When you own a rental property, two silent forces at work to increase your wealth:
1.) principal reduction, and
2.) increasing equity.
With each mortgage payment, you decrease the amount that you owe on a home loan as you reduce your principal. When your property is rented out, your tenant pays your loan for you. At the same time, equity goes up as property values appreciate over time.
Let’s assume that the original mortgage (loan) for a property is $150,000, which is also the original value of the house. As time goes by, the value of the house may increase to $300,000, due to appreciation. At the same time, the amount owed on the mortgage is reduced to $20,000, due to the mortgage being gradually paid down. At this point, the amount of equity (or value) that you have in the house would be $280,000.
If we don’t allow periodic dramatic rises and falls in home values to shake our confidence, we can count on steady, long-term, profits from our investment properties.
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