Share this post:
Wealth is an essential ingredient for a high quality of life. Of course, the first things that comes to mind when someone mentions the concept of wealth are multi-millionaires and billionaires — but in reality, a decent level of household wealth is something attainable by most people.
Naturally, building your household wealth is only possible if you earn enough money to amass some savings, have a long-term plan for your finances, and start working on it early enough. And there’s one thing that helps a lot in ways you may not even be aware of — and that’s being a homeowner.
With this in mind, we’ll share some of the foundational principles that can set you up to build your household’s wealth. One thing is certain — you can do this, the only question is if you will!
If you’re not a personal finance whizz, you may not be familiar with the concept of compound interest. Don’t worry, though — we’ll explain it in the simplest possible terms because it’s one of the keys to building your household’s wealth.
Essentially, compound interest is the process of earning interest on top of initial interest.
When you make any kind of money, it’s only natural to expect a return. In other words, you’re supposed to have more money in the end than you initially put in. And if you leave this investment alone, your interest rate will build over time exponentially.
In other words, compound interest is what happens when your interest starts earning more interest. And while that concept is your enemy when you’re burning through your credit card or taking out a car loan, it’s your best friend when you’re saving money.
For instance, if your savings are growing at a 4% rate, you’ll have doubled your initial investment in just eight years and quadrupled it in sixteen. The longer you save and don’t touch that money, the more money you’ll have to earn interest on.
To clarify things, let’s say that you’ve invested a thousand dollars. And, for the sake of simplicity, your money earns 10% annually in interest. After a single year, you’ve got $1,100 — that’s the original $1,000 and the $100 you’ve earned in interest. However, by the end of the second year, you don’t have $1,200. Instead, you’ve got slightly more — $1,210. That’s because the 10% interest wasn’t calculated based on the initial $1,000, but on the $1,100.
And sure, those $10 don’t seem like a huge difference. But that process happens every year, and compound interest keeps getting you exponentially higher amounts of money. In fact, by the rate and initial investment we’ve described above, you’d get $53,000 from just $1,000 in 40 years.
Of course, this is just an example. Your savings depend on the height of your initial investment and a variety of other factors — such as the number of compounding periods. Your interest can be compounded weekly, yearly, and even daily.
As you might have noticed, compound interest isn’t directly connected to homeownership — and yet, as we’ve mentioned above, homeownership is one of the most important elements in the process of wealth building.
There are two main reasons why homeownership promotes wealth — on the one hand; it can act as a forced savings mechanism. When homeowners make monthly payments to pay down the balance of their mortgage, they slowly increase home equity.
On the other hand, homeownership also builds wealth through home appreciation. And that’s the aspect of wealth-building through homeownership that we’ll tackle first.
However, despite temporary market conditions — over a long period, it’s almost certain that your home’s value will increase. This is precisely what home appreciation is. Though, as we’ve mentioned, home values are frequently affected by local market conditions — as is the speed of home appreciation.
It’s important to remember that some housing markets appreciate quicker than others — after all, housing prices are affected by housing supply and demand, and the value of your home is no exception.
However, you can speed up appreciation with renovations — more attractive landscaping, bathroom and kitchen remodel, and other improvements will all help your home appreciate faster by increasing its base value.
And although this isn’t as common — it’s possible for the value of your home to decrease as well. Contrary to appreciation, this is referred to as “depreciation”. It can happen due to a variety of economic conditions. However, it can also be triggered by an objective deterioration of your home’s condition. If you don’t invest enough in upkeep and home maintenance, this isn’t unlikely.
In simple terms, home equity is the difference between the value of your home and the amount of money you still owe on your mortgage. If you want a rough equity estimate, subtract your current mortgage balance from the market value of your house.
Naturally, it’s always better to get a more precise calculation. You can do this by contacting your loan servicer — they’ll have the final payoff amount necessary to pay off your whole balance.
There are two ways to increase your equity — and thus, your household’s wealth. The first one is regularly paying your mortgage. If you can make regular payments towards the mortgage principal, you’ll be able to steadily decrease the level of debt on your house.
