But how, exactly, can a landlord build equity?
They can do so by:
1. Paying Down or Improving the Terms on their Mortgage – this is straight forward. Both these techniques help accelerate the pay off of your mortgage debt. This, of course, increases your equity by widening the spread between market value and mortgage debt.
2. Making Strategic Capital Improvements – This tactic applies to landscaping, craftsman work, and other artistic expressions that the market recognizes. You will build equity when you invest in an improvement that creates more market value than it cost.
3. Renovating, Restoring, or Rehabbing – These a tactics involve replacing items with higher quality, more modern, or more stylish versions. These tactics will grow your equity if the work improves the function and/or style in a manner that your local market recognizes.
4. Building Additions – Adding more useable space onto your building should increase its value. Your equity will increase if the value of additional space exceeds its construction cost.
5. Applying Sweat Equity – Making capital improvements or renovations yourself is a great way to save labor costs. This tactic builds equity if you can improve your market value with free labor.
6. Waiting for Appreciation – If you speculated and bought a property in what turns out to be a prime location, then your market value will increase in proportion to the growing demand.
7. Increasing Income – This could be as easy (or as painful) as raising your tenants’ rent. Or, more preferably, you could try other strategies to increase the services you offer your tenants and make more income that way. Chick HERE to see a list of ideas.
8. Reducing Expenses – A dollar saved is a dollar earned. Whether you reduce the temperature on the common water heater, use more efficient energy products, or add service-related time savers (like mounting a keybox on site to assist locked out tenants), saving money improves your cash flow, increases your net operating income (NOI), and grows your equity. Chick HERE to see a growing list of ideas.
9. Maintaining a Low Vacancy Rate – Of course a low vacancy rate means more annual income, but it’s also a variable in your NOI computation. Documenting that your rental has a below average vacancy rate improves your NOI which increases your capitalization value.
Follow this link to see a strategy to reduce rental vacancy rates.
10. Partnering with Neighbors – It’s amazing what a landlord can accomplish when they communicate with neighbors, support local youth organizations, and work with others to ensure their neighborhood moves in a virtuous spiral. A “nice” neighborhood can lift the equity of the ugliest house and this equity building tactic might be the most profitable of them all. Check out Catalytic Landlord to learn more about this.
What do you think? Which equity building strategy do you think is best? Please leave a comment below.