The denominator in the calculation is your capital/equity and with no debt the return on your existing equity is low.

Do they have any debtJust because you are a note fund does not mean you do not have debt.

could it service the debt on $1m?

Selling gets a tax free gain and allows you to be more liquid; keeping it allows you to have once in a lifetime cheap debt and have that leverage on an appreciating asset. 

It is small multifamily with 30 year fixed rate debt. 

I literally laughed through the phone at his suggestion, because I was broke, in debt, and in every way and unqualified borrower, and the lending environment in 2012 was probably stricter than it had been since the invention of the 30yr mortgage.

For instance, if there was a total of $250K of debt on those properties that woud leave you with $350K of proceeds to use to purchase $600K of real estate.  

The 2-3% points in extra cost are worth it if you plan on using as I described above because the use would be for a few  months at most and due to that short term use you can survive a rate adjustment up.But, if you have no plan to payoff the debt like when using for a down payment on a long term hold why pay the extra cost for flexibility and have the additional risk of the adjustable rate with the amortization looming when you can get a fixed rate second mortgage. 

Mgt, Landscape/Snow, tax, insurance, utility then debt service. 

Two views of ownership; owning the equity,  owning the debt.