Right now, we’re going to discuss harvesting your equity.
Bob Nelson, Eugene real estate investment broker
Marcia Edwards, Eugene residential real estate broker
Marcia Edwards: We want to talk a little bit about equity. I know that, Bob, over the years, you taught a class at Lane Community College to small time investors, who turned to big time investors because they used their equity, and they leveraged not too much, but just enough to keep moving forward in their portfolio. I love that.
Bob Nelson: Leverage is a fantastic thing, when you’re young. A leverage is not necessarily such a fantastic thing when you’re older. Issue being, you’re taking risk by utilizing debt to advance your investment position. And if you’re utilizing debt to advance your position, when you are much older, that debt could come back and bite you in the fanny, and then that’s maybe what you want to avoid. So, it’s a function of age. It’s a function of timing. Right now is a fantastic time to use leverage.
Marcia Edwards: Let’s talk about that. I was thinking…
Bob Nelson: And also, it isn’t.
Marcia Edwards: I was thinking about it as using cash equity.
Bob Nelson: Okay.
Marcia Edwards: So, you’re talking about using the debt.
Bob Nelson: Right.
Marcia Edwards: So, let’s talk about the scenario that we’re both referring to. I think it’s the same one. You’ve got an investment property, let’s say a duplex in town, and you’ve paid it down through paying part of the rents toward the mortgage, additionally. And now you’ve got about a 40% equity, 60% loan debt.
Bob Nelson: Okay. And the question being, is this a good place to store that portion of your net worth, in that particular property? The problem is this one, with long-term debt, with a 30 year mortgage, 29 years from now you’re still making payments on that particular property. And the payment is the same size. The principal and interest portion of that payment is the same size as it was 29 years earlier. You may be paying taxes and insurance, and that portion had gone up with time, and so forth.
But it’s interesting, because you could have very little debt, and you still have a fairly big payment. And that’s an issue that turns to be tacky. Once it’s free and clear, all of it comes to you in the form of cashflow. But just prior to that, when you’ve got a huge equity, and you’re still making big payments, it’s tacky.
Marcia Edwards: Well, in regards to that equity position, you’re talking with the use of cash, the use of your net portfolio. You’re talking about what you have available, that’s sitting there on that property at 40% equity.
Bob Nelson: Right. And that 40% equity, if the property was worth say $300,000, 40% of that is a very large number.
Marcia Edwards: More on this next program.
Join Eugene, Oregon, real estate experts: Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments, and Marcia Edwards, Residential Real Estate Broker with Windermere Real Estate, daily at 5:30pm on KPNW for the “Real Estate Today” radio show.