If you locked in a mortgage somewhere around 4 percent a few years ago, I understand why you would want to protect it. A rate like that has real value. And if using the equity in that property means refinancing closer to 7 percent, the natural reaction is pretty simple:

Why would I ever give that up?

On last week’s Not Your Average Investor Show, we looked at a better question: what could the equity sitting behind that mortgage potentially do over the years ahead?

The rate matters. But if you still have a financial outcome you are working toward, it can also be useful to understand what that equity might be capable of doing over the years ahead.

Dormant Equity Can Change the Outcome

Equity is simply the difference between what your property is worth and what you still owe on it.

It starts as your original down payment.  Then it grows as the property increases in value and as the loan balance gets paid down by your resident. 

Over enough time, those pieces can add up. As you think about your retirement goals,or income goal ahead, that equity can become another variable worth understanding.

Our client is a great example. After building a six property portfolio over several years, the numbers looked very different from where they started.

The portfolio was worth about $1.38 million, with roughly $544,000 still owed. That left more than $835,000 in equity.

When equity builds up inside a property and is not being considered for another purpose, we call it dormant equity.

There is nothing automatically wrong with leaving it there. But when someone still has a retirement goal or another financial outcome they are working toward, it can be useful to understand what that equity could do.

And right now, there is one big reason that question feels especially difficult.

Avoid the Mortgage Rate Trap

This client did not just have a lot of equity. They also had something many rental property owners value quite a bit: very low mortgage rates.

Five of the six loans were between 4.25 percent and 4.88 percent. The newest was at 6.10 percent.

So I understand the hesitation.

If putting dormant equity back to work means replacing some of those loans with borrowing closer to 7 percent, it is easy to stop right there and say, No thanks.

That is what I mean by the mortgage rate trap. The rate becomes the entire decision instead of one part of it.

👉 Why Investors With 4% Mortgages Hesitate to Use Equity

A more useful question is: What outcome am I trying to create, and what happens if I model both paths?

That lets us look at the mortgage rate alongside the equity, monthly income, reserves, property count, and the investor’s actual timeline.

Put Both Paths on the Same Page

For this client, we modeled what could happen if part of the dormant equity was put back to work.

Importantly, the plan did not try to pull out every available dollar.

Four of the six properties were modeled for refinancing, creating roughly $306,000 in available equity.

Part of that equity could then support four additional properties, taking the portfolio from six properties to ten.

But there was a tradeoff.

The current six-property portfolio was producing about $2,294 per month. Immediately after the modeled change, monthly income dropped to about $580.

At the same time, property reserves increased from $5,000 to $30,000, and the client now had ten properties instead of six.

This is what we call property babies. Equity that has built inside the original properties can potentially help fund additional properties, giving more assets time to build income and equity of their own.

That first year view is important because it keeps us from pretending there is no cost to the decision.

There is.

The client gives up some monthly income today in exchange for having more properties working over the years ahead.

Then we zoom out to the client’s ten year timeline.

Under the assumptions used in the model, keeping the original six properties was projected to produce about $4,983 per month in passive income and approximately $1.84 million in equity.

The ten property version was projected at about $3,873 per month in passive income and approximately $2.44 million in equity.

For this example, the four added properties were modeled using the 3.99 percent purchase rate available in the scenario. 

That is nearly $600,000 more projected equity, while the original six property portfolio still produces more projected monthly income.

These are modeled estimates, not guaranteed outcomes. And that is really the point.

One path emphasizes more monthly income. The other builds a larger projected equity position.

👉 6 Rentals or 10? How the Tradeoff Was Modeled

We also modeled different versions of the plan. A more aggressive version could have added more properties, but it would have pushed the portfolio into negative cash flow. That is why the useful part of the tool is not simply finding out how much equity can be accessed. It is seeing how different choices change income, equity, reserves, and the longer term outcome.

Neither answer automatically tells another investor what fits them. The value comes from being able to see the tradeoff clearly.

NOT YOUR AVERAGE INSIGHT: Start With the Outcome

👉 What Should Your Rental Portfolio Look Like in 10 Years?

I think this is the bigger lesson underneath the whole mortgage rate conversation. It is easy to focus on the conditions we can see today.

The interest rate. The monthly income. The equity sitting in the property.

Those numbers matter. But they are pieces of a longer plan.

Outcome based investing starts with where you want the portfolio to put you five, ten, or twenty years from now, then works backward from there.

For someone who has already reached the financial outcome they wanted, there may be no reason to give dormant equity another job.

For someone who still has a goal ahead of them, understanding what both paths could look like may change how they think about the decision.

That is why I keep coming back to this idea: A low mortgage rate is valuable, but the rate should serve the financial plan rather than become the financial plan.

Sometimes seeing the full picture is enough to ask a better question.

Just remember… Don’t Be Average.
Gregg Cohen
Co-Founder, JWB Real Estate Capital