Using real estate to build wealth: here are three ways your home can increase your net worth - Real Estate - Cover Story

Black Enterprise, March, 2004 by Matthew S. Scott, Carl Unegbu, Aissatou Sidime

When Marceline Alburg refinanced her two-family home in Brooklyn, New York, last October, she had some lofty goals in mind. "I wanted to buy another property by using some of the money from refinancing as a down payment," she says. "I'm looking for a two- or three-family unit with a storefront to put my business in, and then provide rentals to others."

For Alburg, refinancing the two-family brownstone that she bought for $180,000 in 1999 is making her goals possible. Refinancing allows a borrower to pay off an existing home loan with the proceeds of a new loan using the same property as collateral. The Brooklyn-based natural-hair stylist, who specializes in dreadlocks, has run Just Loc's--her beauty business--on the ground floor of her home for one year. She previously refinanced the property in 2001, taking on a $248,000 loan at 8.25% interest, which enabled husband Marcus and her to continue home improvements, pay off a time-share obligation, and pay back Marcus' personal loan. By the time she was ready to refinance a second time in order to look for a second property where her business would be exposed to a higher volume of customer traffic, the value of her home had risen to $450,000. This time, she inked a $326,250 mortgage at 6.25% interest with Wells Fargo Bank, paying off the balance of the first refinanced loan, and cashing out $60,000 of the home's equity, which she plans on putting toward the new property.

Alburg demonstrates just one example of how home ownership can lead to greater wealth. Whether you use a refinancing strategy like Alburg, decide to "trade up" from a smaller home to a larger home, or benefit from tax advantages, homeowners need to understand how they can best use their homes to build wealth that can help them reach all their financial goals.

REFINANCING

By making nearly five years of steady mortgage payments, Alburg has been able to leverage the value of her home in a way that has helped increase its value. Refinancing allowed her to borrow against the value of her home so that she could make home improvements that have contributed to increasing the home's value even more. "The first refinance helped me finish putting all new fixtures in two of my bathrooms and I also totally renovated my kitchen," she says.

In addition, Alburg's second refinance is helping her buy another property, which will increase her wealth tremendously. If she can find a building with a storefront for her business, she will save on the cost of renting commercial space. She will also have the opportunity to receive rental income from any additional units in the building. And of course, her wealth will also he enhanced by the real estate appreciating in value over time.

Marc Giles, CEO of Overnight Funding Inc., a mortgage broker based in the Bronx, New York, says refinancing is used for two primary reasons: first, to reduce the overall cost of the loan by lowering the interest rate. Even a 1% drop in interest rates can substantially lower mortgage payments and interest charges for the borrower. The second reason to refinance is to cash out equity from the home to use for other purposes (equity is the difference between your debt and the appraised value of your property). Giles explains that homeowners can use money obtained from a refinance to serve as a down payment on additional property, to make value-enhancing improvements, like new bathrooms, garages, or swimming pools, to the current property, or to lessen one's overall debt burden by eliminating other debts.

"You can pay off your current debt and get additional lands and a line of credit on the house," says Giles, "Use the money cashed out to make prepayments on your other debts and even on the mortgage itself--that helps decrease debt and increase wealth as you get to make lower payments on the house and secure lower interest rates on things like credit cards."

Roderick McDaniel, CEO and cofounder of Huntington Browne Real Estate, a mortgage banking and real estate sales entity based in Inglewood, California, says homeowners can make refinancing a long-term strategy by utilizing their home as leverage to make other investments or satisfy other personal goals. "As your equity builds, it is money you can take out and invest in the stock market or put your kids through school," says McDaniel.

Alburg says people who want to duplicate her refinancing strategy should make sure they keep a clean credit history. They should be especially diligent when paying their mortgage, because that will determine whether they are seen as a good borrower. She intends to use the money she obtains from refinancing for long-term wealth building, "After I secure my next building, I'll build up the equity in it and look to refinance again," she says

TRADING UP

Another way real estate owners can increase wealth is to "trade up" to larger, more expensive properties. This strategy, also called "upgrading," typically involves using a substantially large equity position in the existing home as leverage to purchase or "make an exchange for" the new property.