Real Estate has long been the great equalizer in helping to build wealth. In addition to owning your own home, investing in other properties is one of the best ways to build generational wealth. On average, individuals who bought a single-family home 10 years ago can expect to have an additional $225,000 in home wealth.
To understand how this happens, it is important to understand 3 basic principles of homeownership. These basic principles can then be applied to other real estate investments as you build equity in your investments, hedge against inflation with a fixed interest rate on a hard asset, and benefit from the general appreciation that occurs in the real estate market.
These principles make building wealth not only easier to understand, but more obtainable.
1. Build Equity
Building equity in your home can happen in multiple ways. The first way to build equity occurs during the initial purchase of your home: the down payment. The larger the down payment, the higher the equity you have in your home. The money that you put down on your home is the equity, or money you would get if you sold your home. It is unlikely that your home will decrease a significant amount in value, so this equity essentially acts like a nontaxable savings account that can appreciate with the market.
A home typically increases in value over time, and you continue to make monthly payments on your mortgage. These monthly payments continue to add equity to your home.
Other ways that you can increase the amount at which you build equity in your home is to make updates to your home. These updates add value to your home and can also increase the price you can sell your home for if you were to put it on the market. It is important to note, however, that some homeowners can make unreasonable updates, where the cost of the update is not realized to the full extent in the increased value of the home.
Another way that you can help to expedite the growth of equity in your home is by paying extra on your mortgage every month. By paying more than the required monthly payment, you are directly paying down the principle, which can decrease the interest you pay overtime when your home loan reaches maturity (meaning the final loan payment).
The equity you put into your home over time acts almost as a savings account. If you were to instead rent a home for the same price as your monthly mortgage, that money would never be yours again. In contrast, the money you pay on your mortgage is being put into a hard asset. This hard asset can then be sold, and the money you spent retaining and building that asset is returned to you. Oftentimes, the hard asset/home increases in value, and helps to counteract the negative impact inflation can have on your personal finances.
2. Protect From Inflation
To understand how homeownership protects against inflation, it is important to understand what inflation is. Inflation is the rate at which the price of goods, services, and cost of living increase over time. When there is high inflation, it means that the value of the dollar decreases, and your money is unable to purchase as much as it used to. Having hard assets during a time of inflation is important because those hard assets typically increase in value as well, helping to ensure that the money you put into the asset also increases.
When inflation increases, and you own a home, you are better protected, not only by the money you have put into the home, but also the monthly payment. If you were to rent a home, rental prices would increase, but when you have a set mortgage payment, it does not increase. This helps to better protect your wealth.
3. Appreciation
Home appreciation is the increase in value for a home over time. This is a natural result of inflation. For the savvy investor, some homes can appreciate at a higher rate, depending on when and where you purchased the home.
Over the course of the pandemic, there was a large appreciation in home values that occurred due to a variety of factors. As inflation continues to increase, and the FED attempts to counteract this increase with an increase in interest rates, it is likely that some of this appreciation in the housing market will slow and perhaps reverse. This depreciation in home values is most likely to occur in housing markets that grew at a quick rate during the years of the pandemic.
In fact, Goldman Sachs predicts that there may be a potential housing crash on the horizon. In some places, this crash is estimated to see home values drop by as much as 25%. This is expected to happen in the four cities that saw the biggest growth during the pandemic.
For individuals who want to maximize their home’s appreciation, it is important to list their home as soon as possible, before the market cools off too much. Although this can be overwhelming, there are services we offer at Light Street Residential that make the process a breeze. We buy your home for cash and quickly. If you choose this route, you will help to ensure that your home is an investment, and the wealth that it has created due to equity and appreciation can be fully realized.
Conclusion
Homeownership is a key piece in realizing greater wealth. In fact, median income earning individuals that owned their homes had almost double the wealth than median income earning individuals who rented. Although homeownership may have more responsibilities and obligations, you will be more financially stable in the long run, due to building equity, hedging against inflation, and appreciating home values.
Personal homeownership is only the beginning of real estate investing. If you apply these same three principles to other real estate investments, you can begin to maximize your earnings and build greater wealth.
Take advantage of the equity you have in your home and sell it quickly and easily. Reach out to us at Light Street Residential today to get a quote on a cash offer for your home!