Real estate equity isn’t a hard topic to understand. Once you understand it properly, you can find ways to leverage it financially. Besides, high equity guarantees high rental incomes.
Real Estate Equity & How to Increase it
What is Real Estate Equity?
It’s the difference between debt and the value of a real estate property. There are several factors that can impact real estate equity, such as interest rate, loan type, the demand of the property, down payment, etc.
How to Calculate Real Estate Equity
To calculate the equity of a property, you’ll have to consider down payment, market value, purchasing price, mortgage duration and rate, and appreciation rate.
Let’s say a property’s market value is 150,000 USD, and you bought it for 140,000 USD. Here you’ll get an instant 10,000 USD equity for buying it lower than the market value. Again, if you pay a 20% down payment, you’ll get 28,000 USD immediate equity. If the appreciation rate is 3%, your equity will increase by 33,891 USD after five years.
Why Real Estate Equity is Important
When you have enough real estate equity, you can leverage it financially and use the excess money to buy a new home or pay a down payment for it. Again, with high real estate equity, you can borrow a loan against it and invest the money somewhere else.
Most real estate investors use their property’s high equity to pay down payments for another property. Once they buy the property, they give it for rent and generate passive income. Investors repeat this process over and over and become a tycoon in real estate.
3 Ways to Increase the Real Estate Equity
1. Pay the Mortgage Earlier
Your mortgage loan will restrain the equity from increasing. If you want to increase your real estate equity faster, you’ll have to pay your mortgage payments as early as possible. It may sound simple, but you’ll need some serious budget planning. You’ll have to make a bridge between your monthly income and mortgage payment.
2. Larger Down Payment
When you pay the larger down payment, you automatically reduce the mortgage payment as well. Usually, homeowners need to pay 20% upfront while purchasing the property. However, these days, people can buy properties at a 5% down payment in some cases. But when you buy a property at a minimum down payment, you’ll have a hard time increasing your property’s equity unless you are able to increase the NOI.
3. Improve the Property Structure
A well-maintained structure will have higher equity than a broken one. You can build some add-ons such as a swimming pool, home gym, dedicated office space in your home and increase the value of your property. If you’re confused about which things to include in your property, you can call a home inspector and follow the recommendation.
Conclusion
If you play it smart, you can use your home equity as an excellent source of passive income. Besides, you can use your home equity as collateral for loans and send your child to college. But you’ll have to remember, equity won’t build overnight; it’s a patience game.
