Building equity on our homestead

Romania’s real estate prices are considerably lower than what you would find in other countries, but that doesn’t make it more affordable to the majority of the local population. There are still a few who can afford buying a modern house or maybe an apartment, but for many that results in 30-years mortgage. I’d much rather just build equity on our house.

How we started building equity on our homestead

I’m not a career guy. Or at least I don’t plan to become one. A future where I’m still working a 9 to 5 to pay off my mortgage is out of the question for me.

Since I can’t afford to buy a $100-200K house, my plan instead is to build up equity on the old farmhouse we bought last year. I find it easier to improve a property and to build up equity on a poor real estate, compared to making all that money beforehand.

We’re getting close to one year since we bought our piece of land here and I wanted to go over some numbers to show everyone what I mean.

In the real estate world, equity is defined as the difference between the market value of your home and the amount you owe the lender who holds the mortgage. 

Let’s look at the numbers for last year:

We bought 3,400m2 of land, a house and a barn for about $33,000. That is $9,70/m2. At that time we borrowed $20,000 from the bank. Adding the interest we end up with $25,000 that we owe. So at the moment of purchase, our equity was $33K – $25K = 8K.

What is the market value of our property now?

Last week one of our neighbours sold a plot of land that is right across the street from us. That lot has no utilities hooked up and it’s much smaller than ours. There are no buildings on it, no orchard, nothing. The closing price was $17/m2.

That puts our property at 3,400m X $17 = $57,000. That’s just for the land, without any consideration for the developments made on the property.

Since we moved here we completely renovated the old house and we hooked it up to municipal water and a septic tank. I estimate the investments we made in the house (reinforcing, insulation, building a bathroom and various landscaping projects) are worth at least $5,000.

Last month municipal the sewage system was installed on our street. This leaves us with natural gas as the only utility we don’t have on our land.

At the same time, we only have 9 years left on our mortgage, and at the moment we still owe about $23,000.

Our house equity has increased 7-fold in one year

All in all, if we were to sell the house tomorrow, I reckon we can get about $60K if we were in a hurry or up to $70K if we’re patient.

There’s also a big project planned for our community, the mayor wants to build an aqua-park just 4 km away from us.

If that project gets done, and we’ll continue to invest in our land, I’m sure that in about 5 years time the homestead will be worth over $100K.

Running the numbers again with the most pessimist scenario, where we only get $70K for our property: $70,000 – $23,000 = $47,000 in equity. Compared to the $7,000 we started with we see a 7-fold increase in our equity in the first year.

Why am I telling you all this?

I think our situation is a bit special, we got a very good deal on the land at a very opportune moment. Not everyone will have the same opportunities in their communities.

What I wanted to convey by writing this article was that in many cases, especially for individuals who are not well-off, investing in a property can make you more money than a job.

As the old saying goes: “Don’t wait to buy real estate; buy real estate and wait.” The price of real estate will always go up, developments in the area will often raise the price of the property as well.

For everyone reading this from Romania, I really think you have a good chance to succeed on this path. Just think really well before making any big decisions, or drop me a message. I’d be more than happy to help you through the process.