Be Careful of Dead Equity!!

[Michael Swan]

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

[Thomas S.]

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.