Twin Cities Property Finder · David Olson, Broker · MN #BK3603584 · Whitefish Property Finder · MN #40646463 · Licensed in Minnesota, Wisconsin and Florida
As a homeowner, you obviously pay for your mortgage but as an investor, your tenant does. Equity build-up is a significant benefit of mortgaged rental property.
Here’s what to know, whether you’re selling, buying or just curious.
Here’s an honest look, whether you’re selling or buying.
What to know
As the investor collects rent and pays expenses, the principal amount of the loan is reduced which increases the equity in the property. Over time, the tenant pays for the property to the benefit of the investor.
Equity build-up occurs with normal amortization as the loan is paid down. It can be accelerated by making additional contributions to the principal each month along with the normal payment. Some investors consider this a good use of the cash flows because interest rates on savings accounts and certificates of deposits are much lower than their mortgage rate.
Notice that both properties have a positive cash flow before tax. The cash on cash return is the revenue less expenses including debt service divided by the initial investment to acquire the property. The 15 year mortgage will obviously have a smaller cash flow and lower cash on cash but the equity build-up is significantly higher.
If the goal of the investor is to pay off the property to provide the highest possible cash flow at a later date, a shorter term mortgage with a lower interest rate will help them achieve that. A simple definition of an investment is to put away today so you’ll have more tomorrow. Sacrificing cash flow now, during an investor’s earning years, is a reasonable expectation to provide more cash flow in the future when it might be needed more.
A simple plan for your move
I’ve been helping people sell and buy homes across Minnesota, Wisconsin, and Florida for about two decades, and I build and remodel luxury homes too. I’ll help you see both what a property is and what it could be.
Getting the house ready, or making it yours
If you’re selling and want repairs handled before buyers see them, Super Crew Contractors can give you an estimate. If you’re ready for something custom, Ivy Lane Homes does luxury home building and remodeling. And a quick coverage check with Intrinsic Insurance before closing can save you a surprise. Ready to talk? Start a buyer plan or ask what your home is worth.
Super Crew Contractors, Ivy Lane Homes and Intrinsic Insurance are owned by David Olson; you are free to use any contractor, builder or insurer.
Your next step
Every move is different. Whether you’re selling or buying, I’ll help you make a plan that fits.
Please note: I don’t handle rentals or property management. I work with sellers and buyers, and that’s where I can help you most in the Twin Cities.
Stay close to the market, without the noise.
Every so often I send a short, practical note: what Twin Cities homes did, prep tips that are worth the money, and neighborhoods worth a look.
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