I was thirty-one when I bought my first house and started building equity.
Equity is the money value of a property or of an interest in a property in excess of claims or liens against it. Meaning the value of the property minus what you still owe to the lender. Equity is extremely important because if you get in trouble or need cash for any reason you could possibly take out another loan against the house, called a secondary loan, for emergency purposes. However, if you are smart, you would only touch this equity when thinking about acquiring additional assets that you feel will go up in value above the interest rate that you have on the second loan of the house.
Even though my dad was a teacher, he used “this principle” of dipping into equity, to grow is wealth in real estate. My dad focus is time on residential property instead of commercial property. My dad believe that residential property was a safer investment because he knew that everybody always needed a place to stay. He also believed that commercial property could be affected by the downturns in the economy. So, he chose to stay away from this investment. As we all know many people have become multi-millionaires in commercial real estate. The scale of the projects are much larger which means a higher risk, however, also a higher reward.
My dad acquired nine buildings with sixty-nine units within his real estate portfolio. My dad was a great man, a hard worker and was kind enough to teach me the business. Besides location, his one rule was, to buy a property so that you never need to come out of pocket with anymore cash. My dad did not like single family homes as an investment. The reason why, was because if the tenant moved out, and it took more than a month to rent the house, you are now taking cash from your pocket to cover the lender. He believed the best way to buy real estate was either a duplex, four-plex, eight-plex or larger. For example, let us take a duplex. My dad would only purchase that property by putting enough money down to cover the 20% of the loan, the property taxes, and the insurance with only one occupancy. Meaning that only one renter would cover all the expenses for both units. It did not take two renters to cover his expenses. This formula gave my dad a better chance of never pulling additional cash out of his pocket for vacancies. That being said, I do own single family homes. If you can find a great deal in a great location, I believe it is ok to buy single family homes if your expenses are lower than the rent. In my area ifit is under $150,000 that makes since for me.
My dad’s formula can be use today, however, real estate prices are inflated which means you might need to put more money down than just the 20% to cover the PPI (Payment Protection Insurance). PPI is an insurance that a mortgage lender demands you pay in case you default on the loan. This premium is added to the life of the loan. I highly recommend putting down 20 percent. You do not want an extra premium that you will probably never use on your loan. If you cannot put the 20% down, I highly recommend calling the lender to remove the insurance once your property has 20% equity.
So. when purchasing assets, having equity at the beginning of the purchase, can be extremely important when trying to leverage your money to purchase other assets. Just make sure your cash flow can pay the bills in a down turning economy and remember to be smart that you do not overextend yourself. Do your research and good luck with your next purchase.
For more information on understanding equity and real estate you can go to www.DiverseInvesting.com or purchase The Road Map to Investing on Amazon.
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