Are You Losing Money Just Because Your Rental Is Empty?
The big question for real estate investors: While you always hope to have your property filled with tenants…how can you make money on vacant rental properties?
You’ve worked hard to acquire rental real estate, expecting cash flow and appreciating assets. But what happens when your property sits vacant? Most landlords panic, watching mortgage payments, taxes, and repairs pile up—believing “no tenants” means “losing money.”
Here’s the reality: Savvy investors can make 100%, 200%, or even 300% returns—even during vacancies—by separating their equity and mastering a counterintuitive strategy professional bankers have known for decades. If you don’t understand how this little-known approach works, you risk lost returns, poor liquidity, and long-term financial headaches.
Let’s pull back the curtain and show you how to transform every rental—full or vacant—into a potential profit powerhouse.
The Problem: What’s at Stake With Your Rental Property Strategy?
The Costly Trap of Tying Up Equity in Your Rentals
Most property owners pay down their mortgages as quickly as possible, aiming for “debt-free” real estate. They plow extra cash flow into reducing principal, convinced that this strategy saves money and lowers risk.
But here’s the trap:
- Low liquidity. When vacancies hit or emergencies strike, funds are locked inside the property and are harder to access (you often have to qualify for a loan using the equity as collateral or sell the property).
- Lost opportunity cost. While your equity sits idle, it produces little to no return.
- Tax inefficiency. Because you only deduct the mortgage interest you actually pay, reducing your principal can mean reduced tax deductions.
- Increased vulnerability during downturns. If the property value drops or tenants leave, your money is tied up in the property, without easy access to capital to weather the storm.
A 2023 Marcus & Millichap report showed commercial landlords with 40% vacancies experienced significant financial distress, especially those who focused on quickly paying down debt rather than maintaining liquidity.
If economic shifts, severe vacancies, or disasters hit, being “house rich but cash poor” can quickly turn investment dreams into financial nightmares.
The Solution: How the Savvy Make Money During Vacancy
Unlocking Arbitrage With Separated Equity
Here’s the little-known approach: Savvy investors keep their properties “mortgaged to the hilt” and store their equity in safe, liquid vehicles outside the property in a properly structured, maximum-funded Indexed Universal Life (IUL) policy, or what I call an IUL Fund.
Why does this work?
- Liquidity: With an IUL, funds are always accessible via policy loans, making it easy to cover mortgage payments during vacancies or to seize new opportunities.
- Arbitrage: With an IUL Alternate Loan, it’s possible to benefit from arbitrage—for example, borrowing at 4% to 6% and earning as much as 8% to 9%.
- Tax Efficiency: Because you’re not paying down your mortgage, the mortgage interest deductible remains higher, which can lower your effective borrowing cost.
- Asset Protection: Keeping cash out of properties can protect equity from lawsuits and market downturns.
Let’s look at an example: Let’s say you borrow $1,000,000 at 6% interest ($60,000/year), but after tax deductions (assuming a 33% bracket), your actual cost is $40,000. With an IUL Alternate Loan, that $1 million is still in your policy acting as collateral for the loan. Let’s say it’s earning an average of 8% ($80,000/year), tax-free. Doing the math on the net return, your policy earns $80,000 earned, while your cost of the loan (with the tax deductions) is $40,000, so you’re earning a $40,000 profit, even if your property sits empty. That’s a 100% return on cost—regardless of vacancy. This is how you can make money on vacant rental properties!
Comparative Insight: Why Most Landlords Get It Wrong
Paying Off Mortgages Early = Missed Profits and Risk
The Common Way
Most people get anxious about minimizing debt, so they send extra payments to the mortgage company to pay down principal as soon as possible. But then what if the rental is vacant, or they’re scrambling for cash? They often get to choose between selling assets or taking unfavorable loans. They’re also paying down their tax-deductible interest, which means they’re left with more taxable income.
The Savvy Way (Separating Equity)
On the other hand, those in the know want to maintain leverage. They refinance every few years to keep mortgages high but manageable. That equity is essentially safe in vehicles like an IUL, often growing faster than interest costs. And even in market down years, their IUL doesn’t lose any principal due to market volatility, with a 0% guaranteed floor. They can enjoy liquidity and flexibly cover shortfalls—even during economic downturns or property vacancies.
