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What is Equity Build up

What is Equity Build Up in Real Estate? – Ways to Build Equity in 2024

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This article is part of our passive investors guide on real estate syndications, available here.

Real estate investing can be a lucrative and rewarding business, but it’s important to understand the various factors that can impact the value of your investment. One key concept to understand is equity build-up, which refers to the increase in the difference between the value and debt on a property.

In this article, we’ll cover what equity build-up is, why it’s so crucial for real estate investors, and the different ways to build equity in your properties.

Key Takeaways

  • Equity build-up refers to the increased positive net difference between the value of the property and the amount owed on the property.
  • Making improvements to the porperty, paying down the mortgage and holding the property for a long period of time all allow you to build equity.
  • To calculate LTV, you simply divide the mortgage balance by the property’s value.

What is Equity Build Up in Real Estate?

Simply put, equity build-up refers to the increased positive net difference between the value of the property and the amount owed on the property. This can be due to various factors, such as rising property values in the area, improvements made to the property, or a reduction in the mortgage balance.

For example, let’s say you purchase a property for $1,000,000 with a mortgage of $700,000. If the property’s value increases to $1,300,000 and you pay down $45,000 of principal on the mortgage, your equity in the property would be $645,000. This is the difference between the value of the property and the amount you owe on the mortgage.

Why is Equity Build Up so Crucial?

Equity build-up is important for real estate investors because this is one of the best ways to build net worth. Having a strong net worth allows you to be able to get access to better financing products to further accelerate your wealth-building efforts.

Additionally, when you go and sell the property, those after-tax gains are yours! But there are still creative ways to lower your gains through strategies such as the 1031 exchange.

In addition, having equity in your property can also be useful if you ever need to borrow against it. For example, if you need to make repairs or upgrades to the property, you may be able to use the equity as collateral for a home equity loan.

Get Access to the FREE 5 Day PASSIVE Real Estate Investing Video Crash-Course. You’ll learn everything you need to know from A to Z about passive investing in multifamily real estate.

Ways to Build Equity in Real Estate

Ways to Build Equity in Real Estate

There are several ways to build equity in your real estate investments, and they are as follows:

  • Make improvements to the property: Making physical improvements or upgrading finishes to the property increases its value. The higher the property’s value, the more equity you create.
  • Pay off the mortgage: As you pay down the mortgage, your loan balance will decrease, increasing your equity in the property.
  • Wait for property values to increase: If the property’s value goes up due to market forces or other factors, your equity in the property will increase as well.

What is Forced Equity?

Forced equity refers to the increase in the value of a property due to improvements made by the owner. 

For example, at Willowdale Equity we focus on purchasing value-add apartment complex’s and when we make physical and operational improvements to these properties, we can charge more rent and increase the property’s NOI (net operating income). 

Apartment communities are valued on a CAP rate (capitalization rate) which is essentially a multiple an investor is willing to pay for a property in that area based on the amount of NOI that property produces. This increase in value would be considered forced equity, as it was due to your efforts rather than external factors like the market.

Ways to Force Equity

Here are some ways you can force equity in your real estate investments:

  • Make renovations and upgrades: Investing in renovations and upgrades can increase the property’s value and create forced equity.
  • Add square footage: Adding additional units, living space, or functional areas to the property can increase its value and create forced equity.
  • Improve the property’s curb appeal: Improvements to the property’s exterior, such as landscaping or painting, can also increase its value and create forced equity.
  • Increase the property’s rental income: If you’re investing in rental properties, making improvements that increase the rental income increases the property’s value.

Related Article: How to Evaluate Rental Property Value

How do you Calculate LTV?

LTV, or loan-to-value, is a ratio that compares the mortgage amount to the property’s value. Lenders often use it to determine the appropriate amount of debt a borrower can comfortably manage and service their mortgage payments.

To calculate LTV, you simply divide the mortgage balance by the property’s value. For example, if the mortgage balance is $700,000 and the property’s value is $1,000,000, the LTV would be 70%.

LTV is important for real estate investors because it can affect the mortgage terms and the amount of down payment required. 

Frequently Asked Questions About The Ways To Build Equity

To calculate equity build-up, you would subtract any debt owed on the property against the property value.

Yes, you can use your equity to buy other real estate. This can be done through various financial products such as a cash out refinance, a HELOC (home equity line of credit), or a mortgage wrap.

What is Equity Build up in Real Estate - Conclusion

Building equity is an essential concept for real estate investors to understand. The best ways to do this are by making physical and operational improvements to the property, paying down the principal balance on the mortgage, or waiting for natural appreciation to run its course. 

If you’re interested in learning more about other real estate investing concepts and terms like equity build-up, join our FREE 5-Day Passive Real Estate Investing Video Crash Course.

Interested In Learning More About PASSIVE Real Estate Investing In Multifamily Properties?

Get Access to the FREE 5 Day PASSIVE Real Estate Investing Crash Course.

In this video crash course, you’ll learn everything you need to know from A to Z
about passive investing in multifamily real estate.

We’ll cover topics like earned income vs passive income, the tax advantages, why multifamily, inflation, how syndications work, and much much more!