Your Rental Property Has $350,000 in Equity. Is That Money Actually Working Hard Enough for You?
By ProfitWise - a Visa Business Plans company
One of our real estate clients wanted to buy another investment property.
He already owned several rentals, the portfolio was performing well, and years of appreciation had created substantial equity. The problem was that much of his wealth was tied up in those properties, while the next acquisition would require a significant amount of cash.
His first instinct was to look at refinancing one of the properties.
Because we handle his specialized bookkeeping, we already knew how each property had been performing. Before looking at how much money he could pull out, we wanted to understand what that decision would do to the investments he already owned.
That changed the conversation.
The Property With the Most Equity Wasn’t Necessarily the Obvious Choice
One of the properties stood out immediately.
It had appreciated considerably since our client purchased it, and the remaining mortgage was relatively small. On paper, the property had about $350,000 in equity.
That sounds like a great position to be in, and it was.
But we also knew from the books how much income the property generated and what it cost to operate.
So we started looking at the property from another perspective: How much was our client actually earning on the substantial amount of his money now tied up in it?
A property can be a successful investment and still reach a point where an owner should take another look at what the equity is producing.
Refinancing Would Give Him Cash, but It Would Also Change the Property
Pulling equity out wasn’t simply a question of whether a lender would approve the refinance.
A larger mortgage would mean a larger monthly payment.
We could use the property’s actual rental income and operating expenses from the bookkeeping to see what its cash flow looked like today and then calculate what would happen after refinancing.
That allowed our client to see the tradeoff clearly.
He could access some of the equity for the next acquisition, but the property he already owned would then produce less monthly cash.
The next question was whether the expected return from the new investment justified giving up some of that cash flow.
Selling Was Another Possibility
Our client could also consider selling one of the properties and using the proceeds toward the next investment.
Again, we didn’t want to look only at which property had appreciated the most.
We already had financial information showing how the properties performed month after month, so we could compare what the owner would be giving up along with what he would gain.
A property with significant equity might also be one of the strongest cash-producing assets in the portfolio. Selling it could provide substantial capital for another purchase, but that decision would make much less sense if the replacement investment didn’t offer enough potential to justify giving up the income the existing property was already producing.
Taxes and transaction costs would also need to be considered with the appropriate tax and real estate professionals before making a final decision.
Our role was to make sure our client understood the financial implications of each option before getting to that point.
Sometimes Doing Nothing Is an Option Too
There was another possibility: keep the portfolio exactly as it was and wait.
That isn’t as exciting as buying another property, but it deserved to be part of the analysis.
Because we knew how much cash the portfolio was generating, we could estimate how long it might take our client to accumulate the money needed for another acquisition without refinancing or selling an existing property.
Now he could compare three very different paths using actual numbers from his own investments.
He wasn’t making the decision based solely on how much equity was available or how badly he wanted the next property.
He could see what each choice could mean for the portfolio he had already built.
This Is Where Good Bookkeeping Becomes Much More Valuable
For a real estate investor, knowing that the overall portfolio made money last month isn’t enough.
We want the books structured so we can understand how the individual properties are performing.
That is why specialized bookkeeping matters.
When our client wanted to make another acquisition, we didn’t have to reconstruct years of rental income and expenses to figure out which properties were performing well. We already had that information.
During our monthly meetings, we could explain the numbers in plain English and discuss what was changing across the portfolio. When the client needed deeper analysis for the next investment decision, we could use that financial history as the foundation for our Fractional CFO work.
Equity Is Valuable, but It Isn’t the Only Number That Matters
Our client had done something many real estate investors work years to accomplish. He had built substantial equity in his properties.
The question was how to use that position to continue growing without unnecessarily weakening investments that were already working well.
Refinancing might make sense. Selling could make sense. Waiting and accumulating additional cash might make sense too.
Before choosing among them, we wanted our client to understand what each option would do to the portfolio financially.
Having $350,000 in equity is certainly something to celebrate.
Knowing what that $350,000 is producing, and what could happen if you put some of it to work somewhere else, gives you much more information for deciding what to do with it.
