Leveraging Your Money

One of the greatest financial aspects of buying a home is the ability to leverage your money. Simply put, leverage allows you to use a small down payment and financing to purchase a larger investment. For example, if you bought a $125,000 home with 10 percent down, you leveraged the $12,500 down payment to purchase an asset worth 10 times that amount!

Appreciation
The benefits of leverage really become apparent with appreciation, or the rise in value of a property. Using the above example, say you were to live in the house for 5 years, and during that time property values in your area were to rise an average of 2.5 percent a year. Your home would then be worth over $141,000. By putting only 10 percent down, you get to enjoy the appreciation for the full amount!

Paying yourself
In addition to the 10 percent down, you'll also have to make mortgage payments. But with each payment, a certain amount of money is being used to pay down the principal balance that you owe. This is called building equity. So in the event you sell your house, not only can you realize a profit from your leveraged money, you also have a chance to pay yourself back for the money you've put in over the years. No wonder so many people consider a home an excellent investment!

HOUSE HUNTING TIP: To preserve and enhance the value of your real estate investment, it's wise to cure deferred maintenance, establish a good regime of ongoing home maintenance and make value-adding improvements to the property.

The best time to tackle deferred maintenance is as soon as possible after title to the property is transferred into your name. This may be difficult for buyers who stretched to their financial limit in order to buy. If you have no resources that you can tap immediately for home improvement projects, establish a budget and a plan to take care of necessary work over time.

It might help to ask your home inspector to prioritize the defects listed in his report in terms of how quickly repairs should be made. If you can't afford to correct all the deferred maintenance at once, at least you'll know which items to concentrate on first.

It's natural to want to spend money on making your home look pretty. But, don't make the mistake of overlooking defects that will diminish the value of your home when you sell. Even though you may have purchased your home "as is" regarding a poor drainage system or a rotted deck, a future buyer may not be willing to overlook these defects.

Serious drainage, foundation and wood pest problems should not be neglected. Some problems will become worse--and more expensive to correct--over time. Unless you're selling in a very strong seller's market, you'll probably have to subtract the cost of overlooked repairs from your equity when you sell. From an investment standpoint, it's risky to make major improvements to your home unless the infrastructure is sound.