Take a lesson from my friend's situation (GOOD story)

It's time to talk about the homes that aren't bought as investment properties. There are plenty of financial articles out there that will try to tell you that your home is not an investment. Some will tell you that you will get a much better return on your money if you just put all your money in the stock market and not buy a house.

Well I've got a friend who would tell you that is absolute bologna. I've been the beneficiary of buying homes that I live in and that appreciate in value. I had a couple of solid home equity wins before I got my real estate license and it has helped me guide my clients through the path to creating real value through their home equity over time. This particular friend hadn't been to any of my speeches, and didn't work through me when he bought his home. He got a fair price a little bit under market value, made some affordable and sensible upgrades, and now is able to benefit from it.

The rough numbers are this: He bought a 3 bedroom home for $95k. Because it was an "owner occupied" home, his loan terms were very favorable and he only had to put very little down out of pocket. After a couple of years in an appreciating market, similar homes in the neighborhood are selling for about $165k. That is a $70,000 spread! Keep in mind, it generally costs about 10% to sell a home after all is said and done, so if he were to sell the property he would end up with about $63,000 to work with. Because he's lived in the home for at least 2 out of the last 5 years, there will be no capital gains tax if the property is sold. The $63k is free and clear. If he chooses to keep it as a rental and repeat the process, he could rent the home for about $1,000 per month in the shape that it's in. The payment is under $600, so as you can imagine, the cash flow would be pretty good as a rental property.

The last option, and the one that I suggested he choose, was to capitalize on the equity that he has gained in his home by taking out a home equity line of credit on the home while it is still his primary residence. Most banks will give you a credit line up to 80% of the value of the home, provided you can meet their underwriting requirements. If we assume the existing first mortgage is at the purchase price - $95,000 - then he should be able to get a home equity line of credit (or HELOC) at about $37,000.

Not every home has to be purchased as an investment property to be a good investment. In fact, the property you buy as your primary residence will often grow your equity at a faster rate if you were to compare your down payment to that of a rental property. Contact me today if you have questions or would like to discuss maximizing and accelerating your equity and we can see if these principles might be able to be applied to your situation.