It’s no secret that property ownership has the ability to build wealth. Your home is likely going to be one of the largest purchases of your lifetime and should also become one of your biggest assets. I’m going to level with you. Not everyone who owns property becomes a millionaire but property ownership affords you the ability to seriously increase your net worth. How? By building your equity!
What is Equity?
Equity can be defined as the market value of your home minus anything you owe on it, including things like your mortgage, line of credit, liens etc. If your home is worth $500,000 and you have a mortgage with a balance of $250,000, your equity is $250,000. Equity is fluid. It has the ability to rise and fall based on the market and how fast (or slow) you are paying off the liens against your home.
Let’s explore some ways to build equity in your home and maximize your property’s value in your portfolio:
- Pay down your mortgage (and any other liens against your home)
This one is a no brainer. The more you owe against your home, the less equity you have. One of the fastest ways to build equity is to pay down your mortgage and any other line of credit you have against your home. In addition to eating into your equity, these loans are all charging you interest. I tell my clients to make the equivalent of at least one additional mortgage payment toward your principal balance every year. It will shave years off the life of your loan, decreasing the principal balance faster and saving you thousands in interest.
- Make thoughtful home improvements to maximize value
You are going to lose out on market value if your home isn’t updated or if it has a lot of deferred maintenance. However, not all home improvement projects are created equal. To get the best return on your investment, keep it simple. According to HGTV, minor bathroom remodels will get you a 102% return on your investment while minor kitchen remodels and improved landscaping will get you 100% ROI. Adding a pool/hot tub or major kitchen/bathroom renovations are great but you are not likely to recoup the majority of the money you invested in these projects. If you do these projects, do them for your own personal enjoyment. In terms of building equity and increasing market value, you’d be better off replacing the roof.
- Time the market
Having a high market value for your home is key when you are building equity so knowing your local real estate market is impetrative. If you are trying to maximize your equity, you never want to sell in a down market. I always suggest that sellers work with a trusted real estate agent to analyze market trends and time the sale of your home correctly. A good real estate agent will be able to give you market reports, run comparable sales and advise you on when to list to maximize the value of your home.