What would you do with a million dollars?

[John Arendsen]

If you had a million dollars and it was the only million you had sitting in a money market account drawing less than 1% per year how would you invest it?

[Aaron Mazzrillo]

Here's a great (and real) story about dead equity;

4 very astute investors were invited to speak on a panel back in 2008 when the real estate market was in a free fall.

An extremely well connected and respected hard money lender, the California king of REO properties, a syndicator and a landlord / wholesaler.

The moderator asked each person "what are you doing now to make money?" 

The hard money lender went on and on about buying properties at auctions, REOs and short sales and then dealing with low appraisal values, fighting banks trying to get their buyers loans funded and all these other problems.

The REO King had just as long of a story. He was out hustling every day looking at foreclosed homes, writing up and submitting offers, dealing with agents and banks.

The syndicator also went on and on about struggling to discover the true value of inventory he was considering buying and then fighting appraisers on the resale side.

Finally, about 30 minutes later, we get to the landlord. The moderator asks, "And what are you doing to make money in this market?" He holds the microphone close to his mouth, glances to the side at the other three panelists, sits up straight, and says, "Collecting rent."

It was my rental portfolio that got me through those lean years as well. Values were sky high, even when I bought some of those houses, but I held on. I dug my nails in and held on. Values plummeted and rents went down a bit too. I kept hanging on. Then, the market calmed. Things started picking up. Values slowly creeped up and rents went right along for the ride too. I still own every house I bought pre-2008. They are all worth more than what I paid for them back then. My rents are higher. I was able to refinanced several into better 30 year, low interest fixed rate loans and now my cash flow is much better. 

The market will surely hatchet my equity again in the future. Does it make sense to cash them all out and try to rebuy back in at a lower price? Maybe. Will I be able to get the same quality in the same neighborhoods and lock up the financing I have? I doubt it. 

So, in my opinion, there is nothing wrong with some "dead equity" on the side as long as that equity is producing enough income to meet your needs. Think of it as an insurance policy. You might be getting a low return, but if you can spend every day doing exactly what you want to do and not have to think about it, is a double digit return necessary? My ROE on some of my properties is horrible. But, that money shows up month after month after month. If I take that money out, I am risking it no matter what I do with it. Locked up in a well located property is a pretty safe place regardless of what the economy is doing. 

Every person on the planet needs three things to survive: food, water and shelter. Well, I don't have much of a green thumb and I think people can find water if they really need it. So, I don't mind being in the shelter business even if the returns aren't all that great. I can always do other things to make bigger checks.