Equity Build Up: Let Your Tenants Pay Down Your Loans
There are really six benefits to investing in real estate and they are income from the property, depreciation, equity build up, appreciation, leverage and control. Today, I’d like to talk to you about one of the few ones that, if you actually pay your loan, is guaranteed: equity build up.
Each month that you make payments on an amortized loan (a loan that you pay back what you owe over the term of the loan), a small amount of your payment goes toward paying back the amount you owe. At first, this amount is small… less than 1% of each payment of a 30 year loan is actually paying off principal in the first year, but over time with each payment, the amount you are paying off increases.
Even if your property value were to stay the same (and you will see the historically home prices have gone up), you are building up equity in the property by paying down what you owe on the property.
What’s great about this? Usually, with rental property, it is not you that is making the payments to build up your equity. Who is it? Your tenants.
Each month that a tenant makes a rent payment to you, you take part or all of it and pay the expenses on the property including taxes, insurance and, if you have a mortgage on the property, then a loan payment too. Well, part of the payment that the tenant made is paying down that loan and so your tenants are actually paying down your loans for you.
Until my next post,
James