Declutter Your Real Estate Portfolio And Make Room For Growth | Ep 66

James: Are you sitting on lazy equity that is holding you back? Maybe. And we're gonna talk about that on the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing. And our mission is to equip people to invest wisely in both property and residence so that together we can build wealth while improve housing.

Improving housing. I'm James, and this is my wife, Jessi.

Jessi: Hey!

James: Hey! I

Jessi: am appalled.

James: Whoa, don't step on my feet. I'm sorry about that.

Jessi: Come on. I'm appalled by how much garbage can accumulate in our children's rooms. Oh. Like, when they clean, I'm just like, how, where did this come from? How, how are there two, like, garbage bags full of stuff that we're getting rid of?

James: Yeah.

Jessi: It's just like, I mean, I, okay. It's not so surprising because you walk in and it's To be fair they're

James: not the ones buying the stuff.

Jessi: Okay, that, yes, that is part of the problem. Yeah, yeah.

James: And it's not me buying all the stuff, I know that. Their mom gets them a bunch of

Jessi: junk. And I let them create mountains of art projects.

Okay, that is true because the other day Eleanor was doing a school project. She needed some boxes to kind of Craft this project. Yeah, I collected some boxes and our son, of course was like, Hey mom, what are these boxes for? I was like there for your sister for her project. He was like, okay, well Can I have the extras

James: and

Jessi: what did you say I said, yes, why, why do I say these things?

Yes. Oh, yeah. I saw you. Okay. Why are you trying to point fingers at the kids? It's on me, but man,

James: you're an enabler. It

Jessi: is surprising how much stuff comes out of those rooms.

James: Yeah. I

Jessi: mean, I surprised myself too. When I clean out areas that are mine and I'm like, what is all this stuff? Where did it come from?

Why, why do we have this?

James: Well, I had a surprise a few years back. Because I was taking inventory, looking at our investment portfolio and was just like, man, I haven't really dove deep into them recently. I should look at them. And I decided to do some math that I had never done before. And essentially, normally when you're doing the math of something, you look at your ROI, your return on investment.

So how much money did you put in? And then you can view. Take your annual amount that you're getting for divided by that and you get your your number.

Jessi: Yeah,

James: you know,

Jessi: yeah Yeah, how much yeah,

James: all that fun stuff and and they look great, you know, like for example We had a duplex that we did not put very much money into at all I mean it was like a few thousand dollars for the down payment and every single year It was throwing off a bunch of cash and our return on investment was like 52 percent a year, which

Jessi: is

James: quite good Yes, fantastic.

Yeah but then when I started doing, because at the time that real estate prices had started to rise a lot, I went, I wonder if I do this by the amount of equity that I'm sitting in here.

Jessi: I'm

James: essentially looking at the opportunity cost. If I take this equity and put it somewhere else, what kind of return?

Like if I just put it in the stock market, what kind of return would I be getting? And so that's not a fair comparison because I get, you got to pay capital gains tax and all that stuff. But you know, just in theory, right? If I put it into another deal. And, and that had risen so much that my return on equity was single digits.

It was, it was tiny. It was like, it was like 6 percent or something like that. Can you

Jessi: run me through like a simple example? Yeah. Okay. Let's say

James: you've got a property that's doing 1, 000 a year. Like making 1, 000 a year? Making 1, 000, that's the cash flow. Okay. Just trying to keep this really simple. Yes. And let's say that you invested 10, 000 into this property.

Okay. Okay. Do you know what your return on income? Return on investment? Yeah.

Jessi: Well, it would be that.

James: It's 1, 000. 1, 000. Divide 000. Huh. Which is 10%.

Jessi: 10%. That's easy math. Okay. Okay.

James: I'm trying to help you out here. I just didn't

Jessi: want to make an obvious mistake. Yeah. No, you're good. So, so there's, so there's that.

Yep.

James: But, let's say you bought it. You put in that 10, 000 yay over time if the the equity has increased and let's just say that it's risen by 40, 000. Oh, so now your equity in it is actually 50, 000. So now, if you have that 1, 000 divided by 50, 000.

