My friend George has a nice 40-unit building that he purchased when his kids were little. Now they are grown, and over the years George put a lot of work into the building. (And made his kids work too — it was good for them, he said.)
Nowadays though, his kids want nothing to do with his real estate, and George said he would like to be able to spend his winters fishing in Florida. But letting go of the management of his building has been hard.
George told me he thought about selling, or maybe keeping the building and hiring a property manager, but he kept going back and forth about the best method.
We discussed a couple of key considerations, listed below, and ran through a financial model. This helped George make a decision he could rest easy about while he was enjoying his new boat in the Keys.
1. You’re Tired of Managing the Property — and Can’t Find the Right Property Manager
One of the most overlooked costs in real estate investing isn’t financial — it’s mental bandwidth. Many multifamily owners reach a point where tenant issues, maintenance coordination, regulatory compliance, and staffing challenges become exhausting. Hiring a professional property manager is the natural solution, but it doesn’t always work out as planned.
If you’ve cycled through multiple property managers, experienced declining performance despite rising rents, or found yourself still “self-managing the manager,” it may be a signal that the asset no longer fits your desired level of involvement.
George had a current NOI of $288,000, without paying a manager. That would put his NOI down to $240,000 if he hired a property manager.
At a 7% cap rate, George’s building was worth $3.5M. If he took this $3.5M and reinvested into a commercial NNN property, he would get a $210,000 return at a 6% cap rate. George decided that for a $30,000 difference, it made sense to let go of having to worry about managing his manager, and worrying about the job they were doing.
2. You Want to Unlock Your Equity and Put It to Work Elsewhere
For owners who have done a lot of value-add to their properties, it’s common to have a lot of equity “trapped” inside the property.
Usually, lenders will limit a loan to up to 70% LTV for a cash-out refi, so it can be beneficial to sell in order to free up more equity.
Investors may decide to sell when:
- Sale prices often exceed appraisal prices in a rising market, which means an investor will free up more cash by selling than by doing an appraisal-based cash-out refi.
- Rising expenses like property taxes, insurance, and utilities can press on their returns.
- The local cost environment for the property is shifting — for example, a jurisdiction that has been raising taxes more aggressively than neighboring areas.
George watched his local jurisdiction lean toward more aggressive tax increases in recent years, and thought an exit from that area could be more beneficial to his long-term cash income.
See our related article on Return on Equity vs. Cash-on-Cash Return if you would like more information about measuring your return on equity.
3. You’ve Fully Used Your Depreciation Deductions
Depreciation is one of the most powerful wealth-building tools in real estate, allowing investors to shelter income while the asset appreciates.
- Depreciation deductions for multifamily buildings run 27.5 years, and once the benefit is used up, it’s gone.
- Moving into another property can “refresh” this deduction, though taxes would need to be paid on the outgoing sale for a whole new deduction to start.
- If you have taken bonus depreciation, you may deplete most of it in a much shorter time.
But what happens when you do a 1031 exchange on a property that is fully depreciated? The basis for the old property moves over to the new one. If the new purchase property is a higher sale price, a new depreciation schedule is created for the difference, and that portion can create additional depreciation.
George realized that instead of paying taxes on his rental income, he could purchase a $7M property with a 1031 exchange, and benefit from a depreciation schedule on the $3.5M increase in purchase price, which sheltered his rental income from taxes.
4. You Want to Avoid Paying Capital Gains Taxes
Capital gains taxes, depreciation recapture, and state taxes can take a significant bite out of your sale proceeds — sometimes 25% or more. For many investors, the fear of taxes is what keeps them holding properties long past their optimal sell window.
George said it made him feel sick to consider writing an almost $1M check to the IRS and state, which held him back for a long time. But thankfully, investors do have options:
- 1031 exchanges to defer capital gains and depreciation recapture into other investment real estate
- Delaware Statutory Trusts (DSTs) for passive ownership with institutional-grade properties
- Tenant-in-Common (TIC) structures
- Opportunity Zone investments (where appropriate)
- Seller financing of the asset (often this can delay, and can reduce, capital gains taxes but does not eliminate them — a great option for sellers to consider to decrease sale taxes)
George considered seller financing for his 40-unit, but decided he would rather 1031 exchange into a passive investment and defer the tax further down the road. The key is planning early — once a sale closes, the opportunity is gone, except for an Opportunity Zone investment.
5. You Want Continued Passive Income — Without the Headaches
A common misconception is that selling a multifamily property means giving up income. In reality, many investors sell precisely because they want better income — more predictable, more passive, and less operationally intensive.
As investors age or shift priorities, goals often change: from growth to preservation, from active management to passive income, from concentration to diversification.
Selling a multifamily property can allow you to transition into investments that still provide monthly income, inflation protection and growth, and real estate–related tax benefits — but without tenant calls, capital expenditure surprises, or management risk.
For George, he liked the idea of moving into net-lease properties. For others, it’s passive syndications, DSTs, or private real estate funds.
Final Thoughts: Selling Is a Strategy
The best time to sell is rarely dictated by market headlines. It should be a reflection of how your money can best serve you — either actively or passively, to attain your financial goals, reduce your tax situation, and create your desired lifestyle.
Many investors we work with have transitioned from long-term assets into either larger properties, or have moved to a more passive income stream with seller financing. If you are considering a transition of property ownership, contact us today for a confidential consultation, to ensure you make the most of your hard-earned return.
