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.

too much equity in rentals??

Chris Purcell

Investor · Philadelphia, PA · Member since 2010 · 739 posts · 372 votes

8y

@Mike Savage

Who is “we”

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Mike Savage

OP

Investor · Portland, OR · Member since 2017 · 52 posts · 18 votes

8y

We=My wife is funneling listings nightly usually thru Zillow. We also have an agent sending us daily listings.

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Mike Savage

OP

Investor · Portland, OR · Member since 2017 · 52 posts · 18 votes

8y

Chris Youssi

Hey Chris! I hear ya. I've been VERY happy with our SFR's as far as peace of mind and management expectations. Every time I see a mortgage statement with our balance declining I get a slight charge thanks to our ace tenants. However after studying daily about money models and listening to multiple guests on BP podcasts I'm trying to envision repositioning or reallocating our assets. After diving into BP I guess I'm trying to figure out how to maximize our assets and feel REALLY GOOD about the quality of life we get from them. It's been a great 14 yr. ride so far. Sometimes I think they should interview a regular guy like me to learn how I got to this point and what I plan to do moving forward. For every hotshot I read about on BP there are a 100 people in our network that are certainly competent enough to be solid investors but just lack that first step. I enjoy sharing our experiences with them.

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Peter StewartBusiness Member

Real Estate Broker · Indianapolis, IN · Member since 2018 · 160 posts · 168 votes

8y

Tap into that equity with HELOCs and either use it to do some flips to generate additional capital, or use them to buy more properties (look out of area or state if the local market doesn't make sense).

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @Calvin Thomas:

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...

You know enough to be able to survive virtually any market correction.. this refi to you dye business is one of the worse things I have ever seen.. and all this talk about dead equity.. the grass is not always greener for part time investors.. full time I kind of get it.

Love your post. !!!

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

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?

I think some of the Dollar Generals maybe close to that.. when you buy in bum you know what parts of the country..

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @Bill B.:

@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.

In lake Oswego were I live whole foods moved over to Bridgeport mall.. mini Walmart moved in for about 20 months they left almost 2 years ago that building is still vacant.. now I think maybe there was some corporate gurantee for the owner other wise yes HUGE sucking sound.

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Sam Shueh

Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes

8y

Suggest a CPA to review your proposal.

1 Reply

Mike Savage

OP

Investor · Portland, OR · Member since 2017 · 52 posts · 18 votes

8y

Thanks Peter Jay, Sam et al. I am considering my next post asking the general question how much is enough $$? Also what is the ideal exit plan? As the days go by all I really want to do is get to FI. I'd like to have that tomorrow with all the work i've done yesterday. The way I look at it is a monthly cash flow in 2018 dollars of $10k from our rentals while not touching any of our other retirement savings will work fine for our family. Anything after that is gravy. Seems investing in more properties could be more headaches and certainly will feel like a "job" Short term goals are be available for our son before he flies the coop. (Empty nesters in 4 yrs.) Many of you know how fast that happens. Eat better, exercise more, live abroad and look for effective volunteer work for my encore career.

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Steve B.

Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes

8y

Jay Hinrichs do you think it’s the sign of an overheated market when we are seeing more and more people telling casual investors to take HELOCS and leverage as much as possible to chase returns? I often wonder if these inflection points in the physiological zeitgeist of RE investing is more telling than any definable market numeric

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @Steve B.:

Jay Hinrichs do you think it’s the sign of an overheated market when we are seeing more and more people telling casual investors to take HELOCS and leverage as much as possible to chase returns? I often wonder if these inflection points in the physiological zeitgeist of RE investing is more telling than any definable market numeric

Had to google Zeitgeist.. yes I agree with you its for sure the idea or mood of many investors these days that think the way to financial nirvana is the number of doors they have and willing to mortgage everything including their personal residence to get in the game.

and of course leverage is needed in the beginning that's for sure.. although we deal with a lot of folks like Steve and they will frankly morph to being the bank for more worry free income by investing in solid performing first trust deeds.. that vehicle really offers what they want they just don't know it exists..

Its all a risk.. Everything I sign on a large construction loan I wonder as well.... but so far this run its worked fine for us and better than fine on many projects..

Also I know real estate runs in mainly 10 years cycles.. but I think the 08 to 2011 time frame was so grave and severe that we did not really get to any sort or normalcy until 2012 2013 when credit came back for investors.. so to me the 10 years cycle maybe starting in 2012 instead of 2008.... Just a thought..

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Calvin Thomas

Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes

8y

Originally posted by @Jay Hinrichs:

Originally posted by @Calvin Thomas:

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...