Jessi: Oh.

James: Do you know what your

return on investment is on that one? 5%?

Jessi: No. 0. 5%?

James: See, 5 percent would be 20, 000. I can't do this. That's like 2%. So all of a sudden you went from like, Hey, a respectable 10%, I feel good about this to a 2 percent where you go, Oh my gosh, this is not good. And we were having the exact same situation

Jessi: because

James: part of it was, we just, we didn't invest very much and the amount had risen a lot.

And so I suddenly was like, Oh shoot, I need to do this for my other properties as well. And it became very quickly, very, to me, very, it became very obvious very quickly. Oh my gosh, I have three places that I need to sell. It's borderline irresponsible for me to hold onto these because of that opportunity cost of what I could be doing with all the equity that was trapped in.

That was the lazy equity.

Jessi: Interesting. Yes. Okay.

James: And so I think investors run into this problem where you buy a property and you go, awesome, cool, long term investment. We're good. And you just kind of like, you just collect the cashflow, especially if you have a property manager, you just kind of like whatever, you know, they're not going to worry about it.

Jessi: And

James: I think that. We can do better. And especially right now, at least in Oregon, it's spring break. And so you may be having spring cleaning on the mind. And so I think it's good to do that with your investment portfolio. And so I've got some, some ways, some tips, some thoughts on how to go about doing it.

Now, the math that I just did, I think is like. Yeah, that's one

Jessi: way

James: you should definitely do

Jessi: the math on your property looking at,

James: if anything, just kind of like, you should look at the overall, like, do a, actually, I don't know here, do a financial deep dive, right? So you should look at the cash flow and, and, and compare that, not just like, yeah, how much am I making?

And what is my return on investment? What is my average annual return? Ben, what is that return on equity? There's probably a more official term for it, but that feels right to me. Now you might be saying like, well, how do I know what my equity is? Like, dude, I don't know. Hop on a Zillow what the, what it takes to value is.

It's okay. Yeah. And, and it may make sense to jump. That's actually in the syndication world. That's kind of a rule is you buy a place, it's a value ideal. You go and you fix it up. And it's like the day you finish it, the value ad, you actually want to sell it. That's like the perfect timing. You just can't.

And cause it just doesn't, it's like, it's just really hard to do. Rarely times out that flips by the way. Right? Like that's the one where it's like, yeah, there's a ton of value. And then you create so much equity so fast. That you're like, I, I should cash this in almost immediately for every additional day.

I hold onto it. My average annual return just goes down.

Jessi: And

James: so that's usually like, that's the game plan. That's why syndications and bigger people, like they just don't hold onto them for very long. Cause like our returns just go down over time. It's not worth it. Interesting. So anyways, do that cashflow analysis.

Again, it doesn't have to be crazy. You can do the simple math that I did. That was like, Oh, this is an eye opener for me. Other things that you want to do is you want to review your debt and financing that you have on it. Do those, like, do you potentially have an opportunity to refinance? And that was an option that we had with our properties.

We could have said, yeah, I want to unlock this equity by just getting bigger loans. Yes, my cashflow is going to go down, so be it. But if I take that money and I roll it into another investment, that'll cashflow. Right. Well,

Jessi: especially if you can lock in. A good interest rate right on a refinance

James: and that's another thing right again You kind of like you get the interest rate and you just kind of yeah, whatever it is what it is Sure, even though right now rates are like seven and a half percent, right?

But still right like it's fine. And so it's worth doing that regular review just saying like yeah Where am I at on my on my debt? It also makes sense like this type of year this time of year You're, we're not quite in tax season, but we're getting pretty darn close to it. And so just from a tax standpoint, it makes sense to like, yeah, is what I'm doing makes sense from.

For my taxes. And again, like a 10 31, which is ultimately what I ended up doing with those three properties, rolled them into something bigger. Does that make sense to, to at least get that equity, like the equity doesn't go away, but can I become a much smaller proportion relative to the cashflow I can get from another place, you know, essentially reset that, sorry, essentially reset.

You know, that ratio. And so yeah.

