Homeowners are much more transient today than they were 50 years ago. According to the National Association of REALTORS, people plan to move every 10 years. Therefore, most people will have owned 3 homes by the time they get to what would be the end of a typical 30-year mortgage. So, it stands to reason that homeowners are not focused solely on building equity in a single home, but several homes over time. If that's the case, does it matter how or when they build that equity?
Assume an existing homeowner has lived in a home for 10 years, it's worth $250,000, and they've saved $30,000 to upgrade to a larger, more expensive home. They'll lose 5-6% of the equity in their current home with sales costs (approx. $15,000), plus be out the $30,000 in savings, to buy a $350,000 house that'll carry a larger mortgage with a new 30-year loan. Their debt rises $100,000 with only a net 15% contribution after costs. Upgrading doesn't look good when you look at it this way.
Would it in fact be better, especially in today's market, to buy another property and rent it out? There are many parts of the country where a real estate investor can be cash-flow positive with a tenant immediately after purchase. Since that's the case, wouldn't it be better to use someone else's money to build equity? That's what happens with a cash-flow positive investment property. The tenant is effectively paying down the mortgage on that property building equity for the owner. Using the numbers above, the homeowner could buy two $100,000 properties using their savings, keep their debt the same, have a $450,000 portfolio, and be generating more equity growth overall.
If the ultimate goal is building enough equity in a home to own it free-and-clear, then it seems to me that buying investment property this way is just as good as buying a home to own. Of course, this only makes sense if you're already in a home and paying a mortgage. Then again,maybe not. My point is that now is a great time to buy and build equity using any real estate you can get your hands on. As long as the financials make sense, now is the time to buy.
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Bryan Robertson, Broker Associate | T: 650.799.9951 | Email: bryan@serenogroup.com | Website: http://www.BryanRobertsonHomes.com |CA License: 01191946 | Sereno Group - Los Altos branch | 369 S. San Antonio Road | Los Altos, CA 94022
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