How to turn your real estate assets into a greater stream of cash
Most of our interest in real estate as an investment vehicle is directed at building assets, not in maximizing cash flow. As a vehicle, real estate is especially suited for building substantial assets, due largely to the ability to leverage the investor’s capital by borrowing. This enables the investor to control and receive the benefit of appreciation from a larger asset than could be controlled without leverage.

On the other hand it’s the debt service required to support the leverage that often causes the cash flow to be minimal, or, in some cases, negative. The most important factor in determining the cash flow from a real estate investment is the amount of leverage. Lower leverage means higher cash flow. It’s that simple.

In an ideal situation an investor would focus on building assets until retirement, then seek to generate more cash flow from a real estate portfolio. We will outline three basic approaches to doing that.

Keep in mind that we still want to be alert to minimizing taxes, and provide a growing stream of income to protect against eroding buying power caused by inflation.

Reduce debt
We will discuss several ways to accomplish this goal. Assuming an investor at retirement holds a number of investment properties, one or more could be sold and the equity from the sale(s) could be used to retire debt on the remaining properties. While this would result in some income tax being due, presumably it would be subject to favorable rates available for long-term capital gains.

An investor, in anticipation of retirement in the future, could apply increased cash flows from operations to more rapid debt reduction, rather than spending that income or using it to acquire other properties. For example, a young investor might focus entirely on asset growth; one approaching retirement might switch to debt reduction so that at retirement the property portfolio would throw off more cash to replace employment income.

Borrow the equity
Borrowing the equity has the benefit of avoiding a taxable event. It’s just another way to extract equity, and one that may be appealing in cases where there is substantial unrealized gain that would fall subject to tax in the event of a sale.

If the portfolio were large enough and the amount of equity withdrawn this way did not exceed the continuing appreciation, the equity in the portfolio would not shrink, and might even continue to grow.

Arbitrage for higher yield
This is a fancy way of saying borrow against the equity in your real estate and invest in higher yielding assets, like notes secured by real estate. If you could borrow your equity at 7% and invest in a note yielding 10% you can enhance your yield by 3% of the funds so invested. No sale occurs so no tax is due on any unrealized gains in the portfolio, plus the value of and the income from the portfolio should continue to grow.

Yields on private, real estate secured notes are often 10% or higher. A prudent investment with good security has a high degree of safety. Still there are dangers with this type of investment, and some expert advice would be advisable.