Sure, that monthly rental income that comes in from your rental properties is great for your cash flow, but smart investors realize that owning a rental property has other financial benefits as well. Building equity in your property is one way to make your money work for you.
Real estate investors who know what they are doing know how to correctly purchase a house. This means buying it at a relative markdown compared to other similar properties. For example, if every house on the block is exactly the same and is selling for $200,000 and you happen to get it for $180,000, then you have an original appreciation of 10%.
Even in a competitive buyer’s market, you can find properties that are offered at a discount. It may be through an estate sale or a foreclosure auction, or the seller may need to sell it quickly for a multitude of reasons.
Appreciation Over Time
Most real estate appreciates over time, even if it is only at the rate of inflation. The longer you own the property, the more equity you build up which equals more money in your pocket. Real estate is known as an inflation-protected investment, and in many cases it appreciates even faster. However, it is best to purchase property in an area that has a wide variety of industries so that if one industry fails, the real estate market doesn’t fail with it.
Paying Down Debt
One of the best ways to build equity is to pay down your debt. Every month that goes by, your property debt lessens and equity increases. You can choose to do a number of things with this equity. You can borrow against this and pay down other debt or purchase more real estate opportunities. Factors involved with your decision include your personal goals, your tolerance of risk, and market conditions. Among all three ways to gain equity, however, paying down debt is the safest way.