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Why Home Ownership is the Key to Building Wealth

Aubrielle Madia — Thu, 21 Jan 2021 09:22:26 +0000

Why Home Ownership is the Key to Building Wealth

It is an established financial principle that homeownership is the key to wealth building. In fact, most recent data certifies that home ownership, regardless of income level, is one of the biggest positive drivers of wealth creation. The Federal Home Loan Mortgage Corporation recently quoted home ownership as the cornerstone to the “American Dream,” as it provides families with a place that is their own as well as an avenue for building wealth over time. This wealth is accrued by the creation of equity, the difference between the market value of your home and the amount you owe the lender who holds the mortgage. As you continue to pay down your principal balance and your property appreciates over time, you enhance your financial stability.

Is homeownership truly a better path to wealth than renting?

Many argue that homeownership is not a viable investment, and rather a liability as it’s taking from your income instead of generating income. While others argue that renting is the route to stress-easy living, but when it comes down to it, renting does not build your wealth as you aren’t generating passive income for yourself, and your payments aren’t being invested towards a hard asset. Rather, your rental payments are being invested into your landlords’ wealth via his/her mortgage and their additional expenses (property taxes, insurance, repairs, etc.), along with a profit margin. Homeownership will always be a better path to wealth as it will contribute to your net worth.

In support of this, the latest Home Equity Insights Report from Corelogic reported four major findings that supported in the link between homeownership and wealth:

U.S Homeowners with mortgages have seen their equity increase by a total of $1 trillion since the third quarter of 2019.
The average homeowner gained approximately $17,000 in equity over last year.
The average household with a mortgage now holds at least $194,000 in home equity.
There’s been a 10.8% increase in equity over the last year.

Here’s a breakdown of the year-over-year equity gain by state:

Source: https://www.keepingcurrentmatters.com

When can you cash in on your housing wealth?

Your home equity is part of your wealth as a homeowner. There are many ways homeowners can leverage their wealth, but the two most common ways for homeowners to cash in on their housing wealth are by selling and/or refinancing.

When selling your home, the equity you’ve built up over time will be yours at the end of the sale. To paint the picture lets have an example, if you had a mortgage of $235,000, you paid off $105,000 of the mortgage and sell the house for $275,000; you would receive a gross profit of $145,000, before seller closing and other transactional costs.

When refinancing your home, you can either refinance to reduce your interest rate, cut monthly payments, or tap into your home equity. The most popular refinance is a cash-out refinance, where you can take out some of the equity you have accumulated. When refinancing, you get a new mortgage. The new mortgage pays off the balance of the old home loan, and normally you’re able to cash out 70-80% of your loan to value. But when refinancing, its required that you apply for the loan to then qualify. You’ll have to file an application for refinance, go through the underwriting process and close on the transaction.

How can these options help homeowners?

Throughout these difficult times, many households have been struggling with their housing and living expenses. Fortunately, homeowners have the upper hand here, where many who have experienced a financial hardship can qualify for mortgage forbearance and repayment plans. Additionally, homeowners who have substantial equity in their home have even more alternatives. Deputy Chief Economist at First American, Odeta Kushi, recently stated that homeowners impacted by the pandemic will not necessarily be faced with foreclosure because with equity, homeowners have the option to sell their home or tap into their equity through refinancing to help weather the storm.

What might the future bring?

Budget experts are predicting home prices will continue appreciating as we move forward. The Home Price Expectation Survey, a survey of a national panel of over one hundred economists, real estate professionals, and market strategists, reported that appreciation of home prices will continue for at least the next five years. By using their projection, the graph below shows the equity build-up a potential buyer is projected to earn when purchasing a $300,000 house this January:

Source: https://www.keepingcurrentmatters.com

For many Americans, home equity is the quickest way to build household wealth. Building home equity, however, is a long-term investment but this wealth gives homeowners more options during both good and difficult times, all while continuously contributing to their overall net worth.

Getting Started In Real Estate Investing

Dynamic Property Partners — Fri, 17 Apr 2020 11:03:02 +0000

Real estate investing is not an easy task, especially for new investors. While there are thousands of companies that structure investment deals for those who are just beginning their investment career, new investors should proceed with caution. Can this company be trusted with your income, or will they bankrupt you? Here, the following tips will guide new investors on the right way to begin their real estate investing journey.

Educate Yourself

Arguably, diligence and hard work are the keys to making money in real estate. However, you can’t be diligent if you are uneducated about the fundamentals of real estate investing. As such, the first step to transitioning into a real estate investor is to get educated about the process. There are various investment terms and calculations that investors should be familiar with, to help guide their investment decisions. When working with multiple investment companies, it is essential that you both speak the same language. You should understand basic investment terms such as capitalization rate (“cap rate”), net operating income (NOI), cost segregation, and after repair value (ARV). By being familiar with investment calculations, you can get a better picture of how each investment works for you.

In general, real estate and market trends are always changing. As such, you should continuously be furthering your knowledge by reading industry books, magazines, and publications, and seeking advice from experts or mentors.

Types of Real Estate Investors

After becoming educated about real estate investing, in general, you must decide if you want to be a passive investor or an active investor. A passive investor invests capital in properties without running the day-to-day business of owning and generating income from their investments. Specifically, passive investors hire real estate companies or individuals to both find and manage their investment properties. You can also contribute to Real Estate Investment Trusts (REITs) or mutual funds as a passive investor. On the other hand, an active investor takes on a substantial role in finding and managing his or her investment properties.

Expect a Positive Cash Flow

You should look closely at the cash flow of any property that you are considering investing in and/or the after-repair value (ARV) of a property if the intent is to sell the property in the near future. Overall, it should be crystal clear that your investment will turn a profit and NOT be an investment nightmare.

Verify the Numbers

When considering a deal, require concrete proof to avoid signing a contract until you do your due diligence and ensure positive cash flow from the investment. Some companies specialize in attracting new investors to work with them, even though the deals are bad. Unfortunately, new investors are suspectable to these types of transactions. When evaluating various real estate deals and companies, you should confirm that all your investment deals are profitable, which is usually verified by triple checking the numbers.

Ask about Value

If you are considering working with a real estate company, you should first ask yourself, how does this company create value? In other words, how does this company make me money? At Dynamic Property Partners, we create value by finding a distressed home and making improvements to maximize the property’s after repair value (ARV). We have the business systems and knowledge to purchase properties QUICKLY. We have a creative marketing system to find and buy properties before they’re even on the market. We find our own buyers allowing us to secure a good sales price and save on sales commission.

Understand the Concept of “Forced Appreciation”

New real estate investors must understand the concept of “forced appreciation.” Specifically, forced appreciation is the concept that the value of the property increases because of the investor’s actions and not by outside market influences. For example, here at Dynamic Property Partners, we purchase distressed single-family residential homes at about 30% to 50% under market value. We renovate and rebuild these homes to their highest potential. We then make a profit by reselling the properties to retail home buyers, landlords, or buy and hold investors.

Build Relationships

Real estate is about relationships. The more real estate professionals that you network with will undoubtedly increase your real estate investment opportunities. Try to remember as many names as possible, know the right people, and keep a team of experts around you, such as investors, managers, attorneys and real estate agents who may all have the inside leads on various investment opportunities.

Start Investing!

At some point, you will reach the point where you have researched and learned as much as you can about real estate investing. Even though the process may seem intimidating at first, as long as you have a good team around you, take the first step, and begin your real estate investing career.