You can also increase your equity in your home by increasing its market value through renovations and home improvements. Though, bear in mind that other things can affect the value of your home — such as the wider housing market conditions in North Delta, BC, or Canada in general.
For starters, you can use the wealth you’ve built up as a homeowner to fund your down payment for your next home. If you decide to sell your house, that built-up equity will materialize itself through the sale.
In other words, if you’ve paid off $300,000 of your mortgage and sold your house for $350,000, you’ll get those $50,000 in a cash difference once the sale closes.
And if you want to downsize or upsize with your next house, that cash can be useful for your down payment. On the other hand, if you aren’t ready to sell your home or you’re not willing to for any reason — that equity is a decent safety net that you’ll have if home prices decline.
Plus, if your financial situation needs some improvement or you want to reinvest your equity into boosting your home’s value — a cash-out refinance is another option.
This is a kind of mortgage refinance that lets you cash in on a part of your home’s equity without having to sell the house.
Let’s say your original mortgage was worth $200,000, and you’ve paid off half of that value. If you opt for a cash-out refinance, a part of your total earned equity will be added to the new mortgage principle.
In other words, you’d refinance your mortgage to $130,000 instead of the initially remaining $100,000 — and you’d get that difference of $30,000 in cash from your lender.
Once your new mortgage is set in stone, you’re free to spend that cash from your equity however you see fit. There aren’t any limitations — that’s now your money to manage. However, we’d be remiss not to point out that spending that cash on home improvements, renovations, and similar projects could be useful — your home would appreciate further, leading to even more equity down the line. And that means more household wealth.
If that’s precisely why you’re considering a cash-out refinance, make sure to speak to your lender — there are loans specifically designed for home renovations, so you’ll be able to get the precise financing option that suits your needs.
Once you decide to sell your home, there are ways you can use your mortgage to diversify your earnings and create a new source of passive income. If you’re in the financial position to “be the bank” for your new buyers, you can offer to “hold the mortgage”.
This essentially means owner financing — instead of the buyer finding a lender, you can extend credit to them yourself. And just as with any other mortgage, the buyer gives you the agreed-upon down payment and proceeds to make monthly loan payments — just to you, instead of a bank.
Generally, this kind of financing arrangement includes some sort of promissory note — where the key information like loan period, interest rate, and penalties for late payments are defined.
Of course, this also means it’s highly advisable to make a deal to hold the mortgage with a real estate attorney, or another type of qualified professional. They can deal with the necessary financing paperwork and iron out any small issues. Plus, they’ll be able to review any contracts or agreements you’ve made in the process of selling.
If you want to do this properly, taking such necessary precautions at the beginning of the process is essential. If problems with loan repayment or the property arise down the line, you’ll have saved yourself a huge amount of money, time, and aggravation.
However, necessary precautions aside — though uncommon, owner-financed home sales can be hugely beneficial for the seller. One of the most obvious benefits is the new source of monthly income that the seller gets. Also, the seller gets a down payment when the purchase is finalized — allowing them to cash in on some of the equity that they’ve built up right away, and invest it in something else.
If you’re in a financial position where you don’t need the lump sum of money you’d otherwise get upon paying off your home and selling it, what you get instead is a source of income with an additional interest rate — one that could be higher and is more secure than with other financial investments.
Plus, sellers are the ones that dictate the terms of the loan — including the payment terms and the interest rate. In some cases, sellers require a balloon payment of the entirety of the outstanding balance within ten years. In that case, the seller can collect payments for a set number of years — but still, get the remainder of the balance in a shorter time frame than with a usual 30-year mortgage.
With owner financing, you can also potentially attract more buyers and close the deal quicker. Plus, if the buyer walks away from the property afterwards or defaults on payments, you can foreclose on the house — while keeping the down payment and any previously made payments.
If you have the financial means and some basic DIY renovation skills, buying and renting out a property could be a great investment opportunity. However, as you probably know already — this strategy for building household wealth already requires a sizable amount of capital upfront. After all, you’ll need the money to pay for the property — but also to finance maintenance expenses and potentially cover vacant months.
