How long does it take to build equity? - Posted by Jim C

Posted by Mike on November 21, 2000 at 22:23:21:

I live in Prince George, BC. This is a city of 80,000 whose local economy is dominated by the forest industry. Resource based industries are cyclical in nature, meaning that there upturns and downturns in the market place for lumber and pulp. I read the paper and listen to the local news where mill closures and temporary shut downs are front page news.

In the mid to late 80’s, a friend of mine was a realtor and real estate investor in the Tuscon area. I was visiting him one time and we went to a couple of his properties. He said that prices had dropped and the market was flat as IBM had restructured and many jobs were lost. He also said the military had down sized their air force base and that many servicemen were transferred out of the area.

So when major employers are laying off, shutting down and restructuring, then real estate prices will flatten out, even drop. But when new industries set up and new jobs are created, then real estate prices will rise. A case of supply and demand. The smaller the city, the more dramatic the impact of major employers fortunes. In large cities with a more diversified economy, the impact will be felt far less.

In addition to keeping aware of local economy issues, I also try to determine trends in prices. I read the real estate flyers, and I read reports prepared by the local president of the Prince George Real Estate Board. I watch the listings for houses, and I especially watch what houses were sold for. The sale prices are a matter of public record as they form the basis for tax assessments and can be obtained from a local realtor or by going to city hall. If prices are dropping, I hold off buying until a sustained trend of increasing prices appears.

How long does it take to build equity? - Posted by Jim C

Posted by Jim C on November 20, 2000 at 21:21:00:

How long does it take to build up equity on a conventional mortgage?

I recently heard that the first 5 or 10 years of a mortgage is just paying off the interest part of the loan. Is that true? You wouldn’t have any equity in a property if you decided to sell it within the first 5 or 10 years?

Thanks a lot!!!

22 years to reach 50% - Posted by Bud Branstetter

Posted by Bud Branstetter on November 21, 2000 at 10:03:59:

The typical loan takes that long to get to the 50% of the original loan amount. Back in the mid 80’s prices in Texas dropped 30%+ For a long time in the late 80’s and early 90’s appreciation was maybe 2 or 3%. Over a long term prices will increase. At 3% it takes 24 years to double in value. Newer houses will appreciate faster in growth times than an older homes.

How much does the market appreciate? - Posted by Rolfe Kurtyka

Posted by Rolfe Kurtyka on November 21, 2000 at 24:29:51:

In addition to equity build-up, the fair market value of the property will hopefully be increasing. Since equity is what the property is worth less what you owe on the property, appreciation can be a strong factor. To calculate the priciple paid off, interest paid, balance remaining, and other fun stuff such as net present value(NPV) and internal rate of return (IRR), try a financial calculator. Hewlett Packard HP12C and HP10C, or the Texas Instruments BAII Plus, are affordable and useful.

Good Luck; Rolfe

Re: How long does it take to build equity? - Posted by Mike

Posted by Mike on November 21, 2000 at 24:28:56:

Hi Jim!

You are correct when you say that most of your payments in the first 5 years go to interest and very little of the principal is paid down. I used the mortgage analyzer stationary found on Appleworks (M/S Works has a similar feature) and ran through a couple fo scenarios.

EX. 1- $100,000 @ 8% over 30 years, payments (principal and interest) = 733 /month. At the end of 5 years, there was $95,000+ left owing.

EX. 2- $100,000 @ 8% over 15 years, payments (P and I) = $955 /mo. At the end of 5 years, $78,000+ was left owing. *note the only change was in the length of the term

You can see here that the way to increase equity is to pay down the mortgage faster by amortizing the mortgage over a shorter period of time. Another way to build equity by accelerating the payment scheudle is pay weekly. To do this, have your mortgage company divide the monthly payment by 4 and take out that amount weekly. It can take up to 8 years off a 30 year term.

Of course, both Laure and dewCO are correct in their observations that the money is made at the time you buy the property, that is you buy it below market value. But additional equity can be built up by paying down the principal more quickly, and seller financing of all or part of the sale price can assist to this end.

Re: How long does it take to build equity? - Posted by dewCO

Posted by dewCO on November 20, 2000 at 22:25:30:

No, some of th epayment goes to interest from day one, just not very much! You’ll see when you do an ammortization. Laure is correct about buying right, but the appreciation while you own it, also increases equity.

Re: How long does it take to build equity? - Posted by Laure

Posted by Laure on November 20, 2000 at 21:23:34:

Go to www.realdata.com and download their free amortization software. You will be able to run payment tables on loans of any type.

To answer your question, it depends. You make your money when you BUY.

Laure :slight_smile:

Re: How much does the market appreciate? - Posted by Tobeykins

Posted by Tobeykins on November 21, 2000 at 24:56:46:

There is passive appreciation that is market driven and dependent on outside market forces. There is utility appreciation or active appreciation that the investor creates by refurbishing, rehabbing, changing the use (putting 2 units on 1 lot), etc. Waiting for the market to go up is dangerous and makes you subject to the whims of the economy. If you study and learn how to create appreciation (getting a fixer and fixing it) you won’t have to wait for the market to change. You will change the marketability-without waiting for the market.
Good luck,
Tobeykins

Re: How much does the market appreciate? - Posted by Mike

Posted by Mike on November 21, 2000 at 24:39:34:

A very good point Rolfe! Jim should consider what his horizon for ownership is…that is how long does he intend to hold the property? The longer he holds it, the more likely it will appreciate. However, local economies vary.

In my area, unfortunately, property values have gone backwards, up to 30% in some cases and in some market niches, since the local market peaked in '97. A house bought in '92 for $84,000 would have sold n the $127,000 range in '97 but is now selling in $110,000 range today. The lesson to be learned is that one needs to be aware of the local real estate market and the economy that drives it.

Re: How long does it take to build equity? - Posted by Dave T

Posted by Dave T on November 22, 2000 at 07:43:51:

“…have your mortgage company divide the monthly payment by 4 and take out that amount weekly. It can take up to 8 years off a 30 year term.”

You accomplish the same thing by just making one extra mortgage payment during the year. Instead of 12 monthly payments, make 13 to achieve the same result. One way to accomplish this is to divide your monthly mortgage payment by 12, and add that amount to each mortgage payment as extra principle. No need ot have the mortgage company go through expensive bookkeeping gyrations – and possibly incur a service charge for doing so.

Re: How long does it take to build equity? - Posted by Brent_IL

Posted by Brent_IL on November 21, 2000 at 18:59:47:

Another way of saying “pay down the mortgage faster by amortizing the mortgage over a shorter period of time” is “higher payments.” If you agree to a 30-year payment schedule, in almost all cases you can alter the number of payments by paying additional cash with each mortgage payment or by making periodic lump sum payments to principle. You are not locked into the higher payments so it is really optional. Every dollar you pay above your regularly scheduled payment effectively earns tax-free interest at the rate of your loan. Weigh against the value of write-offs, et al.

Re: How much does the market appreciate? - Posted by Anthony

Posted by Anthony on November 21, 2000 at 20:58:02:

Hi,where would you find out about the economy that drives the real estate market? thanks for any responses.