As you pay down the mortgage on your home, and as your home appreciates in value you are gradually increasing the equity in your home. Equity is simply the value of the home, minus the liabilities (mortgage) registered against it.
But savvy investors don’t depend simply on those two factors. They accelerate the equity by ensuring they make a purchase that already has some equity in it.
“How do you do that?” You may wonder.
Well, it requires being aware, street smart, hard-nosed in negotiation and patient. That is, of course, tough in a market that’s so hot that most properties get multiple offers within a week of being listed. But just because non-savvy investors get taken in by bidding wars doesn’t mean you need to.
There are always Sellers whose sale is urgent. They don’t need top dollar; they need a clean, quick deal. They will be happy to take your offer, even if they leave a few dollars on the table. Those dollars are pure equity for you, ultimately ending up in your pocket. And those dollars add to your financial bottom-line over the long-run.
Let’s look at an example. Let’s say you get a home valued at $350,000 for $340,000. That’s $10,000 instant equity. And it will only grow. Let’s say you have 10% available for a down payment, and get a 90% mortgage on the property with a 25-year amortization. Let’s say the property appreciates 4% per year.
After five years, that property will be worth $425,828.52. If you had bought it for $350,000, your mortgage would have been written down to $278,755, and your equity would now be $147,073.52. But, since you bought it for $340,000, your mortgage is now only $270,790 and your total equity is $155,038.52, a whopping $7965 more. Plus, you’ve saved about $3120 in monthly mortgage payments (depending on interest rates), for a total of $11,085. Add to that the $1000 less that you coughed up for your 10% down payment ($34,000 vs. $35,000) and the $200 you saved in Property Transfer Tax, and you’re $12,285 ahead in only five years. And, if you’re really savvy and have invested that original $1200 saving so that it has also grown at 4% annually, your total equity is $12,545.