Generally speaking, equity is the difference between the current value of the asset less the liabilities therein. However, in the context of real estate, equity is the amount left after the property’s current market value is deducted by the remaining mortgage balance. It is presented in a mathematical equation as Equity = Asset – Liabilities.
Net Real Estate Equity
Considering other costs of the property on sale and taking them out from the gross equity gives us the net equity. These costs include unpaid property taxes, commission for the realtor, property closing costs, and other necessary costs (if any).
While cash flow is important in renting properties, equity is important for selling properties. In fact, real estate equity is considered an asset as it can be used for other purposes such as buying a new car or as a down payment for another commercial property (as new source of income).
How is Real Estate Equity Increased?
In real estate, equity can be increased based on both mortgage payments and fair market value. So, religiously paying your mortgage can build up the equity. Also, property appreciation can increase equity as this can increase financing scheme as well. Lastly, improving your property through renovations can increase the property’s market value, apparently increasing the equity.
How is Real Estate Equity Decreased?
If equity can be increased, it can also be decreased through the following factors:
- Depreciation in market value – when properties begin to sell in lower prices
- Alteration in the current mortgage – this happens when you accept re-loan and increase the value of your current mortgage
- Lack of property renovation – unrepaired cracks, leaks, and other broken parts of the property can eventually lower its market value.