The Cost to Access Equity in Rental Properties

In Should I Sell My Rental Property? we discussed the concept of True Net Equity™.

True Net Equity™ is the equity you'd walk away with if you sold a  Property after all your expenses like closing costs, real estate commissions, depreciation recapture tax and capital gains taxes.

But wouldn't it be important to consider how much you needed to pay to access your True Net Equity™ via a sale?

In other words, how expensive was it to access your True Net Equity™?

We could measure it in raw dollars and I could show you charts for the Closing Costs When Selling in Dollars, Real Estate Commission in Dollars, Depreciation Recapture Tax in Dollars, and Capital Gains Tax in Dollars. We have  Charts for each of those individually and  Charts for all of them combined as Costs to Access True Net Equity™.

But, seeing the cost without comparing it to how much you are walking away with in True Net Equity™ is less meaningful.

For example, if costs you $10,000 to access your True Net Equity™ is that good or bad? Well, if you're getting $1,000 of True Net Equity™ out then spending 10 times that to access your True Net Equity™ seems a bit high. But, what if you were walking away with a million dollars in True Net Equity™? $10,000 as an expense to access that doesn't seem as unreasonable.

Enter, the  Cost as Percent to Access True Net Equity™ chart.

Cost as Percent to Access True Net Equity™
Cost as Percent to Access True Net Equity™

The example above is from the Cash Flow Versus Appreciation class where we discussed doing cash out refinances on properties whenever we needed money to fund an early retirement.

A couple of comments on the chart.

It is plotting each individual property in our portfolio. So each lime represents the costs to access True Net Equity™ for that property.

When the True Net Equity™ is negative… that is when the cost to access the equity exceeds the money we'd get out of the property… the chart shows a negative percentage. In most cases, we would not consider selling a property that costs us more to sell than we'd see out in equity. Although, people have sold properties at a loss before and I'm sure they will continue to do so in the future.

For the sake of being able to see the chart more clearly, I am going to scale the chart to remove all negative values. It is the same chart otherwise.

Cost as Percent to Access True Net Equity™ - Remove Negative Values
Cost as Percent to Access True Net Equity™ – Remove Negative Values

When the True Net Equity™ we'd walk away from a sale with is small, the cost to access that equity might be comparatively high and that causes large spikes.

Ideally, you'd want to wait until the cost of accessing your equity was reasonable before selling a property.

Let's look at one property.

Cost as Percent to Access True Net Equity™ - One Property with Negative Values
Cost as Percent to Access True Net Equity™ – One Property with Negative Values

I've removed the other 9 properties and we're just looking at one property from the class example. I've also turned back on the negative values for a moment.

Early on when we bought the property with 5% down as a Nomad™, it would cost us more to sell the property than we have in equity (heck… a 6% real estate commission would be more than the 5% we have in equity not counting any other expenses). That's the big spike with negative numbers. We probably don't want to sell then.

Here's the same chart removing the negative values to make it easier to read.

Cost as Percent to Access True Net Equity™ - One Property
Cost as Percent to Access True Net Equity™ – One Property

When the True Net Equity™ is small (as we transition from negative equity to positive equity) the cost to access that small amount of True Net Equity™ is really high.

It is very expensive to access that equity. Those are the positive spikes.

If you haven't watched the class this is a property that we buy, let it appreciate, let the tenants pay down the loan and when we need cash we tap into the equity and do a cash out refinance. Every time we refinance the property the amount of equity that we would walk away at a sale goes down.

You can see this in the  True Net Equity™ chart for this property.

True Net Equity™
True Net Equity™

But, if we were to sell the property our expenses to sell it don't mirror the True Net Equity™. In fact, here's what the costs to sell it look like over time.

Costs to Access True Net Equity™ in Dollars
Costs to Access True Net Equity™ in Dollars

Cash Out Refi Gives You Access to Equity

By doing a cash out refi you've really already accessed your equity in the property. The ratio of your expenses of a sale compared to your True Net Equity™ is not really a completely fair measure in that case. But, it does give you an idea of what it will cost you to get at the remaining True Net Equity™ and should be considered.

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