Converting Equity Into Cash Flow

So, your retired with some rental properties and wondering if you should convert some of that locked up equity for more cash flow.

Do you choose to convert equity for cash flow or let it sit and appreciate? Let’s explore the options a little bit shall we?

When I was working, I didn’t think about touching the equity as much. Retired? Cash flow becomes more important. A little more spending cash for retirement never hurts!

The temptation to convert equity into more cash flow had me playing around with some projections.

Let’s play with some hypothetical scenarios.

Note: These are rough estimations not factoring for many variables such as inflation, principal draw down and taxes. It’s to model out a general direction and future outcomes. Many have mortgages on investment properties so that has been factored into the chart below.

Scenario 1

You hold onto your properties.
Properties appreciate at 3% annualized.
Investments return 6% annualized.
Stocks and bond investments yield 4% income.

10 years later your net worth is estimated to be about $3,336,819.90
Projected monthly income in 10 years is $5,702.27.

I like to think about the worse case scenarios, so dividend growth has not been factored into the income projections. It’s likely the income will be higher than what is estimated.

Scenario 2

Sold 2 properties to tap into the equity and invested into stocks and bonds.
Properties appreciate at 3% annualized.
Investments return 6% annualized.
Stocks and bond investments yield 4% income.

10 years later your net worth is estimated to be about $3,022,719.00
Projected monthly income in 10 years is $8,687.02. (Again, not factored for dividend increases.)

Retaining the properties resulted to a 10.4% growth in net worth. However, that came with slower income growth. Selling the properties had a dramatic boost to Income in 10 years by 52.3%. Not bad for some extra spending cash.

Assuming property values increase in line with historical norms, the more properties you own, the faster your equity should grow. What’s not factored was the principal draw down numbers from Scenario 1 but with that also factored for, the numbers will be much higher. The more properties you have the faster your equity grows. The beauty of real estate investing is truly a great way to build wealth.

In Scenario 2, imagine factoring for partial reinvestment of your cash flow back into stocks. That will obviously have a nice impact to that income growth in 10 years. Keep in mind, having cash flow makes financing an ease when it comes to purchasing additional properties in the future.

To come back to that question, do you sell the properties for cash flow or go for the appreciation.

The answer to that question really depends on what your financial goals are. For me, the answer to that question evolved over the lifetime of my wealth building journey. When I was working, I preferred to let the equity grow. Today? I still have much of the equity locked up in real estate.

I did tap some equity for cash flow and made FIRE (financial independent retired early) possible. Mostly, I chose to keep my cash flow low and allow for appreciation in equity. It’s a game of balance.

Aligning Your Strategy To Your Goals

Depending on your goals, the strategy will differ. In my case, my goal is an attempt to reach a 10 million net worth. I’m nowhere near that goal today so my choice is to keep my equity tied into real estate. At least for now, considering my age.

Even with stock investments, capital growth is what i’m shooting for so I am mostly invested in growth stocks. Growth stocks don’t generate much dividends if any as companies generally use earnings to reinvest into their businesses to grow.

As tempting as it is to tap into that equity for cash flow, setting goals can provide that clear purpose and reminder why you are maintaining your strategies. Setting goals in some sense is like setting your GPS navigation I guess. 😅

But boy does that income look enticing in that scenario!….🤤 Thanks for reading.