Breaking into real estate investments you’ll notice that the words “Leverage” and “Equity” and maybe you’re wondering what that is.
Equity in Real Estate is the amount of the property that you own. You can be easily calculate it by taking the market value of a property and deducting the amount owing on mortgage. Since property Values fluctuate constantly while payments are being made, technically, equity will change over time as well.
Leverage is a term used in real estate for using borrowed money to purchase property. This is why equity is so important and why real estate is considered so attractive to investors. When you build enough equity in your property, you can leverage off of your own property. This is in order to borrow funds in order to purchase another investment property.
Let me explain.
Let’s imagine you purchased a house for $270,000 in 1999.
Real estate isn’t a short term investment but it is a steady long term one. Based on today’s market growth, that property has appreciated and could very well be worth $1,600,000 in 2022.
As the property was bought in 1999 the mortgage would be partially paid now. For examples sake, let’s estimate $170,000 (63%) paid with only $100,000 remaining.
23 years is plenty of time to build equity on your property.
You can revisit your bank or your mortgage lender and renegotiate your mortgage loan agreement now that your home has built equity. You can take this equity out from the bank and use it as down payment for a second property.
Over time that second property will have built enough equity for a third while your first house also continues to build equity and so on so forth.
Conclusion
Leverage and Equity are two terms that you must be acquainted with if you are ever interested in investing in real estate for the long run because this is how you’re going to be able to start the snowball effect and build more quickly over time.
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