As they say in the real estate industry, “Cash flow is king.” However, the largest financial gain in real estate is realized through equity, not cash flow. Equity is usually defined as the value of the real estate you actually own or the amount remaining after deducting the loan balances. In other words, if one of your properties is worth $100,000 but you still owe $65,000 on a mortgage, your equity in that hypothetical property is $35,000. The growth of your equity is necessary to achieve significant growth in equity. If you own a rental property that is currently being rented out, you will increase all of your equity.
The world of real estate, like most other fields, is full of common phrases and terms that describe popular practices or industry events. One of the most popular proverbs in the real estate industry is “you make money when you buy”. The quickest way to increase your wealth is to shield it when you buy a property. Real estate rarely sells at its real value, sometimes it is too expensive and sometimes it is sold at a discount. If you buy a property for less than its real market value, you get equity. For example, if the property is worth $150,000, but you have accepted a price of up to $135,000, then you have simply earned $15,000 in equity.
In other words, you can essentially sell the property for $150,000 and make a profit of $15,000. It is important to note that the value of the property and the price at which it is offered for sale are two completely different things. The first is the actual market value, and the second is what the owners of the property consider valuable. If the hypothetical property we have just discussed is listed at $175,000, but you realize after doing your research that it will not sell for $150,000, then your goal as an investor in the property should be to agree to a price lower than the actual market value of $150,000, not the price at which it will sell.
As mentioned above, if you are currently renting out some or all of your properties to tenants, you are already building up capital. The money from the rent will be used to pay the mortgage. If your monthly mortgage payment is $500, your equity increases by $500 for each payment you make to the lender with the money you receive after paying the rent.
The last option discussed here is to increase your equity at no cost to the investor. This particular phenomenon is called “depreciation”. As the value of the property continues to rise, the investor receives capital each year from an unlimited increase in the total value of the property. Rental properties are depreciated at an average rate of around 3% per year. This means that if you own a $200,000 property that is depreciated by 3%, your equity will increase by $6,000 each year.
There are many ways a person can benefit from a property investment. Capital growth is often overlooked because it brings clear benefits such as cash flow or rapid capital growth through asset conversion. However, despite common practice, capital growth offers the fastest and safest way to achieve financial freedom.