Jessi: Are those two like refinancing or doing a 10 31 exchange, would you say that either of those have equivalent returns? Or is one better than the other? Or does it just really depend on the properties?

James: Hmm.

Jessi: Because to me it seems like a refinance is easier in some ways.

Like you just talk to a bank and get a new loan. As opposed to, okay, if I'm going to like do a 1031 exchange or sell this and buy something else, I have to find another property. I've got to evaluate, you know, what that's all about. Is it going to work? I got to get my timing right for and buying that and it seems a little more complicated, but maybe it has a lot better returns.

I don't know.

James: Yeah, that's a great question. I think it depends obviously. So when you sell, you're going to pay like. Yeah. Capital gains. No, no, no. Oh. Even if you're doing a 1031, right? You got agents involved. Okay. Yeah. And so the properties that you're selling, you're going to have a fee. Now, I ended up listing them on my own and so I didn't have to pay that.

Well, that's not true. For one of them, there was a broker involved that I had to pay 3 percent to that broker. The other two, we didn't have one involved and I didn't have to. But in general, like, so there's a loss there that when you refinance. You don't get that and and there are obviously some funding, some, some debt fees that go with it, but that happens no matter what.

I think it's a question of you saying like, if you were to, so at the time when we were looking at it just because of where the market was at and what was going on I was in, and I could have talked to other brokers I suppose, but at the time they were like, they were not going to give me a very high loan to value ratio.

And so I wasn't going to be able to pull very much money out of those three properties. And so it was going to keep me in that small deal territory, right? So it was like, it was something like I was sitting on, it was kind of crazy for all of them. It was 200, 000 worth of equity, which is part of my like, Oh my gosh, like all of a sudden this return I'm getting is not great.

But had I refinanced, I would have only been able to access like not even half of that. For each of them. Yeah. And so, and it was just because of where we were in the time and whatever, it was super weird. And so it was one of those where I was like, yeah, 300 grand's good, but it was still going to, and it was going to still keep me in like that, like wherever I went, I still was not going to have do a lot down.

It was just, it just kept me in a small deal territory, but by selling them and getting something, it allowed me with the 600, 000, I was able to jump up to a much bigger asset. And even a totally different asset class and all that stuff. And so, at least for the opportunities that were sitting in front of me, it made sense to say, yep, I'm going to sell them.

I could have done a combination. I could have 1031'd. And I could have refinanced. And then put all that towards something that could have been an option. So it does depend,

Jessi: but

James: Yeah. Yeah. Are those the

Jessi: two, are those the only two ways? To use your lazy equity.

James: I don't know how to say that. Yeah, essentially, yeah.

Refinance or sell. And or then roll that into something else. Yeah. Yeah, that's pretty much it. Which I, like, because we ended up rolling it, right? I didn't technically unlock it. I just, I moved it somewhere else. Also worth considering is, so like this could have been an interesting strategy. I could have sold two of the places, get the 400, 000, invest that into something.

And then I could have refinanced another one and maybe take like 50, 60, 000 and use that as a rehab budget to then. Fixed place up get the value add and then in theory once I did that if I add enough value I could refinance that big project one more time at this new value and Get a bunch of those funds back in the form of debt.

And yes, I get it my payments and everything would go up, but I can then use that money to go kind of keep rolling, going potentially. Yeah, you could, you could

Jessi: get creative with it.

James: Yeah. Yeah. Because 1031 as well, especially if you're doing value add deals is it all has to be used for the down payment.

Okay. It's not technically true. I know you guys are out there like. You can use it, but there's very tight timelines for how long you have to do the rehab and to spend the money. And so, it's just, don't think of it that way. Hard. Just think 100 percent for the down payment. And so so yeah, it's it's tricky, but, but those are the primary ways in which you can unlock the funds.

Jessi: Hmm.

James: Other things you want to look at is just the, the property performance, right? Just kind of check in. Is this performing the way that I thought it would. And I'm thinking things like talking about like just vacancy rates, how often our turnover is happening. What I thought it would be it's always fun to go back and look at my like original underwriting be like, how did I?