Just like any other kind of investment, there are pros and cons to investing in a rental property. On the one hand, you get a regular passive income from the tenants — one that’s far more reliable than an investment in the stock market, or pretty much any other kind of investment. Plus, just like with your own home, the value of the rental property is likely to appreciate.
And once you get into the weeds of it, you’ll find that plenty of rental expenses are tax-deductible in Canada.
Though, on the other hand, there’s no getting around the fact that managing tenants can be a tedious job — especially if there’s more than one of them. Sure, you may build up enough wealth and passive income to hire someone to manage them for you down the line — but that’s usually not an option at first.
Also, there’s a chance that tenants could damage your property — and a lull in the local rental market might mean reduced income due to vacancies.
If you want to invest in rental real estate without devoting energy and time to managing it, there are other options. For instance, REIGs (real estate investment groups) are an ideal solution — all you need is enough capital and access to financing.
These REIGs act as small mutual funds for investments in rental properties. In the average real estate investment group, a company will build or buy a set of condos or apartment blocks — and then let investors buy them through the company and join the REIG in the process.
One investor can own multiple units as well, but they don’t have to manage any of them — instead, the company that operates the REIG collectively manages all of them. They interview tenants, advertise vacancies, and deal with maintenance.
And, of course, they get a percentage of all the monthly rents in exchange for conducting these tasks property owners would otherwise have to deal with on their own. There’s also a portion of the rent that goes into a pool that protects owners against occasional vacancies — so you’d get some income even while your unit is empty.
The benefits here are obvious: the process is far more hands-off compared to owning rentals directly, and you get a passive income and property appreciation nonetheless. On the other hand, you’ve got the same vacancy risks as well — along with the risks that come with having a middleman. Plus, the fees are similar to those you’d have in a mutual fund.
One of the ways to build your wealth further once you’ve amassed enough savings for another property is house flipping. However, a word of caution — this is only a process for people with sizable experience in real estate renovation, marketing, and valuation. Besides the necessary capital, you’ll also need the ability to perform repairs or at least oversee them.
This is very much the “wild side” of investing in real estate — akin to comparing day trading to buy-and-hold investors. Real estate flippers generally look for undervalued properties that they can buy and flip within six months.
Inexperienced flippers often find themselves troubled by a property they can’t unload swiftly — leading to trouble if they don’t have enough money on hand to keep paying the mortgage on the new property in the long run, or if they simply need the money for something else.
Needless to say, this is a risky business — one that can easily lead to snowballing losses. Though, if you have enough knowledge and skill to cheaply renovate a property and flip it for higher profits, this is a good long-term investment. Still, it requires a much deeper real estate market knowledge.
If you want to build your household’s wealth through homeownership, you’d be much better served with some of the less risky methods we’ve examined above — even though they may lead to lower returns compared to house flipping.
As you might have noticed, most of the ways you can increase your household wealth through real estate require having some capital saved up in the first place. So, how do you reach a point where you’ve got some money to invest? To put it shortly: by proper budgeting toward viable financial goals.
And setting short-term and long-term goals before starting to save money is important — you’re less likely to overspend and mismanage your earnings if you’re not working towards anything specific. So, whether you want to build equity and pay off your mortgage, buy a car, or do something else — set a financial goal for the future.
Then, you can start saving money through wise budgeting.
Start by tracking your spending, at least for a month. You need to know where you’re at before you can start cutting unnecessary costs. And sure, these days, there are tons of financial apps and software packages you can use to track your spending — but a pocket-size notebook will suffice as well, as long as you record each expenditure, regardless of how small it seems.
By the end of the month, you may be surprised to see where your money is going.
Once you know how much money you’re spending, break down all of your expenses into basic needs and wants. So, shelter, food, utilities, and clothing fall into needs — along with things like any type of insurance you have. However, a lot of the other stuff can be classified as “wants”. Take a long, hard look at both categories, and see what wants you can eliminate — and what needs you can decrease or tweak.
These are all ways that can build your household’s wealth, which can lead to a more fulfilled life!
Interested in learning more about building your household’s wealth check out https://www.forbes.com/investing/?sh=26f5745710ba