Lost Opportunity: During COVID-19, some commercial property owners with high vacancies and low liquidity faced foreclosure, losing every dollar sent into extra mortgage principal. Meanwhile, those with separated equity sailed through, simply redirecting earnings from their liquid accounts to cover payments until tenants returned.
Real-World Example: Thriving in a Down Market
In 2020, a commercial landlord in Dallas faced a sudden shift: 60% of his offices were vacant due to remote work. While many peers panicked, he was calm—he’d kept every building at 80% loan-to-value, parking the difference in a high-performing Index Universal Life policy.
Even with little rental income, his earnings from the IUL policy covered all mortgage payments and left profit to spare. In other words: he was able to make money on vacant rental properties.
By contrast, neighboring landlords (who’d paid down millions in principal), couldn’t extract cash fast enough. Many lost their properties or sold at deep discounts.
His result? Zero default, continued equity growth, and readiness to snap up bargains as the market rebounded.
Action Steps: How to Secure Vacancy-Proof Returns
- Assess Your Existing Properties: Examine your loan-to-value ratios and identify where equity is “trapped.”
- Strategically Refinance: Aim for 70% to 80% LTV, refinancing properties if beneficial, especially when rates are favorable.
- Transfer Excess Equity to Liquid Accounts: Move released funds to a safe, tax-advantaged account (e.g., an IUL policy, or what I call an IUL Laser Fund).
- Monitor Arbitrage: Track the difference between your cost of borrowing and returns from your liquid account—targeting a positive spread.
- Prepare for Market Shifts: This way you can keep your funds accessible and ready to cover payments during vacancies, emergencies, or opportunities.
Counterpoint: Some may worry about complexity or fees associated with IULs or refinancing. While there are costs and a learning curve, expert guidance can help you structure this so the long-term net benefit outweighs initial effort.
The Bottom Line
Keeping your equity trapped in real estate might feel “safe,” but history shows that liquidity, leverage, and smart arbitrage separate the truly wealthy from the merely hopeful. Vacancies, market downturns, or disasters are just bumps in the road when your assets are always working for you, not locked away “on paper.” If you don’t act, you risk joining the ranks of landlords who lose everything in lean times, unable to access their own capital when needed most. If you want to make money on vacant rental properties, you need to consider alternate strategies that can help you take advantage of liquidity and arbitrage.
FAQs
- How can I make money from a vacant rental property? By keeping your equity liquid and using positive arbitrage, in market up years, you can earn returns from invested funds even when your property isn’t generating rent.
- What is equity separation in real estate investing? It’s the strategy of keeping your ownership equity in a safety net account instead of tying it up inside the property, allowing access and growth.
- Does refinancing increase my risk as a landlord? Refinancing at prudent LTVs (like 70% to 80%) can provide liquidity without excessive risk—just ensure your other financial strategies are secure and growing.
- Is mortgage interest always tax-deductible on rental properties? Generally, yes, but consult your CPA for current tax laws and compliance specifics.
- What’s the best place to keep separated equity? Many savvy investors use Indexed Universal Life (IUL) policies (also called IUL Laser Funds) for safety, tax-free growth, and easy access.
- What if interest rates rise after I refinance? If your other financial vehicles are earning higher rates than you’re paying in mortgage interest, a positive spread can still be achieved but is not guaranteed—so review your strategy regularly.
- Can I use this strategy with residential and commercial properties? Yes, equity separation and arbitrage work for both residential rentals and commercial properties.
- What happens if my property’s value declines? If your equity is outside the property, you avoid direct loss—but always adjust leverage based on market conditions.
- Isn’t paying off my mortgage the safest route? It reduces some risks but exposes you to liquidity traps and lost investment opportunity—properly structured leverage can offer greater protection.
- Where can I learn more about liquidity and arbitrage? Order your free copy of my book, The LASER Fund, at laserfund.com (just cover shipping).
Click here to watch Doug explain these concepts on his YouTube Channel today.
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