How did I say this was gonna happen? You want to take a look at the maintenance and and plan out any bigger capital expenses that you might have coming up

Jessi: Yeah,

James: right. You may not spend it, but at least you're gonna plan it cuz Good weather's coming. So you want to, it's a great time to do it. And, and just in general too, you want to ask the question, right?

Does this property still make sense for what I'm doing? Like, I know sometimes we pick up stuff just because someone had an investment and they moved to a whole nother state. Like, man, I'd like, this doesn't make sense for me anymore. I want out, or whatever reasons it might be. Yeah, whatever it is. They're like, hey, I've really specialized in this different type of asset, and I'm just not even messing with this anymore, it just doesn't fit with my system, so I want out.

Jessi: Or, yeah, there's all sorts of different reasons, you know, why you may need to adjust the properties that you're invested in, like you're aging, and used to all your maintenance, and now you can't do that anymore, so you're gonna put it into something different.

James: Yeah.

Jessi: Yeah.

James: Physically, maybe you just can't manage everything on your own anymore, so you need to change the type and switch over to the passive side of things or hire a property manager or whatever.

All right. Keep the tabs

Jessi: on that. Paying attention to it. Yeah. That's totally right. Yeah.

James: Yeah. We already kind of talked about this one, but you know, just asking that question of does it make sense to, to keep, sell or refinance some of them just kind of based on what it is that you're learning.

And then and then, where are my notes here? And then you just want to, oh, I remember, so those are the big, those are the big things that That you really want to do, right? Just, you want to look at again, like, how's it doing financially? How's it doing operationally? And then, how's it doing just within the, the context of my bigger portfolio, my bigger goals?

Those are kind of the three main areas that you just want to look at for each of them. And What's nice about this is, honestly, this is what the big guys do they don't just set it and forget it, I think, and I think in one of his books, I think it's Cashflow Quadrant, Robert Kiyosaki talks about five levels of investors, and he talks about one of the levels I think it's like a level three, whatever.

Where he's like, yeah, this is the, the Senate and forget it. It's the folks who, they put their money into a 401k and they go, whatever, someone else is dealing with it. And which I totally get, but, and I think people can get that way with their, with their properties as well. We're like, yep, I got it.

We've got tenants. I got a manager. Yeah. I'm just not going to worry about it. Like, yeah, I get it. And you don't have to look at it that hard, but at least annually you should. Yeah. Keep tabs on it. It's worth, it's worth looking at. Yeah. And I think it's just good. You know, it's just a good habit to be like, yeah, here's, you know, this is like, it's, it's a meaningful part of your wealth.

And so. So do you

Jessi: have any good, either like. Systems or resources or tricks for like how to keep tabs easily, like tracking systems or, you know, do you just like open up a spreadsheet and write stuff down every single month or, you know what I mean?

James: Yeah. Like how do you easily track that stuff? So, so this time of year especially.

I think when you're, if you have, well, if you haven't submitted your taxes in order to, which I haven't, cause we wait until the end because of other stuff, we had, I got a bunch of K ones that I was going to wait for and it just takes forever. But in theory if you're preparing your taxes, part of what you're doing for any rental that you own, you got to hand over a P and L to your accountant.

And so that is like, A perfect time to start to do it because you're going to get, yep, here's all my income here, all my expenses. And it's just from it. I even feel like you can ignore depreciation for now if you want to. But just get that net operating income, your, your cashflow essentially. And you go, cool, there's that number you've already done.

Either you or property managers always done the work to figure that out. Now it's like, Just get a couple more numbers. Number one, how much did you invest in this property?

Jessi: Yeah,

James: divide that do a little comparison and try to do your best guesstimate on what you think the equity is Yeah, it's going to Zillow look up the value Subtracting out your mortgage principle and then divide that from the cash flow for the year.

Jessi: Hmm

James: She's like, yeah, where was I at on this thing? I think I Spreadsheet, you know the best app in the world Excel.

Jessi: Yeah

James: It doesn't have to be super complicated to, to get some of those ratios. And then you can, if you really want to, you can look at them over multiple years to see kind of how, like, is this a weird year?

