Offered by: Scott and Lora Nordby, Berkshire Hathaway HomeServices Colorado Real Estate
As a homeowner, you may consider your property to be an investment. You’re putting money into it that you hope to get back when you sell. But there are other ways to invest in real estate that will give you a nice profit. It’s just a matter of finding the best way to do it that is comfortable for you and your budget.
Start with a starter home. First-time and lower income homebuyers have great opportunities to build wealth through buying a home and living in it long enough to build equity. There are many government supports that will help you gain wealth more easily, such as lower down payment requirements on mortgage loans, lower interest rates, and lower property taxes.
Build equity. Equity is the percentage of the home that you own VS the amount the bank owns. There are four ways to build equity:
- Down payment. You gain instant equity when you put a down payment. If you put 20 percent down, your equity ownership is 20 percent. The larger your down payment, the less you’ll pay for your loan in terms of interest rates.
- Purchase price. You can gain instant equity by buying your home below the market. Homes don’t typically sell below market unless there is some sort of problem, such as poor condition, lack of updates, short sale or foreclosure. You’ll have to invest in updates and repairs to bring your home up to neighborhood standards, so make sure the cost of the home plus improvements keeps your home competitive among similar homes.
- Paying down principal. As you pay your mortgage, little goes toward reducing the principal while a lot goes to paying interest. e longer the term of your loan, the less quickly you’ll build equity. But as your salary increases and housing costs rise, your mortgage will appear less formidable. If you can, put extra money toward paying down your principal.
- Time. Historically, home values beat inflation by one or two percentage points, which means the market will go up in price, giving your home more equity without your doing anything further. Your goal should be to build enough equity in five or so years that you can rent out your home and make a profit.
Buy, hold, and lease. Real estate seldom goes down in value, and if it does, it soon recovers, as proven by the Great Recession. Your goal should be to pay off your mortgage so that you own the home outright. If you want to buy another home, the debt on the home you already own won’t count against you as much as you may think – especially if you already have the home leased. To see if you qualify to buy a second home, the lender will see if your proposed rent is enough to cover weeks or months that the property may go unrented. There may be lag-time between renters and you also need a little time to clean up, repaint, make repairs etc. before your renter moves in. You can also pull money out of your first home with an equity line of credit to put down on another property.
The ideal time to lease your home is if you can rent it for more than you’re paying in mortgage, taxes, and insurance. You also need some savings that will cover the mortgage while the home isn’t rented, as to pay for repairs that may come up.
To help you decide if leasing is a good idea, talk with your Berkshire Hathaway HomesServices Colorado Real Estate professional. They will have comparables for other rentals in the area, so you’ll know how good the market is for homes like yours and how much you can expect to get for your home.
Whether you’re looking for your first home, forever home, or your next rental investment, you’re ready to meet one of our Forever AgentsSM to help find the perfect home for you. Contact us now at 303-905-8850 or visit BHHScore.com.