In real estate terms, equity is the difference between a property's current market value and the total debt held against the property. People sometimes confuse the concept of equity with profit. It is possible to have a large amount of equity in a specific piece of real estate, yet that does not necessarily mean you can sell the property for more than your total investment and make a profit. Growing equity involves paying down the property loan or increasing the property's value without increasing its indebtedness.
Pay down the property loan. For example, if the property is valued at $100,000 and the loan against the property is $80,000, the equity is $20,000. If an additional $10,000 is paid to the lender, reducing the loan to $70,000 from $80,000, the equity in the property would be $30,000, assuming the property is still valued at $100,000.
Improve the neighborhood, community and local economy. Local home values generally influence all properties in a neighborhood and thus will affect a homeowner's level of equity. When property values rise, so does the level of equity. When property values drop, equity is lost. Unfortunately, a property owner has little control over the local economy or the state of neighbors' homes. Convincing neighbors to fix up their homes to help increase local property values can be a challenging task.
Use "elbow grease" to increase the value of real estate by cleaning up the property and making repairs yourself. When a property’s value increases, equity in that property will grow.
Renovate, remodel or enlarge the property to increase the property’s value. If you take a loan against the property to pay for improvements, your equity is the difference between the cost of the improvement and the increase in value. For example, if you borrow an additional $50,000 against the property to pay for an improvement that increases the property value by $60,000, you have increased your equity by $10,000 after the loan is repaid. But, if you pay cash to make the improvement, and don’t increase the property’s debt, you have grown the equity by $60,000. Thus, you have achieved more equity by paying cash.
Make sure the property conforms to other neighborhood properties. A property that conforms to the neighborhood tends to have a higher value than one that does not conform. This can build equity, providing the cost to conform does not increase the property’s debt for more than the increased value.
Find a better use for the property. Sometimes a property is of more value if the use is changed, such as a large home converting to a bed and breakfast. This can build value and, providing the additional indebtedness on the property -- such as costs for zoning changes -- does not exceed the increase in value, it builds equity.
- "Modern Real Estate Practice"; Fillmore Galaty, et al.; 2006
Ann Johnson has been a freelance writer since 1995. She previously served as the editor of a community magazine in Southern California and was also an active real-estate agent, specializing in commercial and residential properties. She has a Bachelor of Arts in communications from California State University, Fullerton.