When do we consider estate investors increase their net worth and cash flow. If we have identified a purchase opportunity with selling or refinancing a rental property? It can involve personal preference as well as financial concerns. However, sensible leverage over time is how real excellent return on investment and a below-value purchase price, can another property help us to do the deal?
Over time, Carla Investor has acquired rental properties, and she is happy with her cash flows from them. However, if her goal is to free up some equity capital to make another purchase, is it a wise move? She has identified a great buy opportunity, and the numbers say that it will produce great cash flow and potential for short term appreciation as well. However, more cash is required to get the deal to closing.
Carla looks at her current inventory and thinks she sees some help available from one of her existing properties. She’s been paying down the mortgage for several years, plus the property’s value has increased. Her initial Return on Equity in this property was in the double digits, but the spread between the current value and the mortgage payoff has dropped the ROE to 4.5%. How does she know this?
• Return on Equity is the Cash Flow After Taxes divided by the Equity (Value – Payoff)
• Her after tax cash flow on this property is $9000/year
• Value of home is now $350,000, and loan payoff is $150,000
• $9000 cash flow / $200,000 equity is .045 or 4.5% ROE
The property she is eyeing for purchase will yield a great cash flow and return on her investment the first year, and it is poised for fast appreciation with little improvement cost. What can she do? Well, this could be the time to actually sell the other property outright, taking the equity and rolling it into the new deal. Or, if the numbers work, she can refinance the current home and take out some cash to make the second deal happen.
Every real estate investor should do at least annual evaluations of their inventory. Over time, the numbers are changing for every rental property. And, they aren’t all changing in the same way or at the same pace. The intelligent use of leverage is how riches are realized in real estate investing. Each year, check to see how your invested cash is performing. If a property has appreciated in value and, with mortgage pay-down, you find that you have money tied up with a lower return than presented by other opportunities, then it may be time to sell or refinance.