The sale price is a number owners know. What a refinance would free up is usually a guess, so the comparison gets made on feel.
Run the same building both ways and it stops being a feeling.
Take a 12-unit building producing $275,200 of lender NOI. At a 6.5 percent cap rate it is worth about $4.23 million. After five years of payments, $2.46 million is owed.
The refinance side: $257,000 out, and you keep the building
The lender’s debt service coverage test supports a loan of about $2.72 million on that income.
Pay off the $2.46 million of existing debt and the refinance nets roughly $257,000 in cash.
Here is the part that gets underweighted. Loan proceeds are generally not treated as income, because nothing was sold and no gain was realized. That is the structural difference between the two paths, and your CPA can confirm how it applies to your return.
You still own the building. You still collect the $275,200 a year. You still hold whatever appreciation the next decade produces, and you still control the five levers that can raise that income further.
The sale side: more cash, and nothing left producing
Same building, same $4.23 million.
Take off selling costs, call it 6 percent, so roughly $254,000. Pay off the $2.46 million of debt. That leaves about $1.52 million before tax.
Then the tax arrives. Federal capital gains applies. Net investment income tax usually applies. State tax may apply. And depreciation recapture applies, which on a building you have held a long time can be the single largest line on the bill.
To finish the example, assume a total tax bill in the range of $500,000 on a building like this one. That is an illustration, not an estimate of your bill. Your actual number depends entirely on your basis, your holding period, and how much depreciation you have taken, and only your CPA can run it. Have that conversation before you list anything.
Run that through and you net somewhere near $1.02 million.
The gap is real, and it is only half the comparison
On the surface, selling wins. Roughly $1.02 million against roughly $257,000. That is a four-to-one gap, and it is the only number in most comparisons.
Now read the other side of the ledger.
Refinance and you hold an asset worth about $4.23 million, producing $275,200 a year, and you took $257,000 out tax free. Sell and you hold about $1.02 million and own nothing. The income stops. The appreciation stops. And you are now holding seven figures of cash that has to find a new home in a market you just exited.
Neither is automatically right. Sometimes selling is the right call.
Three questions that settle it
- Do you want to still be in this business in ten years? Refinancing keeps you in it. Selling takes you out, and getting back in later means buying at whatever the market charges then.
- Can the building carry the new debt comfortably? Check the coverage ratio on the new loan, not the old one. If coverage is tight, more debt is a risk rather than an opportunity, and the tax-free cash is borrowed against a thinner margin than you think.
- Is there somewhere better for the money to go? Selling to buy something stronger is a strategy. Selling because you are tired of turnovers and tenant calls is a management problem, and selling is an expensive way to fix management.
Answer those honestly and the decision usually makes itself. A no on the first question and a yes on the third points at a sale. A yes on the first and a yes on the second points at a refinance. A yes on the first with tight coverage points at neither yet. It points at the income work.
Before you commit to either path
Both paths are priced off the same number, and it is not the cap rate. It is your documented NOI.
A lender sizes the refinance off it. A buyer capitalizes it and then discounts anything in your file that cannot be verified. The work that improves one option improves the other, and you can do it before you choose. The NOI Leak Check takes about five minutes and tells you where that number is soft.
Then run the mechanics of each path in full: How to Refinance a Small Apartment Building and How to Prepare a Small Apartment Building for Sale.
Own a building in Washington DC, Virginia, or Maryland? TOPA timing changes the sale side of this comparison before any tax number does: Selling a DC Apartment Building
Get a read on your building. Request a building audit and I will run both columns on your actual numbers so you are comparing two real figures instead of one.
Frequently asked questions
Should I do a cash-out refinance or sell my apartment building? Three questions decide it. Do you want to still be in this business in ten years? Can the building carry the new debt comfortably? Is there somewhere better for the money to go? Selling because you are tired of the building is a management problem, not an ownership one.
Is a cash-out refinance taxable? Loan proceeds are generally not treated as income, because nothing was sold and no gain was realized. That is the structural difference between a refinance and a sale, and it is the piece that gets underweighted when the two headline numbers are compared. Your CPA can confirm how it applies to your return.
Does selling put more cash in my hand than refinancing? Usually yes, and by a wide margin before tax. The comparison only becomes real after selling costs, debt payoff, capital gains, net investment income tax, and depreciation recapture. Get the after-tax number from your CPA before you compare anything.