I googled the term “Sleepy Equity” and I found nothing. I can’t remember exactly when or from whom I first heard the expression, but this is a term that we have discussed at Progressive Real Estate Partners a lot recently. We believe Sleepy Equity is one of the biggest reasons why an investor should consider selling their property in today’s market.
What is Sleepy Equity? Simply stated it’s the equity that you have in your property that is not earning a reasonable return based upon current market conditions. For example, let’s say you bought a property 10 years ago for $1,000,000 (in this ex. there is no debt as it complicates the explanation) and, at the time, the net operating income was $70,000/year which equates to a 7% cap rate/return.
Now what if it’s 10 years later and the net operating income has increased to $100,000? Well you might be bragging to your friends that you are getting a 10% return on your $1,000,000 investment from 10 years ago! BUT maybe it is not as good as you think.
What if that property could sell for a 5% cap rate in today’s marketplace and therefore it would be worth $2,000,000? That difference of $2,000,000 compared to $1,000,000 could easily be Sleepy Equity. What makes it “sleepy”? It is sleepy if you could take that $2,000,000 and invest it into a new project that would yield an 8% return and therefore $160,000/year in income.
Understanding Sleepy Equity requires you evaluate your investment based upon its current equity AND NOT the originally invested equity. You could probably see that the math could get even more interesting if you take into account loans and the potential of taking your current equity and obtaining positive leverage based upon today’s low interest rates and favorable financing scenarios.
As cap rates have compressed in certain markets or for certain product types AND as rents have risen for many properties, there are a lot of investors with Sleepy Equity. The ability to redeploy capital to unlock this equity frequently occurs across product types or geographies. Many multi-family investors are selling and buying single tenant properties while many retail investors are selling in one geographic region and redeploying the capital into a different region.
If you have Sleepy Equity that you want to wake-up, we welcome the opportunity to work with you to help you maximize your return on your current equity.