too much equity in rentals??

48 Replies

So i've been traveling a lot and thinking about significant equity in our properties while on the road.  Since the Portland market has been on fire and we've owned 4 properties for 10 plus years we have some very nice equity built up.  I feel good about the timing and the type of property we've bought but i'm wondering about things like opportunity cost and other real estate strategies based on our equity.  I'm ready to be comfortable with financial freedom and want to see if we could make some relatively simple steps to feel good about early retirement.  I would say my biggest roadblock is how expensive our RE market is.  My thought is if we were to sell a property or two and 1031 exch. we'd be buying into super high market in multi's for example.  Our total net worth seems pretty good but lots of that is tied up in the walls of our properties.  My goal is $10k month passive income from rentals to feel FI while leaving our retirement portfolio alone.  We are around $3k+ now on our 3 rentals.  A musician friend in LA bought into Realty Shares and likes that hands off freedom when he is in studio or on the road.   But I'm  very risk averse so not sure this would be  goo d fit

let's discuss and see if I'm missing the forest for the trees.  would love to hear some options from the community.  It certainly seems like we can squeeze more cash out of our good investment decisions.  

Hi Mike.  Sounds like you've got a pretty good start.  I'm also considering something like Reality Shares or note investing as sometime a bit more passive, but I think it's good to keep some rental properties too (keeps you diversified).  I'd recommend you consider what kind of minimum cashflow you are comfortable with from your rentals and then refinancing to cash out some equity that you could invest in something else.  I actually refinanced (taking cash out) a couple of rentals recently and used the money to buy a new primary residence without having to sell my existing primary residence first.

sounds like a cool plan Jared.  we too have been looking for a new primary residence that fits our current lifestyle.  do you plan on selling your primary residence or convert it into a rental?  we really like having our rentals and honestly never plan on selling them unless it would be to trade up for a multi.   

S the math on return equity. Apartment buildings sell at around 5-9 cap depending on different factors. So if you are only making 36k a year on a million on equity that’s a 3.6 return on equity. Not great. If in 360k of equity that’s a 10% return. Better. But return on equity is different than cap rate. Do the math and make some moves if needed.

Good luck.

Thanks Josh,  Can you recommend particular BP podcasts that talk about cap with examples?  that's new to me.   BTW i'm listening to episode 276 right now.  very good!

IF you want to retire, multi's are too much work, and inconsistent cash flow.  All you need is to have to replace the parking lot, the roof, etc... in any given year, and your CF disappears.

Sell what you have, and use your equity to buy a NNN commercial. You didn't tell us the numbers ($$$ equity available), but if you are talking about $1.2M in equity, you can buy a NNN property with a 10 CAP and have $120k in NOI...cash flow.

Hey Joe,  thanks for the great feedback.  i will work on getting my numbers buttoned up and let you know more.  I've been very interested in commercial but don't feel I know enough about that space to operate successfully.  will need to study up on that for sure.

In an expensive market like Portland if you can sell and buy within your 1031x that can be the deal maker. Sell your current high priced asset buy another high priced asset and just make sure it throws off more cash per month. I am currently working at selling a duplex I have in a 1031x and trading up to a six unit and adding some cash to make it work.

ok.  so i just did some quick math.  seems we conservatively have $900k in equity in the 3 rentals and $36k Cashflow / yr.  so my basic math has that at 4% 

is that right? 

Originally posted by @Mike Savage :

ok.  so i just did some quick math.  seems we conservatively have $900k in equity in the 3 rentals and $36k Cashflow / yr.  so my basic math has that at 4% 

is that right? 

Yep. (ie. As per what @Josh C. understated: "Not great"). 

[I hope you don't make a habit of waiting until the top of RE cycles to consider more buying]...

Originally posted by @Joe Villeneuve :

IF you want to retire, multi's are too much work, and inconsistent cash flow.  All you need is to have to replace the parking lot, the roof, etc... in any given year, and your CF disappears.

Sell what you have, and use your equity to buy a NNN commercial. You didn't tell us the numbers ($$$ equity available), but if you are talking about $1.2M in equity, you can buy a NNN property with a 10 CAP and have $120k in NOI...cash flow.

Nothing wrong with multi-families.  Once you have 50+ units, it brings in a nice income each month.  You take that money and parlay some of it into the next one, then the next one, so on and so one.  Everyone needs a place to live.  Urban areas are a headache, but at 600+ units, it's part of the job for us.  That's what employees are for.  Or, if you do not want employees, or are not big enough yet, then you hire a PM.  

Buying into Realty Shares now is like buying at the top of the market in 2007, but you own nothing but shares.  Similar to a co-op.  If there is a downturn in a few years, your income from Realty Shares will drop significantly due people not paying rents, mortgages, etc.  If you own the property, you have some more flexibility.  

Personally, we have only a few with mortgages, the rest free and clear.  Though, we bought them years ago after the dust settled from the crash, there is some nice appreciation.  However, I hate mortgages, and only use them now for larger projects.  But that's me.  We have 3m -- 5m in unmortgaged real estate over several states.  Yea, I know, we can buy 15m+ more in properties and grow even faster.  I do not like going through all the ins and outs for mortgage approval.  I've leveraged enough in my time.  It's always best to have cash reserves, lines of credit and equity in other buildings in case we need to tap them.  

But hey, I'm an old man...  What do I know...

Originally posted by @Mike Savage :

ok.  so i just did some quick math.  seems we conservatively have $900k in equity in the 3 rentals and $36k Cashflow / yr.  so my basic math has that at 4% 

is that right? 

