Should I Sell or Refinance My Apartment Building
You’ve owned the building for fifteen years. It’s worth far more than you paid. The loan balance is low, the equity is substantial, and you’re tired of the 11pm plumbing calls.
So the question surfaces: sell it and move on, or refinance, pull cash out tax-free, and keep collecting?
Most owners approach this emotionally, weighing management fatigue against fear of a big tax bill. The better approach is arithmetic. There’s a specific number that tells you whether your equity is working hard enough to justify staying, and once you calculate it, the decision usually becomes obvious. You’ll need a current valuation to run it, which our guide on valuing your apartment building explains.
The Real Question: What Is Your Equity Earning?
Here’s the trap that catches long-term owners. You bought the building for $1.2 million. It’s now worth $4 million. It throws off $110,000 a year in cash flow after debt service. You think: that’s a great return on my $1.2 million purchase.
But that’s not the relevant comparison. You don’t own a $1.2 million asset anymore. You own roughly $3 million in equity that you could redeploy tomorrow. The question isn’t what you earn on what you paid, it’s what you earn on what you have.
Return on Equity (ROE) = Annual Cash Flow / Current Equity
In this example: $110,000 / $3,000,000 = 3.7%
That’s your real return. And with commercial mortgage rates starting around 5.7% in mid-2026 and Treasury yields where they are, a 3.7% return on $3 million of trapped equity is a genuine problem. You’re earning less on your equity than you’d pay to borrow it.
This is the single most useful calculation in the sell-versus-refinance decision, and most owners have never run it.
Why ROE Declines Over Time
ROE falls almost automatically the longer you own a building:
- Your property appreciates, so equity grows
- Your loan amortizes, so equity grows further
- Rents rise, but under RSO or AB 1482 they rise slowly, capped at 3% to 4% for rent-stabilized LA buildings. See the current law on rent increases in LA for the specifics.
- Expenses rise faster, especially insurance, which has moved sharply in California
The result is a numerator growing slowly and a denominator growing quickly. A building that returned 12% on equity at purchase can easily return 3% fifteen years later, without anything going wrong.
A rough benchmark: if your ROE is below roughly 4% to 5%, your equity is underperforming and it’s worth seriously evaluating alternatives. Above 8%, the building is working hard and there’s a strong case to hold.
Option 1: Refinance
A cash-out refinance replaces your existing loan with a larger one and hands you the difference.
The Central Advantage: Loan Proceeds Are Not Taxable
This is the reason refinancing is attractive. Borrowed money isn’t income. You can pull $1 million out of a building and owe nothing in tax on it, because you’ve taken on a corresponding liability.
Compare that to a sale, where the same $1 million of equity extraction could carry a $300,000+ tax bill unless exchanged.
What Lenders Are Offering in 2026
The rate environment matters enormously to this decision:
- Commercial and agency multifamily loans (5+ units): rates starting around 5.70%, with LTV up to about 80% on multifamily for well-qualified borrowers
- DSCR loans (typically 2-4 units): fixed rates roughly 6.125% to 7.5% as of mid-2026, with adjustable programs somewhat lower
- Cash-out LTV on 2-4 unit properties: typically caps around 70% to 75%, roughly 10 to 15 points tighter than purchase leverage
- Seasoning: most lenders expect about six months of ownership before a cash-out refinance
The Constraint: DSCR
Lenders don’t size loans on your equity. They size them on the property’s ability to service debt.
DSCR = Net Operating Income / Annual Debt Service
Most lenders require 1.20 to 1.25 for stabilized multifamily. Some DSCR programs go lower with compensating reserves, and a few aggressive lenders will lend at sub-1.0 coverage at reduced LTV and materially higher pricing.
Here’s the problem for LA rent-controlled buildings. If your rents are suppressed by RSO, your NOI is suppressed too. And if your NOI is suppressed, your borrowing capacity is limited no matter how much equity you have.
Worked example. Building worth $4 million with a $1 million existing loan. NOI of $180,000.
- At a 75% LTV cap, the maximum loan is $3 million.
- But at a 6.5% rate on a 30-year amortization, a $3 million loan costs roughly $228,000 annually in debt service.
