Hawaii's expensive real estate market can be intimidating, and many people believe that they are unable to purchase a home. They continue to pay rent, without building equity. Using leverage can bring Hawaii's expensive real estate market within reach. With today's low interest rates, mortgage payments have come closer to rent payments, especially as rents here have continued to rise.
Acquiring the American Dream
Leverage is a popular tool in real estate investing. Whether you are a first-time homeowner or an experienced investor, leverage may help you increase your wealth faster in a rising market.
Consider a $500,000 real estate purchase that requires a 20 percent down payment of $100,0001. For 20 percent of the cost of the property, the buyer can purchase a half million dollar home. If the $500,000 property appreciates 5 percent per year, the home's value will have increased to $525,000 in 12 months; an increase in real estate equity of $25,000.
On the other hand, if the homeowner used that same $100,000 and bought a smaller property for $100,000, in 12 months, with an appreciation of 5 percent, the home's value would have increased to $105,000; an increase in real estate equity of only $5,000. This illustrates how using leverage could increase your real estate equity at a faster pace, in this example, by $20,000.
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Leverage can help you purchase a home sooner, build net worth quicker and may offer tax benefits at the same time since most mortgage interest can be tax deductible, depending on your situation. Consult with your tax advisor to determine the deductibility.
It is important to understand that leverage works both ways since the real estate market does not always increase in value year to year. Determining the appropriate amount of leverage for your situation is important in real estate investing. In a declining market, the value of the real estate could even decline below the amount you owe your lender. Our experience in working with both homeowners and investors can assist you to wisely use leverage as a tool for your success.