How Mortgage Debt Undermines Property Ownership Wealth
He Owns Three Buildings But The Banks Own Most Of The Value
I own three residential buildings in Shoreditch worth approximately £3.6 million total. I purchased them using bank mortgages: £2.4 million borrowed. I own approximately £1.2 million equity (33%) and the banks own approximately £2.4 million equity (67%). This feels like ownership until market downturn occurs. If property values decrease 20%, my equity becomes £0.6 million while bank debt remains £2.4 million. My net worth becomes negative. The banks own the buildings more than I own them. I manage properties, make improvements, pay insurance and taxes. The banks collect mortgage payments. If property values increase, my equity increases. If property values decrease, my equity decreases but bank debt remains fixed. The banks have much better position than I have. This structure makes wealth building difficult. Most of my income from property management goes to mortgage payments. Most of the building appreciation goes to equity building but equity building is mortgage debt elimination not actual profit. I am wealthy on paper. I own buildings worth millions. I am actually middle-class in financial position. The banks own most of the buildings. I own the debt on the buildings. Real estate wealth is illusion created by leverage. The leverage creates appearance of wealth while banks capture most of the actual value.
SOURCE: https://prat.uk
