By

Sue Martin
Coldwell Banker Myers-Gallagher
361-758-7534

Becoming wealthy is the second American dream; owning a home being the first and actually they go hand in hand with each other.
Owning a home is a tried and true approach to building that elusive security for later life called “wealth”. However, it’s the equity you build in a home – not the house itself – that drives your prosperity. Equity is determined by the value of your home, less the balance of your mortgage. If your home is worth $100,000 and your mortgage is $85,000, you have $15,000 of equity.
Building wealth doesn't necessarily require a large inheritance or an unexpected windfall. What it takes is planning, perseverance and good investing habits.
Real estate has that magic ingredient that gives us the ability to grow our wealth: leverage. For example: If you buy a $300K home with 10% downpayment, you have established a 90% loan to value ratio. You are only investing $30K (plus closing costs) to purchase that asset. Historically it’s quite common for real estate to double in value every 10 to 15 years. For the sake of our example, I will assume a 5% annual rate of appreciation. At the end of the first year, your $300K house is now worth $315K. Hmm... not bad you say? I say fantastic! You only invested $30K of your own money; therefore you have effectively realized a 50% gain of the dollars you spent within the year. You'd be very lucky these days to make a 5% return if you had parked your money in a CD. This is ten times better!

But, this is just the beginning. Your property is now worth $315K, so let's roll over to year 2 with another 5% appreciation in value: your asset is now worth $330,750; year 3 $347,287; year 4 $364,651; year 5 $382,884; year 6 $402,028; year 7 $422,130; year 8 $443,236. But wait a minute you say, it's increasing in value by more than the original $15K annually, which we had after the first year? Indeed it is because the value of your property is compounding! The increase in value, given the same 5% rate of appreciation, will become greater and greater as the years roll on and this works whether you purchase a home for $60K or $3 million!

Now you start to see the power in owning real estate. To be fair, property values generally do not progress at this rate in a single line fashion. Several years may go by with very little happening, and then suddenly we may experience several years of higher percentage increases annually. The real estate market is cyclical, but again, it is not unreasonable to expect that a well chosen property will double in value every ten to fifteen year period.

Your first purchase is the hardest because you will have to find some money for down payment and closing costs (income tax refunds help dramatically). But once you are "in the game" and own your own little piece of appreciating real estate, you can use the equity from your first house to make a new purchase without having to save up for the down payment. You simply borrow against the equity of your original property to fund the down payment required to purchase your new property(s). (Beware, of securing the equity money from your home and blowing it on a new car or a great vacation. That road leads the opposite direction…to the poor house!)

You have created a snowball effect, and over time your wealth will continue to multiply given stable economic conditions and well selected property in the right location.
Ready to get started on the road to wealth? Here’s the basic idea of how to do just that:
Prepare Yourself for Homeownership Financially. Almost anyone can afford to own a home with proper preparation. Develop a savings plan to build up money for a down payment, for moving expenses, and for post-purchase emergency expenditures such as needed home repairs. Reduce your other debt. Every dollar you spend paying interest on debt is money lost. Even a 10% return on investments isn't going to amount to much if you are paying 18% in interest charges! To help ensure that you can afford timely payments, maintain an emergency fund you can dip into when needed. There should be enough money in this account to pay for needed home repairs as well as emergency expenditures.

Get qualified for a home loan before you look for a house. That will tell you whether you can afford to purchase a home and, at what price. Make certain you contact at least three lenders, including your primary financial institution. This will help ensure that you get the least expensive loan for which you can qualify. Be especially skeptical of uninvited loan offers you receive through the mail, by telephone, or online.

Work with a Realtor. A real estate agent that works solely for you as a purchaser is a buyer’s agent and will be legally responsible for looking out for your best interest.

Purchase a Home! Your local Realtor will help you find the home you desire in your price range and will help with all of the necessary inspections, paperwork, and details that will make your purchase go as smoothly as possible.

Spend less than you earn. Living below your means is one sure way to have the money you need to save and invest. Get into the habit paying yourself first through a systematic plan.

For more information about purchasing a home, I invite you to talk to a local Realtor at Coldwell Banker Myers-Gallagher. Call 361-758-7534 or email info@texascoastproperty.com.