How Are Investors Accessing Trapped Equity?
Rental Property Investor · Joliet, IL · Member since 2013 · 102 posts · 48 votes
Garrett Brown recently asked a compelling question here on BiggerPockets: What has built more investor wealth, cash flow or equity?
Most of the responses I saw pointed to equity. That raised a different question for me:
If acquiring more properties is no longer the objective, how are experienced investors accessing or putting that equity to work?
This question is particularly relevant to me. I’m retired and own a 10-property rental portfolio with substantial equity and relatively low leverage. I’m no longer trying to acquire more properties. My objective now is to improve sustainable income and retirement flexibility without taking on unnecessary risk or creating an avoidable tax burden.
That leaves me wondering: How are investors converting their equity into usable value?
Garrett Brown recently asked a compelling question here on BiggerPockets: What has built more investor wealth, cash flow or equity?
Most of the responses I saw pointed to equity. That raised a different question for me:
If acquiring more properties is no longer the objective, how are experienced investors accessing or putting that equity to work?
This question is particularly relevant to me. I’m retired and own a 10-property rental portfolio with substantial equity and relatively low leverage. I’m no longer trying to acquire more properties. My objective now is to improve sustainable income and retirement flexibility without taking on unnecessary risk or creating an avoidable tax burden.
That leaves me wondering: How are investors converting their equity into usable value?
The quickest and easiest is just a HELOC to pull out the equity. Depending on current rate etc, cash-out refi. Both of those are pretty obvious.
You could sell 1 or 2 of the worst performing doors and use those proceeds to pay off the loans of the others. That way you are not adding debt service, but increasing your monthly cash flow while offloading a headache.
A bit out-of-the-box, something like a reverse mortgage on your primary could also free up monthly cash flow while not touching the rentals. The payment is optional and the line-of-credit grows over time for you to use as you need.
What I Took Away from the Discussion
I came away with a greater appreciation for how many variations exist between the extremes of "keep everything" and "sell everything."
That was exactly what I hoped to get from the discussion.
My top four responses:
Crystal Smith described a different sequencing approach.
Crystal and her partners maintain a liquidity target, use liquid investments when an attractive opportunity appears, and only access real estate equity afterward if they need to replenish liquidity.
Her model is:
Maintain liquidity → find the opportunity → invest → replenish liquidity with real estate equity only if necessary.
What interested me was not any particular investment return. It was the sequencing.
In that model, real estate equity is not money waiting to be put to work.
It is backup capital.
Stuart Udis challenged the premise of my question.
If I do not want to sell and conventional financing does not comfortably support pulling more equity out, maybe that is useful information.
Maybe the equity belongs where it is.
Lower leverage preserves borrowing capacity, provides more room if property values fall, reduces refinancing risk, and allows you to continue collecting relatively unleveraged cash flow.
His question was essentially:
Does accessing this equity put unnecessary pressure or risk on the real estate that remains?
Maybe some equity is not trapped at all.
Maybe it is quietly doing its job.
John M. suggested looking at the portfolio one property at a time.
Instead of asking:
Should I sell my rental portfolio?
Ask: Does every property I own still deserve its place in the portfolio?
A property might have substantial equity but mediocre income, recurring problems, limited upside, or simply require too much effort relative to what it produces.
John sells weaker properties and redeploys the proceeds into more passive investments.
Tom Lade added another variation: sell selected properties and use the proceeds to pay off mortgages on the properties you keep.
That converts equity into additional cash flow without adding new debt or finding another investment.
Ashish Acharya raised the possibility of using certain properly structured Delaware Statutory Trusts (DSTs), which may qualify as replacement property in a Section 1031 exchange.
This is one option I am seriously considering as part of a future exit strategy.
That potentially creates a path from:
directly managed real estate → more passive real estate ownership
without immediately triggering the taxable gain that might come with simply selling.
I still enjoy owning rentals and am not looking for an exit today.
But there is a difference between:
I want to own these properties now
and
I want to personally operate these properties indefinitely.
A DST could potentially provide a transition option between those two positions.
Most of the remaining suggestions fit into three buckets:
Borrow against the equity
Redeploy the equity
Sell or reposition
One point that came up repeatedly is worth emphasizing:
Accessing equity and improving income are not automatically the same thing.
New debt creates a new obligation. Whatever you do with the capital has to produce enough benefit to justify the borrowing cost, cash-flow impact, and added risk.
Thank you to everyone who contributed.
The thread did provide one answer. It identified a much better set of options.
@Alison Robinson Besides DST, there are other options:
1. Section 1031 for a triple net property. Friends of mine sold a 50 units apartment complex and 1031ed into a new build gas station/convience store for like $5.5mil that was triple net leased long term. No tenant calls, and the tenants pay taxes, insurance, and all maintenance.
2. Section 1031 into a vacant piece of land in the path of progress, still have to pay taxes and insurance, but those are once yearly bill.
3. Section 1031 into a vacant piece of land and sell the right to build to somebody else and retain the ownership of the land. Friend of mine owned some land that a Holiday Inn wanted to build on. Instead of renting them the land he decided to trade his free and clear land for a piece of the total project as a partner in the Hotel company. they owned it for 20 years then sold as a package of other hotels to a new operator and made out handsomely.