If that's true, you just retired on about $130k/yr+/- using NNN.

If you want to get truly hands off and still defer tax, check out Delaware Statutory Trusts (DSTs) as an option. They’re passive entities that hold institutional investment real estate, they’re 1031 exchange eligible, you get all the normal benefits of real estate (income, depreciation, etc), but they’re completely hands off. You’ll find all kinds property types in them. I’ve been seeing a lot of multi-family, medical office, self storage, and NNN in them lately (working with a portfolio right now full of Walgreens, Costco, etc). They don’t fit everyone, but I use them a lot with folks hitting a point where they just want to get hands off with their real estate, but not pay tax. Fit well in certain situations. Message me if you want more info. Best of luck.

Originally posted by @Mike Savage :

ok.  so i just did some quick math.  seems we conservatively have $900k in equity in the 3 rentals and $36k Cashflow / yr.  so my basic math has that at 4% 

is that right? 

 Cash flow is one part of return on equity. One would also include the equity gains year over year minus taxes and sales cost as if you were going to sell. 

For example if you had 100k equity at start and one year later it was worth 120k minus sales cost and taxes, that portion is 20% ROE, now add any cash flow for the total ROE. 

Mike it sounds to me like you’re getting a poor percent return when you consider equity versus cash. Pretty anemic in my mind however You must also consider tenants have paid for your appreciation and paid for your debt reduction. Not sure how to calculate that number that certainly a factor in determining value / peace of mind. Personally, I have 50% equally mixed between attached ( 60 units +|- ) housing and single-family residential and I prefer the SFR hands down to any other investment strategy. They appreciate faster, easier to sell usually rent quicker less maintenance.
My thoughts
Chris

Originally posted by @Joe Villeneuve :

IF you want to retire, multi's are too much work, and inconsistent cash flow.  All you need is to have to replace the parking lot, the roof, etc... in any given year, and your CF disappears.

Sell what you have, and use your equity to buy a NNN commercial. You didn't tell us the numbers ($$$ equity available), but if you are talking about $1.2M in equity, you can buy a NNN property with a 10 CAP and have $120k in NOI...cash flow.

Hey Joe. Thanks for posting this. Where can you get a NNN with a 10 cap?

@Mike Dymski

Hey Mike,

NNN cap rates go up as the remaining term of the lease decreases.

I.E. you'd love to buy a Walgreens with a 20 year lease. But how about 19 years later when they have 1 year left on their lease? What's the longest you've seen a store front remain empty? Las Vegas real estate has been on fire for 5+ years. But I drive past "fresh and easy" grocery stores daily that went bankrupt 5 years ago. Those NNN landlords have had 5 years of expenses with zero income. But at least it's been handsoff.

How about a NNN for Kmart, Sears or a shopping mall 20 years ago versus today? Heck Starbucks is closing 150 stores this year. You want a long lease from a huge company that has no escape clauses, though I would assume most do.

Ps. Back on topic, there’s no way I would keep $900k in equity across 3 properties. Not to make $3,000/mo. You could buy 4 houses out right or even 3 fourplexes in Las vegas’s Overheated market that would would outperform that. I have about $1.2mill in 12 properties and I don’t like it. 

Originally posted by @Bill Brandt :

@Joe Villeneuve

Yes, of course Joe, good point. I was just afraid a guy that hadn't investigated NNN's was going to get sucked in by the promise of 10%.

 Good warning from your end too.  Funny, but right after I wrote my comment above, I did a little research and found 6 opportunities that would work for his numbers ranging from 10-12.96 CAPs.

Originally posted by @Mike Dymski :
Originally posted by @Joe Villeneuve:

IF you want to retire, multi's are too much work, and inconsistent cash flow.  All you need is to have to replace the parking lot, the roof, etc... in any given year, and your CF disappears.

Sell what you have, and use your equity to buy a NNN commercial. You didn't tell us the numbers ($$$ equity available), but if you are talking about $1.2M in equity, you can buy a NNN property with a 10 CAP and have $120k in NOI...cash flow.

Hey Joe. Thanks for posting this. Where can you get a NNN with a 10 cap?

All over. You have you decide what type of NNN you are looking for (i.e....Drug Store, Retail, Food, Medical, etc...) and do some research on the Corporation backing the franchise.

You should also realize that with the lack of management (hands on) needed, you don't need to have them in your "own backyard".  I want to own the first one on the Moon (or Mars...I'm not picky).

I compare buying a NNN as a combination of buying stocks, and investing in Notes.

One hugely important thing to watch out for. Make sure you are buying a true NNN. If the listing tells you that as the owner of the building, you are responsible for structure, roof, parking lot, etc..., walk away. That's not a true NNN. When the use the words "absolute", "no buyer/investor responsibilities", etc...., you have what you are looking for.

There is no reason to sell. Refinance or take out a HELOC and go find that NNN (or another investment property). Keep your asset for potential appreciation (the cake), and get the equity working for you.

@Joe Villeneuve which platforms do you use to find NNN properties? Just loopnet?

Originally posted by @Frankie Woods :

There is no reason to sell. Refinance or take out a HELOC and go find that NNN (or another investment property). Keep your asset for potential appreciation (the cake), and get the equity working for you.

@Joe Villeneuve which platforms do you use to find NNN properties? Just loopnet?

Actually, he needs to sell to get the money for the NNN, but the returns will be much higher than what he is getting now. Much higher.

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