As we say in the real estate sector, “cash flow is king”. However, the biggest financial gains in real estate come from equity rather than cash flow. Equity is generally defined as the value of the property you actually own, or the amount remaining after subtracting outstanding loan balances. In other words, if one of your properties is worth $ 100,000, but you still owe $ 65,000 in mortgage, your equity in this hypothetical property would be $ 35,000. Increasing your equity is necessary to realize significant capital gains. If you own a rental property that is currently rented, you are already increasing your equity.
The real estate world, like most other professional fields, is filled with common expressions and terms that describe popular industry practices or events. One of the best known sayings in real estate is, “You make money by buying.” The quickest method to increase your overall capital is to capture it when buying a property. Real estate is rarely sold at its true value; it is sometimes too expensive and sometimes sold at a discount. If you buy a property for less than its actual market value, you are capturing equity. For example, if a property is worth $ 150,000, but you negotiate the price at $ 135,000, you have just captured $ 15,000 in equity.
In other words, you can basically sell this property for $ 150,000 and make a profit of $ 15,000. It is important to note that the actual value of the property and the price for which it is listed are two completely different things. The first refers to the actual market value; the latter refers to what the owners think it is worth. If the hypothetical property we just discussed is listed at $ 175,000, but after doing your research, you realize that it will not sell for more than $ 150,000, your goal as a real estate investor should be to negotiate a price below the actual market value of $ 150,000, not the asking price.
As mentioned earlier, if you are currently renting one or all of your properties to tenants, you are already building equity. The money you receive in rent is used to pay off the mortgage. If your monthly mortgage payment is $ 500, each time you make a payment to the lender from the funds received after you collect the rent, your equity increases by $ 500.
The last method of equity growth discussed here requires absolutely no effort on the part of the investor. This particular phenomenon is called “depreciation”. Each year, as the value of real estate continues to increase, an investor draws equity from the perpetual increase in the overall price of the building. On average, rental properties depreciate at a rate of around 3% each year. This means that if you own a property worth $ 200,000 that is depreciated at the rate of 2%, your equity increases by $ 6,000 each year.
There are many ways in which an individual can benefit from real estate investing. Stock growth is usually ignored due to immediately obvious benefits such as cash flow or quick capital gains made by reversing real estate. However, despite the common practice, increasing property rights provides the fastest and safest path to financial freedom.