What is equity? It’s funny money, the difference between fair market value and unpaid mortgage balances. You can borrow against it, invest it, or sell it. Equity is beautiful.
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.
How about a few random comments from a guy who is eight years into this exact strategy in a single family neighborhood?
1. One house on a block probably isn’t enough to get the gentrification ball rolling.
2. Gentrification is never a bad word.
3. 3 houses on a block probably is enough to get the ball rolling.
4. Join the neighborhood organization and offer to be the webmaster and “e-mail guy”
This is the easy way to develop a valuable contact list.
5. Talk up the neighborhood to realtors and at cocktail parties. Real estate values seem to be the #1 topic at parties. The “Next Hot Neighborhood” subject is always interesting.
6. Speaking of realtors, you probably won’t find a “neighborhood specialist” in your neighborhood during the early “acquisition phase”. But contact those specialists in the nearby neighborhoods that do have them. The sooner a realtor decides that it’s worth the effort to farm your area, the better.
7. Don’t spend any time during the acquisition phase using “blockbusting” tactics. It’s not illegal, but it is unethical, and just not worth it. This is a very slow boat you are turning around, and there will always be undervalued properties to buy.
8. Why do the words “greedy” and “developer” always go together? As this method becomes more well known, “caring neighborhood redeveloper” should be just as common.
9. Use the contact list to distribute good news monthly. Help publicize the new restaurant, or highlight a recent renovation.
10. Density is not a bad word either. Density brings life to a neighborhood, but people are scared of it. See http://en.wikipedia.org/wiki/The_Death_and_Life_of_Great_American_Cities
11. In the fifties, people who were scared of Density and Parking Problems passed laws banning Carriage Houses, Granny Flats, and In-Law apartments. Consider starting a grassroots effort to reverse those city planning mistakes. http://friendsofgranny.blogspot.com/
Oh yeah. This should be the best new home building business model for the next 20 years:
Excellent! Thanks for your input Kevin. Love it!