To all those people who have heard the term “equity real estate” but do not have sufficient knowledge about the same, this piece will be very useful. You probably have heard about this term numerous times when people have a debate about why real estate is considered an investment strategy. But what exactly is it about? So without further ado let’s get started.
What is equity in real estate?
Professionals describe equity as the value of an asset less than the value of all the liabilities on that asset. To all those who love studying mathematics, equity in a form of an equation would look like this: Equity = Assets – Liabilities. However, the definition of equity will also change keeping in mind the various factors depending on the asset or investment.
Why is real estate equity important?
There is no denying the fact that equity is considered as one of the most essential features when it comes to real estate, appreciation and cash flow to name some. Nevertheless, there is a vast difference when it comes to explaining the importance. While cash flow is considered as a priority for renting, equity is equally crucial for selling.
As mentioned above, the more equity the investor has, he/she will be owning more property. The property will be sold more easily if the property has more equity. In addition to this, the real estate equity is also an asset which is why it can be used for various other purposes. Now when it comes to equity, it is most of the time used if you want to make purchases like buying a new property or a brand new car.
How does real estate equity increase?
Because the equity is probably based on factors like fair market value and mortgage payments, anything that boosts these factors will automatically enhance the equity of the property.
- Pay the mortgage: If you pay the mortgage, the equity will be built up. It is that simple. The same goes for the interest which is paid on insurance.
- Fair market value appreciation: If the property is near to the location, the prices will be higher automatically. This is where you will have to get your mortgage financed at a higher value. In return, the equity will be increased then and there.
- Improve the property: Factors like enhancing the property by adding or renovating will automatically increase the fair market value.
How does real estate equity decrease?
The same rules and regulations apply when it comes to decreasing equity. So, anything that lessens the mortgage payments and market value will lessen the equity.
- Change the current mortgage: Changing the current mortgage will ultimately reduce the equity of your property. Accepting the new mortgage or refinancing them will lead to a reduction in the equity of the property. Thus, it is mandatory to speak to an advisor and gather all the information about the same.
- Fair market value depreciation: If the properties near you are sold for a lower price, the equity of the same will be reduced automatically.
- Property deterioration: If you do not take proper care of the property chances are the equity will ultimately fall with the same.
The Final Thoughts
These are some of the thoughts you need to keep in mind when it comes to equity. Make sure you give a thought about them when needed. We hope this piece has helped you gather all the information about equity in real estate.
Do you want to know more about Equity share agreement for real property? Get in touch with the professionals and gather all the information about the same. They are the professionals in the industry with the required skills and expertise.
