Be Careful of Dead Equity!!

Be Careful of Dead Equity!!

Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes

What prevents us all from becoming super wealthy?  Plain and simple it is the return you get from your net worth.  So, for an experiment take your net worth.  That means, if you were to sell everything today and paid off all your loans etc...  What would you be left with?

A few years ago I figured out that if I were to do this, I would have about $2,500,000.00 in Equity or Net Worth.  I thought that was something else at 49 years old.  Then I calculated my ROE or Return On Equity.  I figured out that our passive income from all this RE was at $72,000 a year.  To figure out my ROE, I took that passive income and divided it by my $2,500,000 in equity or Net Worth.  Guess what?  It wasn't very impressive.  My Return on Equity or my return on Net Worth was almost 3%.

Wow!! That was a real eye opener.  That was pathetic.  What that told me was that I had too much dead equity sitting in pricey California single family rental properties.  So, what I did was learned and read and learned and read and attended seminars etc...  What I learned was people with dead equity and were successful RE investors took that equity and did one of 2 things.  The first was they refinanced that equity out (tax free) or the route I took, which was the incredible tool called the 1031 exchange.  

All I did was started to trade this pricey San Diego Re in for undervalue apartment complexes in Ohio.  Right now our passive income has risen to $120,000.00 a year and our ROE is now up to about 5%.  Again, this is tax deferred and the Net Worth is still the same.  The difference was, increasing the front doors from 12 to 78.  That is including 2 personal residences that don't give us any passive income.  Those personal residences have loans and take money out of our pocket each month.

Remember, If you keep the proper leveraged debt 30-50% on each property you keep a level of safety and ROE. Let me know what your ROE is currently and what you plan to do about it.

Happy and prosperous New Year to all here at BP!!!

Swanny

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Member since 2016 · 13k+ posts · 12k+ votes
9y

My opinion has always been that equity in a property is a liability not a asset. The most troubling issue I have with novice/inexperienced investors is they have absolutely no concept of the value of cash, the opportunity value to generate more cash.

Novice investors state that paying down a mortgage increases cash flow, they keep their rents below market, they do not apply annual rent increases. They do not understand that all of those things depreciate a investment. They have no concept that  when a property appreciates their returns are dwindling away. Clearly no concept of the value of cash. These I refer to as hobby investors, regardless of their net worth, as they never see beyond the money coming in.

The biggest hurdle novice investors face is looking beyond the money they are making. They never see the money they are not making. By doing that most overlook the unlimited amount of income they do not even know they are losing. That's right, it is not that they are not making it they are actually losing it and 9 times out of 10 it is because they have no concept of the value of cash. Having equity in a property is reducing cash flow and throwing income away. Appreciation is a double edged sword that money hoarders never benefit from.

Investors holding dead equity are looking at a diminishing dream. A someday thing. Thanks but no thanks I'll take the cash, every dime I can generate, before I die.

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  • Remington LymanBusiness Member
    Real Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes
    5y
    Originally posted by @Charles A.:

    @Dan M.

    I don’t know if Swanny is prepared to tell you the whole truth about Cleveland.

    But I did find out not all that glitters in Ohio is gold.

    I sold my apartment buildings there and returned to Florida.

    I will definitely not be going back there.

    The cash flow everyone keeps telling you on BP is in Ohio RE is a smokescreen unless you have specific local knowledge and street smart team members.

    It’s worse if you fall in the trap of the wrong PMs.

    (Some have a very large footprint here on BP-so beware!).

    My “cash flow adventure” ended in tears even though I had an excellent PM.

    If that tells you anything.

    Look for my member bloog post titled “why I sold Cleveland”

    Good luck.

    Which management companies in Cleveland, Ohio did not work out for you?

  • Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    5y

    Hi @Charles A. and all on this thread I started a long time ago on utilizing your dead equity.

    At the moment I have vastly forced appreciation on all my apartment complexes and have 4 vacancies out of over 200 units and have won every eviction case and the judges are tired of the lying about Covid for these tenants and they did not follow the CDC guidelines to declare etc... 

    At the moment I have 4 apartments listed at 3.7 million and only 1.3 million debt left on them and refinancing another that we only have $500,000 debt on at about 1.4-1.5 mil valuation.  The cash flow is tremendous too.   I am capitalizing to get return on my equity, which has exponentially risen since ai first posted this forum thread.

    Anyone that wants help or to learn more I always love to talk shop.  Go to my profile and message me!!


  • Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    5y

    Hi @Remington Lyman

    I am going to message you now.  I tried calling the phone number and it was somebody else’s name.  I have some questions about Columbus.

    Swanny


  • Real Estate Investor · Unadilla NY · Member since 2017 · 418 posts · 297 votes
    5y

    @Michael Swan So have you reversed your logic with dead equity? If your apartments are paid down that much I assume you have. Was it 1031 exchanges that got you there or just paying down the mortgage with the rental income? 

  • Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    5y

    Nope it has only been 3-4 years just liked I did with the Condos.  Time to cash in the equity by selling or refinancing or maybe lose that equity.  Same strategy.  Can’t you see?

    Swanny

  • Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    5y

    Hi @Dan M.

    Maybe you are not realizing that Apartment complexes are valued differently than single family that I originally invested in.  I have forced the appreciation on these apartment complexes and need to do something with that equity.  Some of these will be 1031 exchanges and some will be straight sales and some may me refinancing into agency non recourse debt.

    Watch podcast 238 to see how I started and then see where I am now.  In the next month or so I will be featured on the RE Masters Summit going out to 50,000 people and I was most recently featured on the front cover of BP’s newest Wealth magazine this past Oct issue!!

    Swanny


  • Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    5y

    @Dan M.

    Those were 1031 exchange properties originally too.  Sorry I did not answer that question completely.  We only invested $160,000 into those 4 single family in down payments and fix up in those 4 original Condos we purchased in about 2012, nine years ago. That was are all in investment that has ballooned to that 3.5-3.7 million valuation on those 4 we have listed right now.

    Does that make sense?  

    Swanny

  • Investor · Cleveland, OH · Member since 2020 · 20 posts · 17 votes
    5y

    Lifelong Clevelander here, so perhaps that goes to your point of knowing the area well. But, I'm curious what areas you had such bad experiences with? Also, what sort of size apartments were you working with?

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