- DSCR would be $180,000 / $228,000 = 0.79. Far below requirement.
- Working backward from a 1.25 DSCR: maximum annual debt service is $144,000, supporting a loan of roughly $1.9 million.
- Actual cash out: about $900,000, not the $2 million the equity suggests.
This gap between “equity I have” and “cash I can extract” is where refinance plans usually break down for long-held rent-controlled LA buildings. Our guide on selling a rent-controlled building in Los Angeles covers how RSO suppresses both borrowing capacity and sale price.
The Negative Leverage Problem
There’s a second issue. If your building’s cap rate is below your borrowing rate, adding debt reduces your cash flow. This is negative leverage.
If your building trades at a 4.5% cap and you’re borrowing at 6.5%, every dollar you borrow costs more than the asset earns. You get cash today, but your remaining cash flow shrinks, sometimes to zero or below.
This is the current reality for a lot of LA multifamily. Cap rates in the 3.5% to 6% range against borrowing costs near 6% or above means many owners can only refinance by accepting materially reduced or negative cash flow.
Refinance Costs
- Origination and lender fees, typically 0.5% to 1% of the loan
- Appraisal, roughly $3,000 to $10,000 for multifamily
- Title, escrow, and legal
- Prepayment penalty on your existing loan, if applicable
Budget 1% to 2% of the new loan amount, plus any prepayment penalty.
Option 2: Sell
Selling converts equity to cash and ends the operating obligation. The cost is transaction expense and, unless you exchange, a substantial tax bill.
What Selling Costs
For an LA apartment building, expect:
- Broker commission of 4% to 6%
- Transfer taxes of 0.56% base, plus Measure ULA at 4% or 5.5% if the sale exceeds $5.3 million within City of LA
- Escrow, title, and reports
- Prepayment penalty on your existing loan
- Negotiated repair credits
Our full breakdown of what it costs to sell an apartment building in LA walks through every line item. Then the tax bill: federal capital gains, California income tax up to 13.3%, and depreciation recapture at up to 25% on all the depreciation you’ve claimed. Combined exposure often lands between 25% and 37% of your gain.
The 1031 Alternative
A 1031 exchange defers all of that income tax if you reinvest into like-kind property of equal or greater value with equal or greater debt, identifying a replacement within 45 days and closing within 180.
This is what makes selling viable for many owners. You’re not choosing between “keep the building” and “pay 35% in tax.” You’re choosing between keeping this building and owning a different, better-performing one.
Common exchange destinations for LA owners with tired ROE:
- A larger or newer building in a market with fewer rent restrictions
- Multiple smaller properties for diversification
- A Delaware Statutory Trust for fully passive ownership
- Triple-net leased retail or industrial for hands-off income
Note that Measure ULA is not deferred by a 1031. That cost is real and immediate.
Side-by-Side: The Same Building, Three Paths
Assume a 10-unit RSO building in the City of LA. Value $4,000,000. Existing loan $1,000,000 at 4.0%. NOI $180,000. Annual debt service $57,000. Current cash flow $123,000. Equity $3,000,000. Original basis $1,100,000. Accumulated depreciation $700,000.
Current ROE: $123,000 / $3,000,000 = 4.1%
|
Hold As-Is |
Cash-Out Refinance |
Sell and 1031 |
|
|---|---|---|---|
|
Cash received today |
$0 |
~$900,000 |
~$2,750,000 to reinvest |
|
New annual cash flow |
$123,000 |
~$36,000 |
Depends on replacement |
|
Tax due now |
$0 |
$0 |
$0 (deferred) |
|
Ongoing management |
Yes |
Yes |
Depends on replacement |
|
ROE after |
4.1% |
Cash flow drops sharply |
Reset to new asset |
Reading the table. Refinancing gets you $900,000 tax-free but cuts your cash flow by about 70%, because you’re borrowing at 6.5% against an asset yielding 4.5%. Selling with a 1031 gets you far more capital to redeploy but requires you to find and close a replacement property inside 180 days, and costs you $160,000 in ULA plus commission along the way.
Neither is universally right. The refinance is better if you want to keep this specific asset and need liquidity for something else. The exchange is better if the underlying problem is that this asset no longer performs.
