Posted over 3 years ago

Why I sold my Washington state rentals: Return of Equity

There are many metrics that Investors use to quantify the quality of their investments. NOI, ROI, IRR, are to name a few. After purchasing a couple rentals in the Seattle market and being the beneficiary of some nice appreciation I evaluated the performance with a ROE or Return of Equity indicator. On of my rentals had appreciated all the way to $450k and my mortgage that I owned was $200k. Therefore I had about 250K of equity which is the demonimator of the calculation. The numerator is the annual cash flow which was about $4K a year. Therefore my return on equity was less than 2%=4k/250k. Frankly, 2% is very poor compared to stocks (~8-10%) or properly leveraged Real Estate (~20-40%). 

Long story short I decided to sell these rentals to unleash this "lazy money" and get it working again with prudent leverage.

More at my blog!



Comments (9)

  1. Hey Lane,

    Thanks for the chat the other week when you applied this blog to my situation. I knew I was selling myself short using the return on initial investment AFTER my 1031 exchange vs ROE. Little embarrassed being an accounting/finance major :P.


    1. Dean, I made some graphs. http://simplepassivecashflow.com/2016/02/13/real-estate-post-1/

  2. Hi Lane,

    Did you look at refinancing out some of the equity?  If so what terms were available? 


    1. The problem with cash out refinancing property that has low rent to value ratios like the Seattle proper area (RV ratios) is that the new higher loan amount and payment can't be debt serviced by the current market rents very well since the market only supports so much rental income for the given area.

      Cash out refinancing in markets that have low RV ratios can be limited since the rents may not be high enough to pay or debt service your new higher loan payment.

      Often time in high cash flow markets you could theoretically cash out to 100% LTV or higher and still cash flow if the lending guidelines allowed it.

      I am not advocating cash flow only persay, but its important to not over leverage and cash out to the point where you're at negative cash flow either. It's good to have a good balance or sell/liquidate the property to be in an asset that can achieve a better balance of your objectives.


      1. Thank you Albert for not self promoting the lending industry! Your an honest one as written in "Equity Happens" refinancing just makes your lender happy.

      2. Thank you Albert for not self promoting the lending industry! Your an honest one as written in "Equity Happens" refinancing just makes your lender happy.

    2. @Anthony Addessi if I refinanced I would be negative cashflow for sure. Only the silly foreign people are buying in Seattle/Cali and the dummies are copying them.


  3. Hi Lane,

    I'm making good cash flow, but thinking about this more and more as my properties appreciate. So what did you do with the money instead? If things get a little too hot here, I'd consider selling 1 or 2 of my properties..


    1. J-

       I added more content to this post here with cool graphs. As for what I did with the money stay tuned... I did not go out and get jet skis.

      http://simplepassivecashflow.com/2016/02/13/real-e...