I also feel that the annual ROI % from appreciation will not increase as rapidly, so it will make up a much smaller portion of the total ROI generated. My assumption is that the annual ROI % will be ~15-20% assuming rents stay the same, taxes go up by more than 50%, and the value of the home remains constant. I am currently seeing an annual ROI % of 20-25% (excluding appreciation), so I am expecting to see a decline in the annual ROI %.

What would you do in this scenario? Would you sell the property or continue to hold if the total ROI % from cash flow, debt paydown, tax savings, and appreciation is better than any other alternative investment options? I am curious to know your thoughts!

[Taylor L.]

I would not consider debt paydown or tax savings with the same footing as cash flow or appreciation. Cash flow would be first. I'm always evaluating exit options to see if it's preferable to hold. You may be able to 1031 into a higher cash flow opportunity.