Home Equity: Why Building Equity Isn’t as Fun (or Hard) as You Think

I know … I’ve been there too. Completely inspired by Property Brothers, Income Property, and the handful of other good-looking people on HGTV, I’ve thought to myself I could do that, wait…and I could make $120,000 with one house?! Count me IN! I’ve been around the house flipping business for a few years now and have watched some really huge checks get cut, but I’ve also seen some serious cash and time invested for one or two thousand dollars. It’s hard to curb the home equity bug, but when you don’t have $300,000 to invest on a single home, get inspired to do the next best thing: build equity into your own home! It’s been a struggle in purchasing our first home, trying to balance realistic goals and inspired frenzy. But once I did the research, I was surprised to find that building equity into your home isn’t as fun, or as hard, as I initially thought. Be sure to check out what I found before tearing down walls and gutting the bathroom.

Long Story Short

Equity is this fuzzy kind of thing. We think we know what it means, but we might not. Equity is the difference between what the balance against your home is (such as a mortgage) and its property value. So, as a general rule, you can build equity by reducing the debt against your home or increasing the value. The bigger the number, the better!

Time

How long do you plan on staying? Home prices rise over time (assuming the market is calm and steady). It generally rises at the same rate as inflation. Today’s market would lead you to believe that it is rising somewhere around 3%. So if I bought a house today worth $180,000, in 5 years it has potential to be worth $234,00 (assuming the market stays the same). We’ll talk more about time and money next.

Money

Your initial mortgage payments are largely interest, which means you’re making sure the bank gets paid before you start actually putting money toward the cost of the house. As you continue to make payments, you inch closer and closer to paying off the actual cost of your home. If you have the cash, it’s a great idea to build equity by making extra payments toward the principal amount of your mortgage or putting in a bigger down payment when you buy your home. This will significantly increase your equity (remember that value – debt = equity), so pay off that mortgage as soon as you can!

Renovations

Unfortunately, the cost of renovations is rarely repaid once you choose to sell your home. You should count yourself lucky to break even when adding up your initial home price plus renovations. I know, it’s heartbreaking. But how do house flippers make so much cash?! I’m glad you asked! It all has to do with time. Talk to anyone professionally flipping a house and you might get whiplash. Why? Because they are in a hurry to sell while the market value steady and add value by adding desirable updates to the home. For example: I buy a house for $100,000. If I make no changes, wait around, and the market drops, I’m going to lose some money. But if I sold it tomorrow I would probably get $100,000 for it. Now, if I sell it tomorrow with a new bathroom, kitchen and patio, I could sell it for $175,000. They can’t wait for the market to look favorable, so they are (so to speak) making hay while the sun shines.

I know that these aren’t the words you (or I) want to hear. But the only renovations that you should be making are ones that you (personally) want to make, or things that bring you up to par with similarly priced/sized homes near you (we’ll come back to this later). If you’re expecting to get an extra $20,000 with a $10,000 kitchen, you’re not making changes in the right place.

Keep Up

Look at the homes around you. Do most of them have a third bathroom? What about a deck? Keeping up with the Joneses is actually a good thing as far as appraisal values are concerned. A kitchen comparable to homes near you will keep your home at just the right value, while an outdated kitchen could bring the value down significantly more than the cost of a kitchen remodel. In looking to build equity, it’s important to keep in mind the home values near you. If you get your house in great condition and it’s worth $400,000 but homes near yours or similar to yours are only worth $175,000 you’re going to be in deep trouble when it comes time to sell. Be sure to not get too far ahead of the competition and keep up if nothing else!

What Can I Do?

So, the question remains: how can I increase the equity of my home? And, let’s be clear, there are ways other than paying off mortgages that you can increase the value of your home! These options might not be as exciting as ripping the walls down and pulling down cabinets with your bare hands, but be sure to check out HSH. They give a great breakdown of the most bang for your buck when it comes to building equity. If you’re looking to do hands on projects, spread the word. Ask friends and family if they have any projects coming up that you can help with. As far as building equity, here are the 7 best things that you can do:

I hope I didn’t break too many hearts with this post, but I want to be sure to balance out the hype that we get from Pinterest, HGTV, and elsewhere. I’ve seen some broken hearts when the kitchen didn’t add more value than it cost, and I’ve seen homeowners disappointed with offers after a big remodel. So  I’ll save you the pain (and green) now. You’re welcome!