In August, we announced that we updated our financial projections on our turnkey rental assets to include equity buildup.  This helped many of our investors discover a Hidden Income Stream.

 

This is a wealth-building factor of real estate investing that most people ignore … or at least discount the importance of.

 

We talk a lot about 1) rental cash flow and 2) appreciation. We even mention 3) the tax advantages of real estate investing pretty frequently. But equity buildup is the unsung hero of real estate wealth creation. 

 

When all four income streams are combined, the compounding effect turns real estate investing — or at least, leveraged real estate investing — into one of the most effective wealth-building mechanisms ever known to humankind.

What Is Equity Buildup?

As we refer to it here, equity buildup is a function of paying down the principal balance of your mortgage. 

 

To recap, your equity in a piece of real estate — whether your primary residence or an investment property — is the difference between how much it’s worth and how much you owe. Subtract the remaining loan balance from the market value, and that’s your equity.

 

Equity = Market Value – Remaining Loan Balance

 

Equity is the asset value of the real estate on your personal balance sheet. It adds to your net worth. You can’t spend it at a grocery store, but it is worth money. If you were to sell the property, in theory the equity is how much cash you would pocket (after closing costs). You can also use your equity as collateral for a refinance loan.

 

So how do you gain more equity? Well, appreciation adds to your equity by adding to the value of the property.

 

But you can also build equity on the other side of the equation — the loan balance.

 

In an amortizing mortgage (i.e. not “interest-only”) every monthly payment includes interest, but it also includes some portion of paydown of the loan principal balance.

 

Early in the loan, those monthly payments are mostly interest and very little principal paydown.

 

But as the years pass, those payments become less and less interest, more and more principal paydown. Over time, your buildup of equity starts to accelerate from your mortgage payment alone. Combine that with appreciation, and your net worth is effectively turbocharged.

Why Most People Ignore Equity Buildup … But They Shouldn’t

Why do people overlook this? Because it’s easy to forget. They can watch the cash flow land in their bank account. They can watch the Zestimate spike. They can pump their fists with glee when their CPA returns a tax bill of zero dollars.

 

But the mortgage payment? It stays the same. It’s downright boring. The same payment, month after month after month. 

 

The magic is built into the amortization math. With every payment, the math pushes the interest expense lower and lower — and the principal repayment higher and higher — without ever changing the payment amount.

 

Years later, when the property owner decides to sell the house or refinance the loan, they find the principal balance greatly diminished. They thought they had increased their net worth by the amount of appreciation … but because they have been diligently paying down that loan, they actually increased it much more. 

 

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Of course, equity buildup through principal paydown only works if you leverage your investment with a mortgage loan — which, if at all possible, we recommend that you do. Every one of our turnkey rental assets is structured to produce positive cash flow on day one — even with maximum leverage. Check out what properties we currently have in our inventory, — renovated, rented, and ready for acquisition by an investor like you!

 

Never taken out an investment mortgage before? Don’t panic. We partner with lenders who finance investors from all walks of life. Ask us for referrals — we’re here to help.