Your real estate might be your most neglected investment
Do you treat the real estate that you own with the same attention that you give to your other investments?
Even though real estate is often one of the largest drivers of wealth for individuals and families, most people adopt a passive and simplistic approach. This approach might include merely refinancing when rates are down and selling when the time is right. But there’s more to thinking about your real estate than just refinancing rates and selling.
Every month you spend a lot of your money on housing payments and only a portion is going towards building equity.
The way that you finance your house has a big effect on both the cash that you are spending and the equity (net worth) that you’re building.
Depending on your goals, there may be a better way structure your financing, such as additional mortgage payments, a different length loan, taking equity out, recasting the mortgage itself, or a combination of approaches.
Without periodically evaluating your approach, it’s like if you put your money into one investment and never thought about it again. How do you know that your money is going to perform the best it can?
A Real Estate Asset and Financing Evaluation (REAFE) is about maximizing the returns you get from your real estate.
When you analyze your current real estate as an asset and compare financing options with your short and long term goals, it puts you in a position to see the quality of your real estate as an investment over time and evaluate the effects of different decisions in advance of any changes.
This can help you make smart decisions around the equity you are building in your real estate. You can start to see managing your real estate as not just a passive process. You see the numbers around your cost and equity today, versus the next few years and decades.
Financing a house a certain way compounds the gains or losses you experience over time. If you think of it like an arrow shooting a target, moving your arrow by a little can result in a big difference in where it ultimately lands. The amortization of your financing results in a mix of spending on interest and paying down the principal.
By projecting out in the future and looking at different scenarios that take into account your short and long term goals, you can find advantages that result in more net worth for the money that you spend.
Why can’t a mortgage banker do this?
Mortgage bankers are experts at making suggestions when you know what you want, and knowing the ins and outs of getting a new loan completed, but they aren’t trained in, nor often aware of, how to analyze properties for long term wealth.
You also don’t want to muddy the waters of compensation to have your mortgage banker doing an analysis, as there shouldn’t be any financial incentives to put you in one scenario vs. another. You deserve to have an unbiased look at your situation and goals, so that you can make the very best decision.
And timing is another reason. If you simply know that you want to refinance to a lower rate, then the right course of action is to contact a mortgage banker. You want to move quickly, as the rate environment can change. Your mortgage banker is focusing on one thing, which is getting a loan processed. The goal is to get a new loan done.
It’s too late at that point to do a full analysis, as you want to be in a position to move quickly.
Who should get a REAFE and when?
If you have one or more property and see real estate as a short or long term investment, then it makes sense to do a REAFE. If you are in a house and just plan to stay there for a short time and sell, then it might not be right for you.
If you decide that you see your real estate as an investment that you want to maximize, just like you do your stocks, retirement or other investments, then the sooner you do a REAFE the better, as you’ll enjoy the benefits and compounding effects sooner.
Considering the amount of money you spend on your real estate, it makes sense to have it analyzed and your investment maximized according to your goals. every few years.
What are the phases of a REAFE?
Phase 1
First, we look at the current state of your real estate. Look at comparables to get a sense of value, what your financing is, how much you’re spending on your payments, how your financing is structured (type of mortgage, home equity loan, etc.). We develop a snapshot of what the financial impact of your real estate is today (cost and equity) and then project your current scenario out over the long term, 5, 10, 20, etc. years.
Phase 2
Second, we identify your overall goals. Some examples of goals are saving cash, equity utilization (leveraging home equity through home equity loans, etc.), and long-term financial outcomes, such as selling and buying a new property or simply maximizing overall net worth.
Phase 3
Third, based on the determined goals, we work out three scenarios. Depending on your goals, these can involve refinancing into other products or terms or recasting of the mortgage itself (taking the remaining loan balance and financing it at the same rate and remaining length), revising or exploring home equity loan scenarios, extra mortgage payments or paying down the principal on existing loans, using a portion of the equity as down payment on a second home, and sale proceed options.
How do I find out more?
Contact me at nicole@homeownering.com to find out more and discuss your individual needs.
The Mini-REAFE
Sometimes, you have a particular financial decision to make regarding your home and are not sure what your options are. Or, you don’t know the best way to analyze your options in order to uncover the best path forward. In the case of a discrete financial decision, you may want to consider getting a Mini-REAFE.
Some examples of discrete real estate finance decisions that you may want help with are:
- Deciding on the best way to finance something with your home equity
- Determining how much of a windfall you should pay off your mortgage with and how it might affect your future finances
- In the event of a divorce, determining the proceeds you might get from a sale or need to divide
From my extensive background in real estate finance, I can help you see clearly the financial impact of your options. That way, you can make the best decision and don’t leave any money on the table.
Email me for more info on this option: nicole@homeownering.com.