A Crash Course to Understanding Property Equity
Ever heard of property equity? If you’re like most people, the answer is probably “no.” But it’s important to know about this financial concept if you want to be successful in your future investing.
Property equity can refer to two different things:
- How much is owed on a home from the original purchase price and
- What percentage of a building or land does an investor own.
In this article, we will focus only on the first definition, which means that by reading this blog post, you’ll learn layman’s terms for the term property equity. See here for some tips on buying your first property.
What is Property Equity?
What does property equity mean? Simply put, it is how much money has been invested into a piece of real estate. The more money that has been invested into a property, the greater percentage of ownership equity you have for it. If someone were to invest $16 million in an apartment building and earn back $40 million over time, they would see their investment grow exponentially because they own 100% per cent of this asset (a very simplified example).
This is different from a property that is not owned 100% by the owner. Instead, this would be an interest-only loan for example where you own 40% of the building and have an outstanding mortgage as well as other loans on it. In layman’s terms, if someone were to invest $16 million in a piece of real estate but had no equity in it, they would be considered a “non-owner.” This could happen if the property were to go into foreclosure and the lender were to take over.
Now that we know what equity means in terms of real estate ownership, let’s discuss how you can use this information to your advantage.
How to Use Property Equity
One way to use your equity in a property is by cashing out the equity and reinvesting it into another piece of real estate. This can be done through a cash-out refinance, where you borrow more money against your home than what you currently owe on it. The extra funds can then be used to purchase another investment property. There is, of course, a limit to how much you can borrow against your home. Most people are able to cash out up to 85% of their equity in the property depending on the type of loan they have and other factors.
Another way you can use an existing asset is by leveraging it into another piece of real estate through what’s called leverage or using someone else’s money (in this case, a bank) for part or all of your investment purchase amount. This is something that most investors do when purchasing properties because not everyone has enough money saved for large investments like buying multiple houses at once unless they’ve been extremely frugal with their income over time. But if you want more financial freedom sooner rather than later so that you can retire early or start a business, then leveraging existing assets into a new property is one of the quickest ways to do so.
The final way you can use your equity in an asset is by borrowing less money for another piece of real estate. This will have its pros and cons as well because if you only borrow 80% of what the building costs instead of 90%, that means you’ll be paying interest on less money which saves you thousands each year but it also limits how much capital gain potential there could be from selling this second home later down the line when prices have increased even more. However, with current low-interest rates being offered through refinancing loans, now might just be a very good time to buy that second property using your equity.
Research and Strategize
Keep in mind that there are pros and cons to all of these methods, so do your own research before making any decisions. But at the very least, understanding what equity is will give you a much better idea of how to move forward with your investment plans. You can find more tips here to learn more about unlocking property equity.
As you can see, there are many different ways that you can use your equity to purchase more property. By understanding what this term means and the different options available to you, you’re in a much better position to make informed decisions about your investments. So go out and do some research on which option is best for you!
And remember, if you have any questions, don’t hesitate to reach out to a real estate professional who can help guide you through the process! Equity is an important term when it comes to real estate ownership – especially when looking at purchasing additional properties.