When Each Option Wins
Refinance when: – You need liquidity for a specific purpose and want to keep the building – Your ROE is acceptable and the building still performs – The property has genuine remaining upside, such as significant loss-to-lease you intend to capture – Your NOI supports meaningful proceeds at required DSCR – You’re not near a ULA threshold, making a sale disproportionately expensive – You have strong emotional or strategic reasons to keep the asset
Sell when: – ROE is under roughly 4% with no clear path to improve it – Rent control caps your ability to grow NOI, and turnover is slow – Major capital expenditures are approaching, such as a soft-story retrofit or roof replacement – Negative leverage makes refinancing counterproductive – You want out of active management entirely – Your submarket has peaked relative to where you’d redeploy
Hold and do nothing when: – The building performs well with ROE above roughly 8% – You’re approaching an estate planning horizon where a stepped-up basis matters – You’re mid-value-add and haven’t captured the upside yet – Neither liquidity nor management burden is an actual problem
Which Costs You Can Actually Reduce
Reducible: – Commission rate, modestly, and mostly on larger deals – Prepayment penalty, by timing your sale to an open window – Repair credits, by addressing deferred maintenance before listing rather than negotiating under pressure – Escrow and title, marginally, by negotiating splits
Deferrable: – Capital gains and depreciation recapture, via a properly executed 1031 exchange. Review the common mistakes that void an exchange before you start. – Everything, if you hold until death, where heirs receive a stepped-up basis
Essentially fixed: – Measure ULA, unless your sale genuinely falls below the threshold or you qualify for a narrow exemption – Base city and county transfer taxes
On the ULA threshold specifically: pricing a building at $5.25 million instead of $5.35 million saves $214,000 in tax while giving up $100,000 in price. That math is real, and near the threshold it’s worth modeling carefully with your broker and CPA. Structuring a transaction to artificially avoid ULA, however, invites scrutiny. Legitimate pricing decisions are fine; contrived structures are not.
The Estate Planning Angle: Step-Up in Basis
There’s a third path that often beats both.
Under current federal law, when you die, your heirs receive the property at a stepped-up basis equal to fair market value at death. All of the accumulated capital gain and depreciation recapture disappears. Heirs can sell immediately with little or no income tax.
This connects directly to broader planning, which we cover in real estate investment strategies for retirement. For an owner in their seventies or eighties holding a highly appreciated building, this changes everything. A building with $2.5 million of embedded gain carries roughly $800,000 of deferred tax. Hold it, and that liability evaporates for your heirs.
The classic strategy, “swap till you drop”: exchange through 1031s during your lifetime to keep improving your portfolio without ever paying tax, then let the step-up eliminate the deferred liability at death. It’s the most tax-efficient path available to long-term real estate owners.
If liquidity is the issue rather than the asset itself, a cash-out refinance during your lifetime combined with the step-up at death gives you cash now and no income tax ever. That combination is hard to beat, provided the property can service the debt.
Estate tax is a separate consideration at larger portfolio values, and this is territory for a qualified estate planning attorney and CPA, not a blog post.
Decision Framework: Work Through These in Order
- Calculate your ROE. Annual cash flow divided by current equity. This is your baseline.
- Assess whether ROE can improve. Is there loss-to-lease you can capture? Adding an ADU is one route some LA owners use to lift NOI. Are units turning? Under RSO with long-tenured tenants, the honest answer is often no.
- Test your refinance capacity. Ask a lender what your NOI actually supports at a 1.25 DSCR. Compare that to what you assumed your equity was worth.
- Check for negative leverage. Compare your building’s cap rate to current borrowing rates. If borrowing costs more than the asset yields, refinancing shrinks your income.
- Model the sale. Get a valuation and a net proceeds estimate including ULA. Know your after-tax number and your exchange-deferred number.
- Factor your age and estate plan. If a step-up is realistically within view, that heavily favors holding or refinancing over selling.
- Be honest about management. If you’ve stopped wanting to own this asset, that’s a legitimate input, not a failure of analysis.
Common Mistakes
-
Measuring return on original purchase price. It flatters the numbers and hides underperforming equity. Always use current equity.
