Let’s say you bought a property for $100,000 put $20,000 down (we’ll ignore costs to buy). You have rented it out for 10 years at an average net income of $300 a month.
We’ll assume you have had no repairs, or vacancy or advertising costs.
This “Piggie Bank” brought you $3600 ($300 times 12) a year on an investment of $20,000 or an 18% return on investment (ROI) (This was a good deal)
Today this property is worth $200,000 and you owe $100,000 on the loan and the rent has increased so that you are now netting $500 a month
You now have $100,000 (ignoring less costs to sell) in Equity
So your Piggie Bank is now returning $6000 a year ($500 times 12)
However… you are now only getting a 6.00% Return on EQUITY ($6000/100000)
Because the Equity you have is so big… EVEN though rent is higher
It may be time to 1031 Exchange This Property!
If you Sold property for $200,000 and netted $80,000 after paying off all loans, commissions etc. You could pay capitals gains taxes of approximately $15,000 (talk w/ your accountant) And walk away with $65,000
You could conduct a 1031 Exchange and buy three properties for $100,000 each (a bit more than 25% downpayment on each from your $80K equity)
Assume each property rents for $1000 and you net $320 each after all expenses
Your Piggie Bank now looks like this:
$80,000 in Equity is now generating $960 a month ($320 time 3)
More than Doubling your rate of return from 6.0% to 14.40%
And if property values go up you will gain more from appreciation too!
LOOK at your ROE so you can have your Equity make you a better return!
Your Quick Rate of Return
(Just a Rule of Thumb)
Let me know if we can help you!