Whenever I read the quote "Don't Wait to Buy Real Estate, Buy Real Estate and Wait.." I always thought it just meant that your home appreciates over time. But what else does that quote mean? What other benefits do you unlock from owning real estate overtime?
Why I love buy and hold real estate is because it gives you OPTIONS and I try to emphasize that whenever I can. If you do not own any assets and you just have cash in the bank then your option is to purchase something (if you have a ton of cash then you have options).. But if you are like most of us we don't have millions in the bank. Real estate unlocks cash for us.
Through OWNING real estate you may forget that your home is appreciating (hopefully barring some event). You may wake up one day and check what prices are going for on your street to find your home has appreciated 70,000 since you bought it (this can happen in a few years depending on where you live). That 70k in equity is now yours to play with. You could do a cash out refinance on your home and pull that cash out up to 80% LTV (Loan to Value).
Joe bought his property at 200k.
It's now worth 270k.
He owes 189k
270k x 80% = 216,000 - 189k = 27,000 that Joe can pull out. Joe's new loan would be higher than the original, change his payment, and mortgage closing costs would be charged.
This money can be used to buy a new investment property which will create more OPTIONS for Joe.
Or a HELOC can be used ... Home Equity Line of Credit. A Heloc lets you use that 27k as a line of credit to borrow against. You can use all 27k and will pay the back bank at generally higher interest rate than a mortgage. This is something that can be used over and over again as long as you keep paying it back.
Lowering Your payment
If you have owned real estate since the height of the high interest rates in the 80's than this applies. Interest rates have generally been falling year over year for the last 30 years. There have been some spikes in some years but the trend has been downward and it benefits people who own real estate! (and can hurt traditional investors). When interest rates lower money is cheaper to borrow. Traditional IRA and Mutual fund investors get less of a return on their investment.
Real estate investors can refinance their loan and get a lower payment on their property.
2 things I have done or am doing:
One property we refinanced from a 4.75 to a 3.75 heightened the payment around 150 a month but knocked 10 years off of the mortgage. The overall savings were around 170k over the 30 years of the mortgage.
Another property I just got approved for a new loan that will allow me to take advantage of the low interest rates. I had a 3.75% and will be dropping to a 2.625% and upping the mortgage from a 27 year back to 30 year. This will drop my payment $198 / mo upping my cashflow $198/mo or $2376/yr. Upping my money I can reinvest in that property!!!
Getting Rid of PMI
PMI is Private Mortgage Insurance that you pay when you put down less than a 20% down payment on a property. We generally do 5% down payments and add value (fix up) the property which usually brings our equity in the property up to at least 20%. We also live in Philadelphia which has been appreciating really well adding the equity we have in the home.
So the one homes we pay $63/mo in PMI on the loan since we didn't have much equity in the property when we refinanced. Since then we have redone the kitchen and bathroom and comps in the area have gone up considerably. Now I can have the property reappraised which will cost $475. The property will most likely (knock on wood) appraise to show we have 20% equity in the property now and we can drop the $63/mo or $756/yr PMI. Over the 18 years left on the loan that's $13,608 in savings!
Equity and Appreciation
Most of the benefits I mentioned before were side affects of improving the property condition and APPRECIATION! I do not buy for appreciation but it is a great side effect of owning real estate.
When I bought a few years back I was told the market was high, but I didn't care because I plan on holding these properties forever. To buy the same properties today I would be paying around 60k more. The Philadelphia market over the past few years along with most of the nation has enjoyed a generous appreciation. This appreciation increases the value of your property and thus how much equity you have in the property.
If you bought a property for:
200k and put down 5% your loan is = 190k
Your market value was 200k when you bought it and your loan is for 190,000.
If that property is worth 270,000 today then you have:
270,000 - 190,000 = 80k in equity.
The benefits of buy and hold real estate keep on giving the longer you own it. We have only owned ours for a short period of time however I keep finding new benefits every year. Of course I find new maintenance problems every year too but to me the pros outweigh the cons. Everyones goals are different but for me buy and hold real estate provides the best returns!
Matt Tallent is a Realtor with The How Group. His passions include rental property investing and helping others achieve their real estate goals.
Real Estate Investing
Buy and Hold
720 Fayette St, Conshohocken, PA 19428