Is Your Rental Property Equity Actually Working for You?

If you had $550,000 of equity in your rentals and were collecting only $1,000 a month in net passive income, would you consider that to be a good investment?

If you said yes, either your focus is capital appreciation, or your answer might be a sign that you’re calculating the return using the wrong number.

Suppose you bought two rental homes ten years ago with a total down payment of approximately $100,000.

Today, appreciation and principal paydown have increased your equity to roughly $550,000.

After the mortgages, property management, maintenance, vacancy and capital expenditure reserves, the two properties produce approximately $12,000 a year in free cash flow.

I think most landlords would look at that cash flow as a percentage of their original down payment and think that they were earning a 12% return….and that would be a mistake.

Compared with the equity you have today, your current cash yield on equity is only 2.2%!

I don’t know about you, but if generating income is my priority, I’m not very excited about a 2.2% yield on my equity.

With that said, I’m not saying you should necessarily sell your rental house.

You may still value the potential appreciation, principal pay-down, tax benefits or low-rate mortgages. Those are legitimate reasons to keep owning the properties.

But “I bought them years ago” is not an investment thesis.

Here’s what you might not be thinking about: you are no longer deciding what to do with the money you originally invested. You are deciding what job $550,000 of equity should be doing for you now.

In my newest video, I walk through the complete calculation, including what could happen to your monthly income if you sold, paid the applicable costs and taxes, and repositioned the net proceeds.

If you own equity-rich rentals that produce surprisingly little income, this is a calculation worth doing.

Comment YouTube, and I’ll send you a link to the video so you can decide for yourself.