35% of American adults have less than $1000 saved. 35% have no savings at all. But what if you could use the amount you pay for the roof over your head to steadily build your wealth?
Building equity in a home is often easier than you may think. Especially when you consider how much you’d spend on rent instead. When you’re paying off someone else’s mortgage, that’s money down the drain. When you’re paying off your own, that’s money in your pocket later on.
Keep reading to learn everything you need to know about this wealth-building strategy.
Borrowing Money to Make Money
A traditional mortgage is made up of both the principal amount you owe and the interest that the bank charges. In a way, this mortgage is forcing you to save, since you need to pay it every month unless you want to risk ruining your credit and losing your home.
Since you’re paying off the principal, this can be considered savings. After all, if you ever sell your home (providing it’s in a good market) you’ll get this money back.
Not to mention, real estate will usually increase in value over time. Capital growth is almost a given, simply because of the laws of supply and demand. As populations increase and all those people need somewhere to live, the value of property continues to increase as well. This allows you to leverage your wealth later on when you’ve built equity in your home.
Positive and Negative Gearing
If you decide to purchase an investment property, you’ll not only benefit from capital growth, but you’ll also have rental yields as well. Usually, the goal is for your tenants to cover most (if not all) of the costs associated with the property. However, depending on the rental market, you may find that rental yields actually provide more income above and beyond this.
This is known as positive gearing. And while it will have tax implications, you can often save a lot of money or use it toward another property.
The other option is to use negative gearing. This works in the opposite way- your expenses are greater than the income you receive from your property, but losses can be claimed against your taxable income. This means that you’ll pay less tax overall. It’s best to talk to a financial planner or tax accountant to find out which option is best for you.
Purchasing a Home for Equity
Here are the steps you should take if you’re planning to use this strategy:
Consider Your Downpayment
One of the biggest considerations for most people hoping to buy property is the downpayment they’d need. Saving this downpayment may seem overwhelming since most financial gurus advise having a 20% downpayment before you buy.
However, it is possible to purchase a home with a downpayment as small as 3.5% (or even 0% in some cases). You may need to pay for mortgage insurance, but this is a good way to get onto the property ladder.
Some people even borrow money to make their investment in the first place. That’s because it may take you years to save for a downpayment, but if you borrow this money, you could be paying off your mortgage over these years.
Obviously, the more you can save yourself, the better financial position you’ll be in. This may involve some short-term sacrifices, but it will be well worth it for long-term rewards.
The lender you choose will greatly impact the terms of your mortgage. You’ll often hear people say “It’s a good idea to shop around so you can compare all your offers- the lower the interest rate you can get, the less you’ll pay in the long run.” But if you choose the right lender, they can do the shopping for you. Here at the Lindley Team at Mortgage Express, we are what is considered a correspondent lender. In a nutshell, we have access to loans across multiple channels and with different investors, so we can do the shopping for you and present you with the best option based on your unique financial circumstances and goals.
This is also why it’s also important that you begin getting your credit score in tip-top shape well before you want to buy. Have your lender pull credit and give you recommendations if it needs work. In general, the better your credit rating is, the lower the interest rates you’ll have access to.
You should also take your time when considering which property to buy. If you’re planning to purchase an investment property, this means taking any emotion out of the decision and only looking at the financial potential. Even for a home, you’re planning to live in, consider whether you’ll be able to sell it for a profit down the line.
There’s nothing worse than finding the perfect property, only to miss out because another buyer was ready to go. You can get prequalified by lenders so you’re ready to make an offer as soon as you find the right house.
When you get preapproved, a lender will examine your finances and give you a letter which confirms how much you’re allowed to borrow. This is exactly what sellers want to see.
Know Your Budget
While a mortgage can help you build wealth in the long term, one of the biggest mistakes many people make is borrowing more than they can afford. If you lose your job, make sure you have money saved to make your mortgage payments until you can replace that income (6 months worth of living expenses saved is a good rule of thumb). If you’re purchasing an investment property, you’ll also need a fund for tenant damage, tenants who don’t pay, rental loss during vacancies, any repairs, etc.
It always pays to be conservative. It’s a good idea to not even look at homes that are outside of your budget- otherwise, you’re taking a chance that you could end up falling in love with a property you can’t afford.
Do Your Homework
Once you’ve found a great property, don’t risk getting burned later. Make sure you get a professional inspection so you’re well aware of the full condition of the property. Not all inspections will test for pests and mold, so make sure this is part of your inspection.
Ensure your inspector can access all parts of the house, electricity is turned on, all appliances are in working order and try to attend the inspection. Ask questions, and check the report so you can negotiate if the house needs work.
Ready to Begin Building Equity in a Home?
If you’re hoping to retire comfortably and you’re tired of paying off other people’s mortgages, building equity in a home could be the answer for you.
By following the above tips, you’ll be in a great place to begin investing in real estate. To learn more about your options, get in touch today.