You know enough to be able to survive virtually any market correction.. this refi to you dye business is one of the worse things I have ever seen.. and all this talk about dead equity.. the grass is not always greener for part time investors.. full time I kind of get it.

Love your post. !!!

Thank you. Just posting some things I've learned over the years.

0 Reply

Matt R.

Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes

8y

There is no such accounting line called dead equity. All equity is alive and well 24/7 365. It will fluctuate like a living thing even untouched.

2 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @Matt R.:

There is no such accounting line called dead equity. All equity is alive and well 24/7 365. It will fluctuate like a living thing even untouched.

a lot of investors sure would have liked to have a LOT of dead equity in 08 to 2012 to help them through and those that did .. were fine those with leverage to their eye balls and in a market that retreated and tenants left the building guess what happened.

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Matt R.

Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes

8y

Originally posted by @Jay Hinrichs:

Originally posted by @Matt R.:

There is no such accounting line called dead equity. All equity is alive and well 24/7 365. It will fluctuate like a living thing even untouched.

a lot of investors sure would have liked to have a LOT of dead equity in 08 to 2012 to help them through and those that did .. were fine those with leverage to their eye balls and in a market that retreated and tenants left the building guess what happened.

Yeah that could have killed any notion of the dead equity theory after that...idk short memories maybe. I also think some are not fully understanding how ROE formula is measured YOY. They seem to only account for the cash flow portion which in many cases is less than equity gains. How does something dead grow? Answer, it was never dead.

1 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @Matt R.:

Originally posted by @Jay Hinrichs:

Originally posted by @Matt R.:

There is no such accounting line called dead equity. All equity is alive and well 24/7 365. It will fluctuate like a living thing even untouched.

a lot of investors sure would have liked to have a LOT of dead equity in 08 to 2012 to help them through and those that did .. were fine those with leverage to their eye balls and in a market that retreated and tenants left the building guess what happened.

Yeah that could have killed any notion of the dead equity theory after that...idk short memories maybe. I also think some are not fully understanding how ROE formula is measured YOY. They seem to only account for the cash flow portion which in many cases is less than equity gains. How does something dead grow? Answer, it was never dead.

Matt my surfer dude buddy.. this is simply post GFC were the mantra is cash flow is king and appreciation is luck .. and well many many people believe that.. or cash flow is the only thing and appreciation is gambling...

but if I look at the biggest hits of my career its been on Non cash flow assets IE NO cash flow or negative but multi million dollar paydays.

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Chris Youssi

Rental Property Investor · Caledonia, IL · Member since 2015 · 290 posts · 213 votes

8y

I concur with the myth of “dead equity “. My tenants add to my equity every single month by paying down my loans. Reminds me of 2007-8 when a fireman bought land so he could build n develop multi family . Not sure who was more ignorant him or the lender that loaned him funds . The hype behind dead equity gives me pause as investors drink the kool aid of leverage leverage leverage . Rains will come n go but tsunamis are difficult to survive - ask those of us who made it thru the worst and are better off . A developer who mentored me stated “ you will make more money in a down market!” I am a believer. Nothing dead about any equity period .

1 Reply

Kenneth LaVoie

Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes

7y

@Calvin Thomas - It's a relief to hear someone else talk about not liking mortgages. My wife and I sold a couple and used the equity to pay off two multi mortgages. In doing so, we raised our CF back up to ALMOST make up for the loss of income from selling the building. This is our plan until we get to 0 balance. Our 28 units F&C will cash flow as much as 50 leveraged, more or less, and this is what we're looking to do (maximum cash flow, least number of units). Although we do at least want enough units to take advantage of various "scales of economy" (i.e. having a couple of contractors we can keep busy, etc.)

I sometimes doubt my plan because so many investors present leveraging to buy more units as if it's the only option, and to do anything else (like, gulp, paying off my mortgages early and completely) is cause for headscratching, wailing and gnashing of teeth. Thanks for chiming in.

2 Reply

Calvin Thomas

Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes

7y

Originally posted by @Kenneth LaVoie:

@Calvin Thomas - It's a relief to hear someone else talk about not liking mortgages. My wife and I sold a couple and used the equity to pay off two multi mortgages. In doing so, we raised our CF back up to ALMOST make up for the loss of income from selling the building. This is our plan until we get to 0 balance. Our 28 units F&C will cash flow as much as 50 leveraged, more or less, and this is what we're looking to do (maximum cash flow, least number of units). Although we do at least want enough units to take advantage of various "scales of economy" (i.e. having a couple of contractors we can keep busy, etc.)

