Best Use of Free and Clear Property

1 Reply

Have been investing for almost 2 decades now and have assembled a nice portfolio of SFR properties. In about a year, the last one will be free and clear and trying to decide what's the best use of these assets. The Return on Equity (ROE) has gone from really great to what I consider normal over the last 10 years as values have skyrocketed, rent hasn't kept up at the same pace, and loans have been paid down. The free-and-clear portfolio ROE will be somewhere around 5.5% when measuring the Cash Flow against the Equity. I don't factor in the appreciation in my calculation because I do not receive it during the year and it would technically affect both side of the ROE.

I could pull the equity back out and use it for living expenses and just let the rent cover the loan. If all the properties were in a personal name, this is an easy thing to do, but when the properties are in nested LLC structures then its not so easy. The money coming out of the corporation has to be accounted for in some way, even though there is no offsetting income, just a liability. I don't think you can just distribute loan proceeds via a K-1 so I have not figured out how to make this work.

Another radically different plan is I could easily construct an equity portfolio using REITs that would produce the same or better ROE with less hassle. This is getting more appealing as we get older and want to travel. I am having a hard time with this one as I see private housing gobbled up by big corporate REITs meaning the scarcity of individual home ownership will increase.  If I put a house on the market it would most likely get bought this way so just not sure I want to do that.

I guess the fundamental question is if ROE is the correct way to measure a SFR portfolio against other investment alternatives? Also, if I can make it work, is pulling all the available equity out (80%) to live on better than living on the monthly portfolio income.

@Stan Butler I do not think you are correct about doing cash out refinances. I have done cash out refinances many times with properties held in corporations, and the proceeds are not considered taxable. I would check with your CPA there. It sounds to me like you have a nice portfolio that is relatively low stress. Why not fleece the sheep and keep the flock so to speak?