-
Assuming equity equals borrowing capacity. DSCR governs your loan size, not your equity. Rent-controlled buildings with suppressed NOI routinely support far less debt than owners expect.
-
Ignoring negative leverage. Pulling cash out at 6.5% against a 4.5% yielding asset feels like free money until you see the new cash flow statement.
-
Treating the tax bill as an absolute barrier to selling. A 1031 exchange defers it entirely. Fear of taxes keeps many owners in underperforming assets unnecessarily.
-
Forgetting Measure ULA in the sale scenario. Above $5.3 million in the City of LA, ULA adds 4% or more and is not deferred by an exchange.
-
Ignoring the step-up in basis. For older owners, holding can be dramatically more tax-efficient than any transaction.
-
Refinancing to avoid a decision. Pulling cash out of a building you fundamentally don’t want to own postpones the problem while adding debt to a low-performing asset.
Frequently Asked Questions
Should I sell or refinance my apartment building?
Start by calculating return on equity: annual cash flow divided by current equity. Below roughly 4%, your equity is underperforming and selling or exchanging deserves serious consideration. Above 8%, holding or refinancing usually makes more sense. Then check whether your NOI actually supports the loan you’re imagining, and whether borrowing costs exceed your building’s yield.
Is cash-out refinance money taxable?
No. Loan proceeds are not income because you’ve taken on a corresponding liability. This is the primary tax advantage of refinancing over selling.
What is return on equity and why does it matter?
ROE is annual cash flow divided by current equity, and it measures what your actual capital is earning today rather than what it earned when you bought. It matters because appreciation and amortization steadily grow your equity while rent control limits income growth, so returns quietly decline over time.
When does negative leverage make selling smarter?
When your building’s cap rate is below your borrowing rate, added debt reduces cash flow. With LA cap rates often between 3.5% and 6% and borrowing near or above 6%, many owners find refinancing produces cash today at the cost of most of their income. If the asset also has limited upside, selling or exchanging is usually the better path.
How do current rates change the decision?
Higher rates cut both ways. They reduce how much you can borrow at a given DSCR and increase the chance of negative leverage, which weakens the refinance case. They also affect buyer financing and pricing on the sale side. In mid-2026, commercial multifamily rates start around 5.70%, with DSCR programs generally higher.
What is the step-up in basis strategy?
When you die, heirs receive the property at fair market value as their basis, eliminating accumulated capital gain and depreciation recapture. Combined with lifetime 1031 exchanges, this “swap till you drop” approach can permanently avoid income tax on decades of appreciation.
Can I refinance now and do a 1031 later?
Yes, though sequencing matters. Refinancing shortly before a sale specifically to extract cash tax-free can be challenged by the IRS as disguised boot if it appears to be part of the exchange plan. Refinancing well in advance for legitimate business purposes is common practice. Discuss timing with your CPA before acting.
How much equity can I pull out?
Not as much as your equity suggests. Cash-out LTV typically caps around 70% to 75% on smaller multifamily and up to about 80% on qualifying commercial multifamily, but DSCR requirements of 1.20 to 1.25 often bind first. Rent-controlled buildings with suppressed NOI frequently support far less than the LTV cap allows.
What DSCR requirements apply now?
Most stabilized multifamily lenders want 1.20 to 1.25. Some DSCR programs qualify down to around 0.75 with additional reserves, and a small number of lenders offer cash-out with no minimum DSCR at reduced LTV, but pricing on those is materially higher.
Does refinancing reset my depreciation schedule?
No. Depreciation follows your basis in the property, not your loan. Refinancing changes your debt, not your basis or depreciation schedule.
Run the Numbers Before You Decide
The sell-versus-refinance question has a right answer for your specific building, and it usually becomes clear once three numbers are on the table: your current return on equity, what a lender will actually advance against your NOI, and your true net proceeds from a sale including ULA and taxes.
If the answer points toward selling, our main guide on selling your apartment building in Los Angeles covers the process end to end. Most owners have never calculated any of the three. Getting a current valuation and a net proceeds analysis costs nothing and turns an emotional decision into an arithmetic one.
