Most real estate investors spend their time looking for properties that will increase in value, build equity, and generate reliable income. Success is usually measured by appreciation and growing net worth, after all.
What many investors do not expect is that a property can become so successful that keeping it may no longer make financial sense.
David Moore and Tom Moore, CEO and President of Equity Advantage, often see investors focus on how much equity they have built without stopping to consider whether that equity is still working hard enough for them. They know the challenge firsthand. Early in their own investing careers, they discovered that a property’s success can eventually create a different question: whether the equity trapped inside the investment is still producing the return they want.
How to Evaluate an Investment Property Objectively
Tom often asks investors a simple question to help them evaluate a property:
“Would you put that much money into this property if we were buying it now?”
For many investors, the answer reveals whether they are holding a property because it remains their best investment or simply because they already own it.
As properties appreciate over time, investors naturally become attached to them. The property may be fully leased, producing steady income, and operating exactly as planned. From an ownership perspective, everything appears to be working.
That can make it difficult to recognize when the numbers are telling a different story.
Growing Equity Changes Your Return on Investment
Investors often buy a property with a clear plan in mind: improve it, stabilize it, rent it out, and create consistent income. When everything goes according to plan, the property performs well and the owners are happy with the results. After all, it is doing exactly what they wanted it to do.
As the years go by, however, the property’s value may continue to increase. The equity grows right along with it.
That growing equity is usually a sign of success, but it can also change how investors evaluate the property. The return may look very different when compared to the amount of capital now tied up in the investment.
A property that once generated an attractive return may no longer deliver the same level of performance relative to the amount of equity now tied up in the asset.
The property itself may not have changed. The income may not have changed significantly. What has changed is the amount of capital sitting inside the investment.
Investment Property Appreciation Does Not Always Improve Performance
Many investors focus heavily on appreciation because it is easy to see. A higher property value creates a sense of success and accomplishment.
However, appreciation alone does not necessarily mean a property remains the best place for your capital.
As equity grows, the return generated by that equity can begin to decline. The property may still be doing everything you want it to do, producing income and operating smoothly, but the amount of equity tied up in the investment may no longer justify the return.
When Real Estate Equity Outgrows the Return
The challenge is not always finding a successful investment. Sometimes it is deciding what to do after that success creates a large amount of equity.
That does not mean the property failed. In many cases, the opposite is true. The property may have reached a point where the growing equity no longer produces the return on investment it once did. Rather than a problem with the property itself, it becomes a question of whether that capital could work harder in a different investment.
If you are considering a sale, a 1031 Exchange, or simply want to understand how growing equity may affect your investment strategy, contact Equity Advantage to speak with an Exchange expert and evaluate whether your current property still aligns with your long-term investment goals.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
FAQs About Growing Equity and 1031 Exchanges
How can a successful investment property become less attractive over time?
A property can be doing everything an investor wants it to do, but the growing equity inside it can eventually change the economics of keeping it. As more capital becomes tied up in the property, investors may begin questioning whether that money could generate a stronger return in a different investment.
Why do investors ask whether they would buy the same property again today?
Asking whether you would buy the property today helps remove emotional attachment from the decision. The question encourages investors to evaluate the property based on its current value, equity, and return potential rather than simply because they already own it.
How can a 1031 Exchange help when a property’s return on investment begins to decline?
As equity grows, the return generated by that equity may become less attractive compared to other opportunities. Some investors use a 1031 Exchange to sell a property and reinvest the proceeds into another investment that better aligns with their current goals while continuing to defer capital gains taxes.