I sometimes doubt my plan because so many investors present leveraging to buy more units as if it's the only option, and to do anything else (like, gulp, paying off my mortgages early and completely) is cause for headscratching, wailing and gnashing of teeth. Thanks for chiming in.

Mortgages can make sense in some circumstances. However, I'm an anti-debt kind of guy. If you can get a mortgage 2% - 4% and lock that in for 15 or 20 years, then it could make sense. However, nowadays, most rates are north of 5% and I'd rather have that 5% in cash or cash equivalences to use. After a certain amount of units, you really do not need many more. I know a lot of other people in the business that use debt is their friend. And, at certain times, it can be. However, when crap hits the fan and they up crap creek because of cash flow issues, it's a great time to have cash or cash equivalences to scoop up the property at a discount. Think like Warren Buffett, not Pres. Donald Trump (when he was a developer, not U.S. President). He almost went bankrupt due to debt several times. He got out of it because he owed so much it would had been mutual destruction for for The Trump Organization as well as the lending institutions. The banks had learned form this and rarely allow that much leverage anymore. At that time, developer Trump lost most of the equity in all those buildings; if not all.

Again, I do have a mortgage on my large complexes, but I am in the process of getting rid of that debt too. I have a feeling that we're going to reset for a bit and then take off again. I want that cash available to me so I can pickup any deals on sale for cash buyers.

P.S.: When I mean cash equivalences, I mean insured muni bonds, money market accounts, and CDs. All insured and pulling in something while I wait to pounce. Always good to have more than one stream of revenue. I would then margin those securities at 3% (2 years ago, I was paying less than a point), and be my own bank. I prefer being my own lender than giving it to banks and private lenders. I give myself better terms. :)

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Kenneth LaVoie

Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes

7y

@Calvin T. Thanks for this thorough information. I have a question. Where can one get such low margin rates?

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Chris Youssi

Rental Property Investor · Caledonia, IL · Member since 2015 · 290 posts · 213 votes

7y

@Calvin Thomas Excellent post well thought out and somethings I have not considered like - DUH? same cash flow less units when debt free - makes perfect sense to me . Truly you can teach on old investor new tricks! I am 59 months away from owning 8 SFH outright can't wait. At 59 years young perfect for our retirement from the grind. Another 12-13 years from another 20 if I chose to hang on that long. 6 years will be here in a minute.

THX for sharing!

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Calvin Thomas

Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes

7y

Originally posted by @Kenneth LaVoie:

@Calvin T. Thanks for this thorough information. I have a question. Where can one get such low margin rates?

JPM Private Bank, Morgan Stanley Brokerage, TD Ameritrade Private Client or Interactive Brokers. They will usually play ball when you have a million or so in investable assets. The first two you need a bit more. I think Interactive Brokers still has some very attractive margin rates if you have the investible assets to spare.

https://www.interactivebrokers.com/en/index.php?f=...

What I've always done is keep a certain amount in the bank to run the buildings and the rest go into my investment accounts. No, I do not allow any of the firms to touch my money. I then take those funds and buy either actual insured GO bonds, corporates or agency bonds which pay tax free or taxable 3% - 4%+ plus and place the money there. I also have a secondary emergency fund for my buildings I place in a Vanguard prime money market fund right now earning 2.44% and backed by SIPC. I then have my own little bank where I can borrow 80%. That 80% is earning money while I am also using some of that money to snatch up properties to earn more money. So, in review, take excess funds, place them in a brokerage account with aggressive margin rates, place cash in secured assets, borrow against said assets, and expand my real estate holdings essentially for free. I am earning income from the securities and my real estate. My effective margin rate is less than zero still due to the fact that my security holdings are earning more than what I am paying out. Though, as these clowns raise rates, I have started to pay of a lot of the margin.

Also note, if a seller is willing to hold paper, that's fine too. I just can't stand dealing with banks.

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Calvin Thomas

Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes

7y

Originally posted by @Chris Youssi:

@Calvin Thomas Excellent post well thought out and somethings I have not considered like - DUH? same cash flow less units when debt free - makes perfect sense to me . Truly you can teach on old investor new tricks! I am 59 months away from owning 8 SFH outright can't wait. At 59 years young perfect for our retirement from the grind. Another 12-13 years from another 20 if I chose to hang on that long. 6 years will be here in a minute.

THX for sharing!

Happy to lend some of my experience. You'll get there, just watch your leverage.

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too much equity in rentals??

too much equity in rentals??

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Chris Youssi