Creating Wealth Through Real Estate

Equity is simply defined as the difference between your home's market value and the outstanding balance on your mortgage, and it’s one of the greatest avenues for building wealth.

Let’s use this simple math example to illustrate:

You've purchased a home for $750,000, making a 20% down payment of $150,000. This initial down payment immediately gives you $150,000 in equity.

Other Ways to Grow your Equity

A larger down payment

As mentioned above, your downpayment is instant equity so the more money you put down when you buy a home the more of your home you own outright.
One caveat worth mentioning is that it’s important to keep some cash reserves on hand just in case any financial emergencies pop up or surprise home repairs occur.
Rule of thumb is to always have around 1% of your home’s value on reserve so that you are able to address any maintenance or repairs.

Increase your property’s value

Most improvements to your home will increase the value, and honestly they don’t need to be big. A quick coat of paint and some updated hardware can go a long way!
(See The Top 5 Ways to Increase the Value of a Home).

Be mindful of your renovation choices and avoid over-improving and adding more value than the market can support. Consult with a professional Realtor or Appraiser to give you an idea of what similar homes to yours with upgrades are selling for, and be sure all work is done with proper permits!

Paying Down your Mortgage

Obviously over time your equity will increase as you pay down your mortgage. The first couple of years of payments are primarily go toward the interest so it takes a bit to get any gains, but rest assured that every payment you make is future money in your pocket.

Even the smallest adjustment to your mortgage can make a significant difference. The most budget friendly way to increase your mortgage payments is by paying 1/12 extra each month. By the end of the year you’ll have made one extra mortgage payment.
Another sneaky way that you’ll hardly notice is by rounding up your payment. For example if your mortgage costs you $936 you could round it up to $950.
Believe me, it all adds up to your benefit!
You can also do a lump sum payment, but check with your mortgage provider first to find out what’s allowed. The last thing you want is to be charged a prepayment penalty.

Market Appreciation

In my opinion, the best (and easiest) way to grow your equity is through market appreciation.
By nature, real estate is an appreciating asset. On average home values go up about 3% per year, so based on this formula that property you bought for $750,000 will be worth around $975,000 in 10 years.
Deduct the balance owing on your mortgage at that point and voila! There’s your equity.

But wait, it gets better!

Now you can leverage your equity and use it for other things like buying more real estate, paying off other debts, paying for a wedding, a vacation or medical expenses.

Real estate truly is one of the most efficient ways to build wealth.

In essence, you never fully own a home; you own a mortgage with the home as collateral. The key is to properly maintain your home over time to ensure you always get the highest value for it. Keep rolling it over and creating more and more wealth for yourself.