In one podcast I listen to on investing they discuss the concept of "equity harvesting" on their properties. The idea is simple, as your tenants pay down the mortgage and the property (hopefully) increases in value that you refinance at low rates and pull that equity out before a market crash and then let the tenants build it back up for you again. They say you can put this equity into new investments.
In theory this sounds like a great idea. However I am also a person that has taken the principle of low to no debt lifestyle to heart. I like knowing that I have properties with lots of equity and easily manageable monthly payments on them, especially as I approach retirement. However, I also realize my return on equity numbers are falling dramatically and that I could potentially put some of this equity to better use.
I just wanted to hear what others think of this concept and if you have properties with equity are you pulling it out? What are you doing with it? How does this fit in with your future goals and feelings on debt?
@Michael Temple , I fall somewhere in the middle. Your equity is idle cash when it is locked in a property, so from a dollars and cents standpoint, leverage your properties up and buy more. As long as you are covering your costs, you are ahead. Look for posts from Joe Villenueve and he will give you the break down of how you are very much behind by not putting that equity back to work and letting someone else create your equity and cash flow.
I am also a big proponent of being able to sleep at night. If having $5mm of debt outstanding will keep you from living your life, or sleeping at night, than more debt is not the right answer.
Lately, I have just not wanted to be a landlord. So I have been selling my rentals and reinvesting in syndications. In an apples to apples comparison, I am making more money, and do not have to think about what maintenance do I need to defer, reserve for, and generally deal with.
The worst case scenario is if you lever up and then all of a sudden your income dries up (Covid/eviction moratorium).
A market crash in value doesn’t really affect you if the rents keep rolling in. Just can’t sell while underwater.
So you just have to stress test your portfolio. If x % of tenants stop paying, can you still cover the expenses?
Investors younger in their journey are looking to grow and will more often lever up and reinvest. Those on the back end of their journey are more concerned with wealth preservation and may opt to hold more equity with fewer doors and lower debt payments.
It really is a matter of how well you can redeploy capital. If you pull out equity at 3% and have to service that monthly while letting cash just sit around you destroyed equity.
If you can redeploy at 3% well, you didn't really accomplish anything.
If you can redeploy at 6%, then you are "pocketing" that difference. It might not seem immediate the delta will appear (compound interest).
@Michael Temple struggling through the number crunching right now on this very thing. I already know the right answer mathematically is refi and put the capital to work. the other half of me says you're in year 2 of a 7 year plan to leave corporate so cashflow is priority. so I'm taking hybrid approach. I will pull out equity and redeploy only if the new debt service delivers the same cashflow I had before the refi. then I have dead capital in completely paid for properties that are seller financed so I'm just the bank getting the same COC rate without the rental problems. the goal here is to have enough seller finance deals to cover the debt service on the rentals in a worst case scenario of 100% vacancy. moral of the story is look for the shades of gray for what helps you sleep at night versus attaining the goal. if maximizing leverage is needed to achieve the plan, then have plenty of reserves via liquidity in some form to help you sleep better at night.
@Evan Polaski I have had my weeks/months where I also didn't enjoy being a landlord. Those are typically the months where I had a lot of repairs come due or just other annoying headaches I would have preferred to not have. However on the whole I can say I have many more "up days" than down being a landlord. Part of that I figure is the type of properties I invest in. I tend to purchase properties higher on the economic curve where I am getting a different caliber of tenant than say if I was doing low end rentals. This has allowed me (so far) to weather COVID moratoriums without ill effect and not have any tenants missing rent.
@Max T. You make a really valid point about market crashes not really affecting your day to day life too much as long as you weren't planning on selling during the down time. As I mentioned above so far COVID has not been an issue for my rental business and I am hoping it stays that way. I am about 10-15 years from "normal" retirement age so I don't quite have the goals of younger investors looking to grow monster portfolios, but I am too young to be getting conservative as well. I am in this weird in-between stage. I may pull out some equity, but leave well over 60% or so still in there. Plus build up my cash reserves more.
@Alexander Szikla I really like your point of evaluating if I can deploy the equity taken out at a rate higher than the borrowing cost. I believe I can at the moment because borrowing costs are soooo low, but that might be the case in a few years if inflation increases and rates have to go up to slow it down.
@Bryan Lyde I only have one seller financed deal right now on the buy side and none of the sell side. I am still piling up rentals and have no interest in selling anything yet, but you make a good point about balancing the middle ground there.
I have one property in a "A" class neighborhood that I can rent for a high amount and it is almost entirely paid for. I have a HELOC available on it for 100K, which I can tap to pull equity out, BUT, that is at a variable rate of interest, which is currently low, but may not stay that way over the long run, probably won't. The other wrinkle is I try to keep this line pretty available to do BRRRR deals if any present themselves.
I think if I want to pull equity out of anything I think a refi, with a fixed rate of interest on other stuff that has equity is the way to go, but really like how many of you talked about the "middle ground" route. That sounds more like my style.