If you were a home owner in the DFW area, 2013 and 2014 have been very good for you. A happy home owner is often pleased to just set on his assets and rejoice that things are going well. This blog is addressed to you homeowners who are in the age range of 20 to 60 plus. Older homeowners may be very hesitant to take any risk at all, and are by definition excluded from the discussion herein.
For reference, let’s assume that you own a home in Collin County. Used homes are presently appreciating in value at the rate of about 10% per year. Because of supply and demand, new homes are appreciating at an amazing rate of about 20% per year. (Many of our buyers have contracted to have a new home builder construct their new home over a five to six month period, and have enjoyed an increase in value of their home appreciate by $30,000 to $ 40,000 during the time it was being built.
We further assume that you own a home in Collin County that is six years old, and has a current market value of $ 250,000 (net of costs of sale). We further assume that your mortgage has a net pay off balance of 200,000, and thus you presently have a net realizable equity of $ 50,000. We assume that your monthly mortgage payment, including principal, interest, tax escrow and insurance escrow is $ 1,850 per month. The rental market is hot, and your home can be leased for $ 1,850 per month, which covers your costs.
With our hot seller market, your home’s equity may increase each year for the coming four years, as follows.
Year Net Market Value Mortgage Balance Your Net Equity
Now $250,000 $200,000 $50,000
EOY 1 $275,000 $197,000 $78,000
EOY 2 $302,500 $193,000 $109,599
EOY 3 $332,750 $190,000 $142,750
EOY 4 $366,025 $186,000 $180,025
Sounds wonderful, and I truly believe that our residential market is that strong. We have thousands of people moving to Collin County every year to get a new job, and our market will almost certainly continue strong for the next four years.
Because of our fantastic sellers’ market, our seller in the above example will probably see his net equity increase from 50,000 today to as much as $ 180,000 in the coming four years. With a little courage, this same owner can dramatically improve his financial outlook over the same four year period. How?
By leasing out his property for enough to pay for his monthly payments and by buying a second home (now) for about $250,000. His new second property will require an FHA down payment of 3.5% or $ 8,750. By being selective in the choice of your home builder, this homeowner may be able to have the builder pay all or most of his closing costs.
We are in the market every day and believe that this investor owner will see his second home appreciate by $ 20% during the first year alone. We will base his wealth building plan on an average appreciation rate of 10% per year for years, 2, 3 and 4. Look at his appreciating equity over the four year holding period.
Time Net Market Value of Mortgage Balance Net Equity Home No. 2 Home No. 2 Home No. 2
Now $250,000 $241,250 $8,750
EOY 1 $300,000 $240,000 $60,000
EOY 2 $330,000 $237,000 $93.000
EOY 3 $363,000 $234,000 $129,000
EOY 4 $399,000 $230,000 $169,000
Note carefully, this $ 169,000 can and will belong to our home owner at the end of the fourth year. The same homeowner will enjoy the equity increase in his first home, he just does not live in the first home. The key to understanding how the home owner can accumulate an extra $ 169,000 is that with the first home leased with sufficient monthly income to pay the total mortgage cost the owner may just qualify to buy a second home and enjoy fabulous appreciation on both homes. Obviously, the owner’s financial status, and credit status will play an important role in pulling this investment together.
Did you notice that the two homes together might help our example homeowner accumulate a net worth of about $ 358,000 four years from now.
Here’s the bottom line:
Each of us must live within our own comfort range. If your situation is similar to the above home owner, and you have a home in Collin County, you have several options relative to the fantastic real estate market in which we live.
- You, as an owner, may simply do nothing. You can enjoy your present home and enjoy a rapidly appreciating market. You can continue to pay on your home mortgage for another 25 years.
- You could follow my suggestion, lease your present home and purchase a second home with a minimum FHA down payment. This decision can reward you tremendously. You might keep both homes indefinitely. You might sell your second home in about four years and use the sales proceeds to pay off the mortgage on your first home, thus owning the first home free and clear.
- If you like being a rental property owner, at the end of four years, you might choose to keep both properties and buy a third property.