Growing Real Estate Equity
There are two goals for investing in real estate: 1) Growing your equity and therefore your wealth, and 2) creating a relatively steady and passive income stream to help with your bills.
Quick: what is equity? Equity is cash in the form of real estate. If you put 25% cash down on a $1M property then you have $250,000 in equity on the million-dollar property. Then, that amount changes with the value of your property and as you pay off your loan.
When you purchase income property, you may be fortunate enough to have the option to obtain financing or pay all cash. If your rental income covers your expenses, including mortgage, you love that the %$ you borrowed is turning into equity as your tenants pay off your loan over time. If you pay all cash, you enjoy a higher cash yield because you don’t have the extra expense of a mortgage.
Now, the big question: how do I grow my equity the fastest?
I can speak with some authority on this because not only have I doubled my own equity in one year by being an active real estate investor, but I have also helped my clients do the same – in one case growing my client’s equity more than 10X in under three years (this is rare).
Contrary to what some say, if you have a limited budget you have to sell to grow your equity quickly. Unless you are attracting investors or you have unlimited funds, you cannot hold onto all of your properties forever. In order to fully maximize the opportunity in a property, you have to be well capitalized. Not everyone is. And that’s why you sell.
If you bought aggressively, you probably took advantage of an uninformed seller and listing agent, or you bet on a neighborhood that is still up and coming, or both. This automatically puts you in a position to increase your equity by 1) selling with a good listing agent and/or 2) selling when the neighborhood popularizes. (Unfortunately, lenders don’t love to give you loads of cash when you refinance, so that’s not a viable option in the short term.)
Once you sell, a 1031 exchange allows you to trade up without paying taxes, as long as you follow certain protocol. Now it’s time for you to do the same thing you just did, only on a larger scale. Either your new equity will help you a) buy a more valuable building or b) buy two. Now you repeat your previous strategy, but this time in a new up-and-coming neighborhood or from a different uninformed seller.
Wash and repeat. Does it sound simple? Unfortunately it’s not. Because you really have to understand (1) rent control (2) neighborhood specifics (3) deal making and (4) 1031 exchanges, it means you have to be extremely aggressive during the sell/buy period and operate with finesse.
If you have $350,000 or more to invest and you want to actively build your equity/wealth, please get in touch.