Building Additional Equity in Property

Simply stated, the appreciation of equity in property is one of the easiest and most successful paths to wealth that is available to you. There are a number of ways to build additional equity in a property, some easier than others but all effective.

1) Higher initial down payment
2) Extra principal payments
3) Shorter mortgage term
4) Property improvements

1) Higher initial down payment

The most obvious way to build additional equity is at the first opportunity making a larger down payment at the time of purchase. This extra money is immediately "banked" in the property, making it much less tempting to spend.

2) Extra principal payments

Making extra payments of principal (or just adding money to your monthly payment designated to go to principal) has a double effect on your equity. First, every dollar you send reduces your debt by the same amount. Second, reduced debt means less interest paid, which means that each month more of your payment goes to principal and less goes to interest. NOTE: Although most loans allow it, be certain that your lender will accept extra payments of principal.

3) Shorter mortgage term

If you are currently in a long term mortgage (such as 30 years) refinance and get a shorter term. These shorter mortgage terms mean that you will be paying down your principal much quicker and therefore gaining additional equity at a much faster rate.

4) Property improvements

When you improve the quality or size of your property, you also increase its value and thus your equity. Be aware, though, that although virtually all property improvement projects will bring some return, some are much more advantageous than others. For example, remodelling kitchens or bathrooms traditionally have brought a greater return than adding leisure amenities such as pools or whirlpools. To get the maximum equity enhancement, make certain that the kind of improvements you are looking to do will raise the value appreciably.

Property Portfolio Building Step 3. Control your expenses and build up the equity as quickly as possible

When you were preparing to buy your Investment Property, you had to analyse your income and expenses to enable you to save. Now that you are a property owner, budgeting is still important. Your mortgage is probably the largest obligation you have incurred in your life to date. Your Investment Property probably represents your largest investment – as well as your source of pride and security. Now more than ever, it’s important to stick to your budget. Planning for major purchases, budgeting for unexpected expenses and adhering to a regular savings plan will help you to be a successful property investor.



Why Budget?

• Prepare for large expenses.
• Expected expenses such as insurance payments
• Unexpected expenses such as property repairs
• Identify controllable spending.
• Keep control of your financial future.
• Encourage savings.
• Help to accomplish goals.

 Some of the common sources of money problems include:

• Too little income
• Too much spending
• Drop in income
• Layoff or other temporary/permanent loss of job
• Goals not committed too.
• Illness
Setting financial goals and developing a budget that you can live with generally leads to reduced economic pressure and tension.

Financial Danger Signals

• Are you borrowing money on your credit cards to pay current bills?
• Are you charging everyday expenses or small items?
• Are you paying more than 20 percent of your take-home income for installment
purchases and credit card charges?
• Are you forced to reduce your debt payments to pay for food and housing expenses?
• Are any of this month’s bills coming in before you have paid last month’s bills?
• Are you unable to save money for anticipated annual and occasional expenses; i.e.,
insurance premiums, car repairs?
• Are you borrowing more money before existing debts are paid?
• Do your charge account balances grow each month?
If your answer is yes for any one of the above questions you should take a closer look at
your budget.

Six Steps for Successful Budgeting

1. Evaluate your income and expenses.
• Know what you are dealing with – how much money is available.
2. Set your goals.
• It is easier to stick to a budget if you have a goal.
3. Develop your spending plan.
• This will chart your direction month by month.
• In order for your plan to work – your budget must be realistic and reasonable.
4. Stick to your plan.
• Realise that there are outside enticements that can derail a good spending plan,
but you need to be willing to make necessary adjustments as they arise.
5. Identify your needs versus wants.
• Shopping wisely can keep you on track with your budget.
6. Keep a record of your spending.
• Tracking spending can keep you on target with your budget.

Remember the saying: “Rome wasn’t built in a day”? Well, your financial situation is not likely to change overnight either. It may take some time to achieve your goals but you will get there if you are willing to put in the effort.

Building Equity in Property

The financial advantage of property ownership is that if you pay down your mortgage over time you build up equity. Your equity is defined as the difference between the appraised value of your property and the amount you owe on the mortgage. Because you have financed your investment property your initial equity may be limited to the amount of the cash investment you made as a down payment. In the early years of owning your investment property your equity will depend mainly on local market values. Gradually your mortgage payments (if you are paying principal and interest) will reduce the principal balance of the mortgage. Over time as the amount of your loan balance decreases, the equity available to you will steadily increase. This should also be the case if you pay interest only on your mortgage, because historically the value of residential property has increased over time. The other way to add equity is to make extra payments to your mortgage