Many real estate investors that owned properties during periods of low interest rates and/or rapid appreciation are sitting on lots of equity.
But equity is deceptive.
Simply taking your property value and subtracting what you owe is not how much you’ll walk away with if you opt to sell the property.
You’ll need to account for the mortgage balance, of course, but you’ll also need to account for:
Real Estate Commissions - Often real estate investors will opt to utilize the services of a real estate professional to assist them in selling their property and pay them a fee to do so. Other times, they may opt to For Sale By Owner (FSBO) like when they choose to sell to a tenant-buyer on a lease-option or lease-purchase.
Closing Costs - Often real estate investors will need to pay their share of closing costs when selling a property. In some less common situations you may be able to negotiate to have a buyer pay all closing costs including the ones that are customary for a seller to pay.
Capital Gains Taxes - If the property appreciated while you owned it more than the costs you have associated with the sale, then most real estate investors will need to pay capital gains taxes on the gain. Some real estate investors may opt to defer paying these taxes by choosing to do a 1031 tax deferred exchange but, in most cases, they’ll end up paying these taxes later.
Depreciation Recapture Taxes - If the property was a rental, the IRS assumes you were depreciating the property. When you sell the property, the IRS wants to tax the amount you depreciated in the form of depreciation recapture taxes. Similar to capital gains taxes, some real estate investors may opt to defer paying these taxes by choosing to do a 1031 tax deferred exchange but, in most cases, they’ll end up paying these taxes later as well.
The amount of equity you have left over after accounting for all these expenses is what we refer to as True Net Equity™.
If you sold the property, you’d be walking away with True Net Equity™ (not regular equity) to invest in your next investment.
So, you’ll want to understand what returns you’re earning on True Net Equity™—and not equity—to determine what you new returns will be.
True Net Equity™ Spreadsheet
Use the True Net Equity™ Spreadsheet to quickly see your True Net Equity™ for each property.
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This spreadsheet—and all the others on this website unless explicitly stated otherwise—is provided to current, active subscribers under the very limited, revocable Don’t Steal My Stuff license. Basically, you can use it for your own personal use only while you’re a paying subscriber.
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Download the latest version of the True Net Equity™ spreadsheet below.
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