Dead equity

5 Replies

have 16 rentals paid off. Cash flow great but should I be concerned with all that dead equity?  In it for the long haul. 

Originally posted by @Nancy Ulrich :

have 16 rentals paid off. Cash flow great but should I be concerned with all that dead equity?  In it for the long haul. 

 Is there a reason you wouldn't borrow out the equity and buy more cashflowing real estate?  I bet you're doing pretty well right now, and I'm not telling you what to do (I have way less experience than you do), but imagine using the equity from your 16 rental properties to put a 20% down payment on another property.

If you had 16 rental houses, each valued at $80k, and each paid in full, then you would have $1.28M in equity.  If you could borrow against 80% of the equity in each home, you could borrow a total of $1.024M.  Assuming you used that $1.024M to put 20% down on another investment property, you could theoretically buy a $5.12M property.  Assuming you have the technical expertise and a team in place to manage that investment, the  $5.12M property could earn you infinitely more than stagnant equity.  And in a few years, you may borrow on the equity of your property again (including your new $5.12M property) to put a down payment on another property.  Lather, rinse, repeat.

Do you need all the cashflow for your lifestyle? If no, then how much a month do you need? Find that number and then reverse engineer a monthly cashflow from there.

Lets say you don't need much of the cashflow at all and each of your 16 has 100k in equity: You can cash out refi at 70% and get roughly 1.2M in cash to go buy other properties. The increase in volume will help offset your loss of cash flow to an extent but not immediately.

This is actually a very personal question in my opinion. It has everything to do with your cash flow needs. You could leverage every single property and double or triple your portfolio, and your net cash. But you would be much busier as well dealing with your properties. 

I often ask myself how much is enough? For example, I have a goal for my newest company to place 40 homes into it. This company was started to achieve a specific personal investment goal. After that goal is met, I will focus on another goal. Point is, make yourself happy and balance it out. What good is owning 200 homes if you are miserable. Good luck to you! 

Curtis Yoder, Yoder LLC | [email protected] | 407‑877‑2427

Thank everyone for your input. I think balence the key, I guess. Actually have 48 rentals with 16 paid off. My goal was to have cash flow for retirement but I do hate to see all that equity sitting there. I also hate having debt. Guess I need to run some numbers and give it more thought. 

IMHO if you are fine with the income you have coming in and all the houses are owned free and clear then I would just make sure that you are well protected via LLC or some other for of corporation, and most likey I would break the properties up into 3-4 corp's so that way if someone sue's you in one of them they can come after your personal property, or after all your CF properties at once.

when you own free and clear, the last thing you want is for someone to come in and take away your hard earned cash flow all in one fell swoop.  

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