What Is Equity?
What Is Equity? What equity means, and how to increase the equity in your real estate properties.
Equity is the current market value of any real estate property you own, minus any loans, liens, or other liabilities attached to the property.
If you want to cash out the equity you have in a property, you have two choices.
A) Borrow against the property.
B) Sell the property.
Tips For Building Equity In A Property You Own:
- Don’t make the minimum payment on your mortgage. Did you making just 1 extra mortgage payment per year, can decrease the length of a 30 year mortgage by 6 years? It’s easy to setup automatically with most banks, as you can have your mortgage taken out bi-weekly, instead of monthly.
- Don’t borrow against the property to make improvements. I know it’s tempting to remodel your property, with the equity you have in it. The problem is that even if your remodeling project increases your properties value. It is unlikely it will increase the equity in your property, if you borrow against it. For example: If my property is worth $150,000 with an outdated kitchen, and $175,000 with an updated kitchen. Let’s say I borrow $35,000 to remodel the kitchen with equity I have in the property before the remodel. When the project is complete my property will have increased in value by $25,000. But my equity will have shrunk by $10,000 up front. Furthermore, if I took out a 15 year loan, for the remodel, I would pay an additional $19,000 in interest (at 6%). Meaning the remodel actually cost me $54,000. Which means the equity in my property, actually decreases by $29,000 from the remodel. Not to mention, that by the time it’s paid off, the kitchen will be outdated.
- Make improvements to the property. While I don’t suggest borrowing for major renovations, as highlighted above. I do think cash improvements are a great idea. The things to remembers when renovating are: Don’t over improve for the neighborhood. Try to be realistic about the financial impact your improvement will have on the property value. Try to find ways to cut costs, without compromising quality. For example sometimes you can refinish a bathtub, during a bathroom remodel, instead of replacing the tub. This can shave at least $1,500 – $3,500 off the cost of the remodel. Maybe you can professionally spray paint your cabinets, and change the hardware instead of replacing them. Shaving at least $3,500 – $8,500 off the cost of the remodel. Think about the ROI from improvements as well. Choosing a tank-less water heater will cost you more money, than a traditional water heater up front. But if you plan to own the property for 5-10 years, the energy efficiency will save you more than the difference in cost. (Assuming you are responsible for the utilities) Utility prices will continue to rise, due to inflation. So usually the ROI from an improvement like that, is actually under-stated.
What Is Equity? Written By: Derek Puleo & Laura Al-Amery.
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