Help me Understand Equity? It seems Arbitrary

[Charles Montgomery]

I dont really understand equity, especially on the buy/hold strategies. It seems like equity is subjective and speculative.

For example, reading some of the BRRR threads. People talk about Cash out refinancing for 70-80$ LTV, leaving the investor with 30-30% equity. But, does equity really equal wealth?

If I buy a house and rehab it all with cash, say $150K total, and that house is worth $150K. I have 100% equity. But do I have wealth? Great, I get cash flow from renters, but if the home loses value,, I still have 100% equity, its just that I have 100% of a lesser value.

I feel like I am overthinking. Just trying to figure out if buying some turnkey rentals is a good place to have my money tied up, versus tying the money up for shorter periods of time by flipping.

[Ned Carey]

I think you understand equity. Yes equity is wealth, but wealth does not equal income. 

If you owned $1million in collectible artwork but but had no job, technically you wold be wealthy. Yet you would be struggling every day. 

Generally if you have wealth, you have income from your assets. Also generally when you have more equity in a property, you have less risk, as you have lower financing payments. In your example of $150K house you own free and clear, you'd likely have pretty good cash flow. Lots of landlords like free and clear properties because they cash flow well and they sleep well at night, never having to worry about making mortgage payments.

However if you have high equity, or free and clear with 100% equity, you are not getting the best return on your equity (wealth). You can get a higher ROI, ie: more cash flow by borrowing more and having less equity.

Ultimately it is a balancing act and a personal choice about risk.

Not to your last comment about flip or buy an hold. Flipping houses is a job. It is a high paying job but none the less a Job. Buy and hold is more passive, no not completely, it still takes work but it is a way to build wealth long term.