s we say in the real estate sector, “cash flow is king”. However, the most significant financial gains in the real estate sector are achieved thanks to capital and not to cash flow.Equity is generally defined as the value of the property you actually own or the amount left after subtracting balances due for loans. In other words, if one of your properties is worth $ 100,000, but you still owe $ 65,000 in mortgage, your equity on this hypothetical property would be $ 35,000. Capital must be increased to obtain significant capital gains. If you own a rental property that is currently rented, your capital is already on the rise.
The real estate world, like most other professional sectors, is full of common expressions and terms that describe popular industry practices or events. One of the most famous expressions of the real estate sector is: “You earn money when you buy”. The fastest way to increase your general capital is to take it when buying a property. Properties are rarely sold at their true value; Sometimes it is too expensive and sometimes it is sold at a discount. If you buy a property lower than its real market value, you are acquiring capital. For example, if a property is worth $ 150,000, but the price is negotiated at $ 135,000, you have just captured $ 15,000 in capital.
In other words, you can basically sell this property for $ 150,000 and make a profit of $ 15,000. It is important to keep in mind that the real value of the property and the price for which it is listed are two completely different things. The first refers to the real market value; The latter refers to what the owners consider worthwhile. If the hypothetical property just mentioned appears at $ 175,000, but after doing your research, you realize that it will not be sold for more than $ 150,000, your goal as a real estate investor should be to negotiate a price lower than the real value of $ 150,000 market, not the sale price.
As mentioned above, if you are renting one or all of your properties to tenants, you are already accumulating capital. The money you receive on rent is used to pay off the mortgage. If the monthly mortgage payment is $ 500, each time you make a payment to the lender of the funds received after you have collected the rent, the principal increases by $ 500.
The latest capital growth method discussed here requires absolutely no investor effort. This particular phenomenon is called “depreciation”. Each year, while the value of real estate continues to rise, an investor obtains capital from the perpetual increase in the general price of the building. On average, rental properties depreciate at a rate of around 3% annually. This means that if you own a $ 200,000 property that depreciates at a rate of 3%, your property increases by $ 6,000 every year.
There are many ways in which an individual can benefit from real estate investments. Equity growth is generally neglected due to more immediate obvious advantages, such as cash flow or rapid capital gains obtained through the reversal of ownership. However, despite common practice, an increase in equity provides the fastest and safest path to financial freedom.