The sauna conversation that made us sell two rentals.

The most expensive conversation I had this year happened in a sauna.

At the mastermind I joined this year, a bunch of the guys ended up sitting in one together. The guy next to me started telling me about the day he realized none of his equity was actually working for him. So he liquidated his entire portfolio, all of it, and redeployed the money into one huge bet.

Today he's worth exponentially more than he would have been if he'd kept holding.

I didn't say much. I was too busy doing math in my head. Because I had a sinking feeling our equity wasn't working for us either.

How we've always kept score

From day one, we measured everything with one number: return on investment. How much money did we put in, and how much does it make us each year?

When we started in real estate, 12% was the bar. If a rental cleared it, we kept it. Then we learned the BRRRR method (buy, rehab, rent, refinance, repeat) and started pulling all of our money back out of deals. When you have zero dollars in a deal, your return on investment is technically infinite.

And it's very hard to argue with infinity.

That number told us a comfortable story for ten years. It was also hiding something.

The number nobody runs

ROI has a blind spot. It only measures the money you put in. It says nothing about the money piling up inside the property: every principal payment the tenants make, every year of appreciation. On the rentals we bought when we were first starting out, the ones we've now held more than a decade, that pile has gotten big.

So this year we ran a different number. Return on equity: what the portfolio actually makes each year, divided by all the equity sitting in it.

Four percent.

For perspective, the 10-year Treasury pays about 5% right now. Guaranteed. Zero risk. From your couch.

Ten years of tenants, turnovers, and 2 AM water heater calls to underperform the federal government by a full point.

When you see that number, you rethink your whole strategy. Which is exactly what we've been doing.

The three options

Once you know your equity is lazy, you have three choices:

1. Stay the course. Keep doing what you're doing. You'll still amass real wealth over time as tenants pay the properties off, values climb, and cash flow rolls in. This is the safe one.

2. Refinance everything. Pull 80% out and put the equity to work elsewhere. The problem: rates have risen so much that new debt would wipe out most of the cash flow and put us in a genuinely unsafe position as long-term landlords.

3. Sell the underperformers. Go property by property on a return-on-equity basis, sell what's lazy, and redeploy into things earning 20%+. The scariest option. The most work. Also the one that makes the most money.

What we're actually doing

Some of each. We're keeping the properties with low interest 30-year debt right where they are, refinancing a few others, and putting a line of credit against the remaining equity so it's available to deploy.

And we're selling. We've already sold two properties this year that weren't serving us well and rolled that cash into three additional short-term rentals (Airbnbs), which gives us four total. Every one of them is producing a substantially higher cash return than any long-term rental we own.

We're shuffling the deck. The long-term wealth machine stays intact. The lazy equity gets a job.

The part that actually matters

Here's what gets me. The ROE math was sitting there the entire time. Nothing was stopping me from running that calculation five years ago.

It took sitting next to a guy who'd already made the leap for the lens to change. Ten minutes in a sauna did what a decade of spreadsheets didn't.

That's the real lesson, and it's bigger than real estate. You have to get around people who are ahead of you. In investing, in business, in marriage, in parenting. We eventually become the people we spend the most time around. What better option do you have than putting yourself in rooms with people already standing where you want to be? (more on this in a future newsletter.)

Your challenge

Run your number. Take what your portfolio, your business, or your savings actually produced last year and divide it by the equity sitting inside it. If a Treasury bond is beating you, you don't necessarily have a bad asset.

You have a lazy one. And now you know.

— T.J.