Are you on track? Is it slowly getting better? Is it slowly getting worse? Which my guess is the return on investment is slowly getting better over time. And the return on equity is slowly getting worse over time. That's my guess. There's a nice little, there's a nice little thing there. I think for for like, for the vacancy and turnover.

I think it's just worth, like, if you're not, like, if you've got a product manager, you can ask but you yourself should be like, yeah, how many vacancy days did I actually have? And like going through and looking at that.

Jessi: Yeah.

James: Ours are super low just in general in this area. And so that's usually not a factor for us.

No one wants to

Jessi: move when it's raining and it's always

James: raining. I know. It's kind of nice. For the maintenance and capital expense piece of it. I think it's good just to do, to do a walkthrough and either you or partner managers is like, Hey, how are things going? Then for the CapEx piece an app that's not free, but I really like is called estimate on and you can download it and it's made by Verisk and, and you can go in and just like, Hey, I'm thinking about doing the roof.

Like I'm just trying to get an idea for what the cost would be. And I think they may give you a couple of free. Rounds before we have to start paying.

Jessi: And I

James: blow through this really quick. I think you like three free a month or something. And you can. As three free projects and you can have as many.

Like line items as you want. Like you can do roof paint, new carpet, new flooring windows. Like you can have, that's a

Jessi: project.

James: No, that's within it. Yeah. Those are all to bundle together. It's a project. So, pick a property address that represents most of them. And then you can do all the numbers for all of them if you want.

And, you know, you have just a singular project. I

Jessi: guess.

James: Yeah. So that's like a tool that you can use. Or, honestly, you can also, like, if you're thinking about doing a roof, just be like, yeah, let me just make some phone calls. I think it's a good way.

Jessi: Yeah, that seems to be, like, what would make the most sense is keeping tabs on things a little bit at a time.

You know, I, I don't know what that principle is, somehow, or at some point we talked about you talked about it in like cleaning or like doing laundry and it's like five minutes a day, like just a little bit.

James: Yeah.

Jessi: Like

James: it Tortoise and the hare? You never get, yeah, you

Jessi: never get behind. It's never this big deal.

James: Yeah. That,

Jessi: oh no, now I have to evaluate my property and where am I at? Yeah. You know, it's like, okay, I'm just, I'm going to create this spreadsheet. Yeah. And when I'm thinking about the roof, I'm going to put some information in there. Yeah.

James: Yeah. Yeah. I think it's also important to do just even as a passive investor, obviously it's a lot simpler, but it's good to look at like, Hey, how is my, what's my return look like? And maybe it makes sense to, honestly, maybe it makes sense to call up your sponsor and be like, Hey man, how's it going? Like, tell me about this project.

If you haven't heard from them recently on what they're doing I think it's a good And I

Jessi: think either sponsors or property managers should be giving you regular reports and if they're not, you know, you totally can ask, how are things? Give me some numbers here. Like, where are we at?

James: Yeah, totally. Okay.

And expected to do that. So there you go. That's a happy spring cleaning. I hope my hope is that you listen to this and go, yeah, I want to find out what my numbers are and grab them and look them up and do some of the ratio stuff. And if you do have any trouble doing that, I love looking at this kind of stuff.

So feel free to reach out to me and like, it's just fun. So I'm totally happy to look at whatever it is. And you go through it. It's true.

Jessi: He loves spreadsheets. I

James: do love, I do love a good ol spreadsheet. He loves some good

Jessi: math.

James: I do. And, yeah, again, even if you're doing it passively, I think there's some interesting things to look at and say, yeah, this is still fit with what I'm doing.

So there you are, man. Happy spring break to do some spring cleaning. Let's get after it. It'll be great. So with that, stop listening to us, get outside, well, hopefully, maybe you're walking around listening. That'd be cool.

Jessi: Or,

James: If you want to, you can also just hop online. You can check us out at furlo.com. Learn more about us, our investing thesis, how we think about things because we are regularly looking at and reevaluating our portfolio. And I feel like there was something else. Yeah. And honestly, if you love this podcast, we would love to know that. Feel free to leave a comment wherever it is that you listen to it.

And so thanks for listening. Have a great day.