Taking Chips Off The Table
n interesting problem that arises for many successful people, once they have done very well in business or investing and have a considerable amount of equity, is:
Should they take some chips off the table and harvest that equity?
It’s hard to do when you’ve nurtured these tangible assets (whether your business or real estate investments) and they’re producing income. You’re thinking, “I don’t want to let go of that, because I don’t know what else to do.”
It’s a pivotal question.
One doctor in medicine I know has several practices that serve a certain type of clientele. He’s relatively young, has a run rate of about $20 million in these businesses, and certainly has the capital from them. He doesn’t have to sell them yet. However, they are highly regulated and have a lot of liability associated with them due to dealing with insurance – government regulated Medicare and Medicaid. It’s a scary place to be. If the government arbitrarily decides his business is doing something improper, it could take everything down.
While counseling him, I said “You’ve got a lot of equity. What would it take to sell that business – and likely take $50 million off the table at 40 years old?” How much more do you need? You don’t need to be like Bill Gates or Jeff Bezos and keep cranking it. There’s a time to take equity off the table.
It’s the same with investment properties. Say you bought a single-family rental house at $200,000 eight years ago and it’s now worth $600,000. The value and rent have gone up, but the rent doesn’t go up as fast as the value. So now the rent to value ratio, or the return on the equity (not the original investment) is much lower than it was, because the equity has increased so much.
Again, probably time to consider taking equity off the table, either by selling that property or exchanging the equity into other properties. That allows us to leverage or reallocate to get a better return. Because again, the markets go up and down, and sometimes you can't catch it at the top – but you can catch the waves. Being early is better than being late.
Again, if you’ve got considerable equity in businesses, Real Estate, investments, or even your own home if you could downsize, consider pulling equity out while you’re at the top of the market and reallocating it into investments that don’t have downside risk.
P.S. Whenever you’re ready, here are some other ways I can help fast track you to your Freedom goal (you’re closer than you think) :
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