Bang for the Buck (Return on Equity)
Are you currently getting the most that you can out of the properties that you own? Most people that we speak with intend to maximize their earnings potential from their properties. Many people like the long-term hold strategy, and over time their equity gets tied up in the property and doesn’t earn as much as it could. Even though the return on your initial investment usually grows over time, your return on the equity that you have in the property will go down.
Here are a few options to consider:
Keep doing what you’re doing and pay off the loan
Refinance and use the tax free proceeds however you want
Refinance and use the tax free proceeds to buy another property
Sell and do a 1031 exchange into another investment property
Here’s an example of a recent analysis that we did on a property. This was for a long-term owner who’s property value had more that doubled since they bought it, and the property was paid off. Since the investor was pretty conservative and didn’t want the max leverage, we analyzed the refinance and new acquisition scenarios with financing based on a 50% loan to value ratio. The property was also stabilized so it would qualify for long-term agency debt with Freddie Mac or Fannie Mae. We did a forward looking 10 year analysis with their options and here’s what we found out:
In this case, the owner would be able to increase their after tax capital accumulation or net worth by almost $5 million over the next 10 years if they choose the refinance and buy additional property option instead of just holding as is! Every metric of performance is better when the money is put to best use and this is the whole point of talking about return on equity and getting the biggest bang for your buck.
The great news is that when you have equity in a property, you have options! When you’re ready to look into these options - call us and we’d be glad to help!