Exit Strategy
Key takeaways
- Track your return on equity. When it falls, the equity in your rental may be sitting lazy.
- There are three main ways to put it back to work: sell, do a 1031 exchange, or take a cash-out refinance.
- Selling a rental usually means capital gains tax plus depreciation recapture. A 1031 exchange can defer both if you follow the rules.
Tax rules to know (updated November 2026)
- When you sell a home you lived in, you may be able to exclude up to $250,000 of gain ($500,000 for most married couples filing jointly) if you owned and lived in it for at least 2 of the 5 years before the sale. See IRS Topic 701, Sale of Your Home.
- Since 2018, 1031 exchanges apply only to real property held for business or investment. See the IRS page on like-kind exchanges.
- When you sell a rental, the gain from depreciation you took (unrecaptured section 1250 gain) is taxed at up to 25%. See IRS Topic 409, Capital Gains and Losses.
Sophisticated investors always monitor their Return on Equity. Personally, when my ROE falls under 10-15% I look to re-leverage my equity to maximize my net worth while staying in positive cashflow. This is an important concept that most investors do not understand and embody.
Return on Equity = Profit (Cashflow) / Total Deployable
Exit Strategies
- Return on equity
- What should high-net-worth investors do?
- Progression of an investor
- Should you buy a 2-4 unit?
- How much money are you making? Total return.
- Inflation hedging
- REIT investing
- Runtime – 35 minutes
When your property appreciates and your tenant pays down your mortgage, your equity position goes up; unfortunately, your return on equity goes down.
To get your lazy equity working again, you have three options, which we will go into more depth:
- Sell the asset
- 1031 exchange
- Cash-out refinance
Where is your lazy equity?
Download worksheet – theWealthElevator.com/roe
Too much lazy equity that you bought timeshares…
When You May Want to Sell Your Properties
Here are some situations when you may want or need to sell your rentals:
Getting Rid of Underperforming Properties
Re-evaluate your portfolio every 3-10 years and sell off properties that are not performing well to free up cash to buy better ones. Or if the total returns (cash flow, tax benefits, appreciation, and mortgage pay down) get below roughly 15% then the next best investment. A quick rule of thumb is to unload any properties that do not meet the 1% theWealthElevator.com/turnkey Rent-to-Value Ratio.
Consolidating Your Portfolio
If you decide to venture into residential or commercial multi-family investing in the future, you may want to sell your single-family homes and consolidate your portfolio by buying fewer, but bigger, multi-family buildings.
Leave Real Estate Completely
If you decide to venture into residential or commercial multi-family investing in the future, you may want to sell your single-family homes and consolidate your portfolio by buying fewer, but bigger, multi-family buildings.
Common Ways to Sell Your Property
When selling your primary residence, you will likely be exempt from most of the capital gains. See video.
When selling a rental or other asset that made you money, you will have pay taxes on the capital gains.
Always know where you fall on this Adjusted Gross Income chart to minimize your taxes
1031 Exchange
You sell one property and use the sales proceeds to immediately buy another similar property.
With this strategy, you can replace an underperforming property or consolidate your portfolio. You will not be required to pay capital gains taxes on the sale, provided that you follow all of the rules and regulations of this exchange program.
You can check out the full guide here.
Cash-out Refinance and HELOCS’
These are both ways to leverage the equity built up in your properties.
Cash-out refi is a strategy that allows you to obtain a new loan to pay off the current one and also take out the equity.
Home equity line of credit (HELOCs) use the equity in your home as collateral. It works like a credit card, where you replenish the available credit when the balance is paid. You can borrow from it when you want and however much you want (up to the balance) until the draw period ends.
A HELOC is an excellent means of getting lazy equity out of your current primary residence if you own your home. We don’t really recommend owning your primary residence anyway, especially if you live in a primary (tier 1) market. But anyway I digress… (I am passionate about younger families buying a large home to live in, which blows a big chunk of liquidity and gets them stuck with a large house payment.) HELOCs are a great temporary solution to get equity out of your current assets to deleverage additional properties. It does not require any expensive re-origination fees associated with a new home loan by doing a refinance, and you can reverse it by paying the loan back. This is a great option when starting out and you don’t have much liquidity other than what is in your current home. At some point, you will have to make the irreversible decision to refinance or sell the asset. But hopefully, we have empowered you to get started, and then you can have real-life proof of concept for yourself.
See which one is best for you in this article
Unlike some things in life, HELOCs are reversible
Investors who make over $100,000 a year or net worth of over $250,000:
From 2009, I bought single-family home rentals as I grew my net worth from $0 to $600,000 in 2015. Six years later, I owned 11 rentals, and I realized that buying rentals was not scalable past 20-30 rentals. I also joined masterminds with other doctors, lawyers, engineers, and other professionals who had a much higher net worth than myself. Through these groups, I learned a lot of techniques that the wealthy do that I share in our Mastermind. One of these is that there is a certain point where you transition to syndications.
The numbers on 2-4 units seem to be stronger. Why should I buy a single-family home rental?
As we have been hinting, as an investor, you will eventually gravitate to being a more passive investor. For those who are able to save more than $30k a year or have substantial liquidity (over 200k), being a landlord is a lot of work. Do the math here… with 300 dollars per property (2 months of work to buy a turnkey rental), you are going to need 20-40 of these to replace your income. I have 10 of these and have systems in place, but have 1-2 evictions a year and 3-4 big things that happen. Imagine if I had 30, just 3 x those numbers.
If your net worth (income minus expenses) is under $200,000 or you barely save $30,000, syndications are not for you. Stick with these Turnkey rentals despite what Gurus (who are trying to sell you their program) tell you for now. They have a little higher gains (a lot more volatility), but a syndicator who is willing to put you in a deal with more than 10-20% of your net worth is asking for trouble. But for those investors who make over $100,000 a year or net worth already over $250,000, stick with single-family homes because the exit sale is much easier than a multifamily 2-4 unit, which will sit on the market 2-4x as long and only go to a cheapskate investor like us. You might even hold onto these first few rentals for as little as 1-4 years.
Within the next two weeks:
Read through both articles for 1031 Exchanges and Cash-out Refi vs HELOCs and understand the differences between them!
Deeper Learning
Managing Offers
Build wealth for the next generation
Tired of investing on your own?
How larger syndication deals work
Have some rentals?
Don’t be a Mom & Pop investor
Notes from the coaching call
These notes come from the group coaching call on this topic, recorded in 2020. The replay video is on this page.
- Moving a rental into an LLC after you buy it changes the ownership and can trigger the loan's due-on-sale clause, which lets the lender call the full balance. Lenders rarely do this when payments are on time, but keep it in mind.
- Real estate professional status: Lane's view on the call was that it usually isn't worth chasing unless your income is very high, and it isn't worth buying 10 or more rentals just to get it. Ask your CPA how it applies to you.
- Before you add any side investment, such as infinite banking, ask three questions in order: Is it your highest and best use of time, or would more time at your day job earn more? Is your spouse or family okay with it? Do you enjoy it?
Talk it through with us
Thinking about what to do with the equity in a rental? Hear how other members made the call.
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The podcast behind this course
Your First Rental Property
Short episodes for new investors on buying and running out-of-state rentals: markets, numbers, property managers and the mistakes to skip.
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