As they say in the real estate industry, “Cash flow is king. “However, the greatest financial gains are made in real estate equity, not cash flow. Equity is generally defined as the value of the property that you actually own, or the amount remaining after deduction of current loan balances. In other words, if one of your property is worth $ 100,000, but you still owe $ 65,000 on your mortgage, your participation in this hypothetical property would be $ 35,000. Growing your equity is required to realize capital gains. If you own a rental property that is currently rented, you’re already over your equity.
The world of real estate, like most other professional fields, is filled with common phrases and terms that describe popular practices or events within the industry. One of the most famous words in real estate is, “You make money when you buy. “The fastest way to grow your global capital is captured when buying a property. Real estate is often sold at its real value; sometimes it is too expensive, and sometimes sold at reduced prices. If you buy a property for an amount that is less than its actual market value, so you will capture equity. For example, if a property is worth $ 150,000, but you negotiate the price down to $ 135,000, then you just captured $ 15,000 in equity.
In other words, you can basically sell this property for $ 150,000 and make a profit $ 15,000. It is important to note that what the property is actually worth and the price that is quoted are two totally different things. The first refers to the actual market value; it refers to what the owners think it’s worth. If the hypothetical property that we just discussed is listed for $ 175,000, but after doing research as you realize that it sells more than $ 150,000, then your goal as a real estate investor should be to negotiate a lower price the actual market value of $ 150,000, not the asking price.
As mentioned earlier, if you currently rent one or all of your properties to tenants, then you are already build equity. The money you receive in rent goes towards the repayment of the mortgage. If your monthly mortgage payment is $ 500, and with each payment you make to the lender, the funds received after collecting rent, your capital increases by $ 500.
The last method to develop equity discussed here requires absolutely no effort on the part of the investor. This phenomenon is known as “amortization”. Each year, due to the fact that the value of properties continues to increase, an investor earns equity of perpetual increase in the overall price of the property. On average, rental properties depreciate at a rate of about 3% per year. This means that if you have a value of $ 200 000, which of the experience of sinking at a rate of 3%, then your capital increases by $ 6,000 each year.
There are several ways by which a person can take advantage of real estate investment. equity is increasingly often overlooked because of the immediately obvious benefits such as cash or capital gains quickly flipping properties. However, despite common practice, an equity growth is the fastest and surest path to financial freedom.