For most of us, buying a home will be one of the most significant investments ever made. Why, because we are using a large amount of money to purchase a home. Why not use our investment to make money while we are living in the home. Most homes appreciate over time building equity. “Equity is the difference between the market value of your home and the amount you owe the lender who holds the mortgage.” (Weintraub)
Let’s use an example. The Sales Price of the home was $350,000 bought in 2015. The value of the home today is worth $434,000 appreciating about 6% per year. The home essentially gained 84,000 dollars of equity or appreciation just sitting idle.
What happens if you decide to sell the house? You can use the equity to move up into a larger home or reinvest your money to purchase more homes.
Using equity wisely is not an easy task because one has to be smart with how to reinvest that equity to build one’s wealth.
I started with my first starter home, and it was a diamond in the rough. The house was bank-owned called an REO (Real Estate Owned) in 1999. The sale price of the home was $222,500. At the time the home was a bargain because of the area. The house was in a prime location. It was a four-bedroom and two-bathroom home with 1800 square feet of living space. The lot size was average in the area of 7,500, with a detached garage. The house needed repairs. The bathrooms were remodeled in the 1970s. The kitchen was outdated with linoleum flooring, particle board kitchen cabinets. Do not get me wrong the house was habitable but not appealing to most buyers. Hence, it was a good buy. Make no mistake buying a home is the largest investment one will ever make but use common sense and a long-term strategy to make money. It took a few years to remodel my home. Little by little my projects came to life because I wanted to continue saving money and think about how I could reinvest the equity to buy another home.
The key to investing and buying real estate is not buying the perfect home. I usually buy the diamond in the rough, which means the ugly home in the neighborhood that has potential. I look for the opportunity and the layout of the home. If the floor plan, structure, and foundation are reliable, then I look at what are the turnkey homes selling for in the area. Most buyers want to live in a nice neighborhood that has excellent schools, low crime rates, walkable with amenities in the area, or relatively close. If you are looking at a home that is priced the lowest ask yourself why? What is wrong with the home? Can you overcome its challenges? As an investor looking to make money understand no home is perfect and expect the unexpected when investing in a home.
Most homes have issues that are not visible to the naked eye. It is a wise choice to get a home inspection once the offer is accepted as soon as possible. “The home inspector describes the condition of the home at the time of the inspection but does not guarantee future condition, efficiency, or life expectancy of systems or components.” (“Home Inspection”) A home inspector determines the condition of the home while an appraiser determines the value. They serve different functions.
The million-dollar question is what are you going to do with the money if you sell the property? I say it depends on you. I look at every home as an investment to make money and use for my retirement.
I still own my first home. The home gained a lot of equity, and I was able to pay down the debt of the home. I now rent out my home and have a line of credit that I use for investment purposes. From this home, I was able to buy units and my move-up home. Owning real estate is a wise investment for most of us. It is a tangible investment you can see, touch, and feel. The key is to buy low, a fixer that has potential, and buy with a long-term strategy that makes sense for you.
Buying a home will be one of the most significant investments ever made. If you are not afraid of work, construction projects, and getting your hands dirty then real estate investments might be for you.