What is equity and how can it help you grow your property portfolio?
In property investing, equity refers to the difference between the current market value of a property and the outstanding balance of any mortgages or liens against it. Essentially, it's the portion of the property that the owner truly "owns."
Hereβs a simple way to understand it:
Market Value of Property: This is what the property would sell for in the current market.
Outstanding Mortgage/Loan Balance: This is the amount still owed to the lender.
Equity = Market Value of Property - Outstanding Mortgage/Loan Balance
Example:
If a property is worth $500,000 and the owner has a mortgage with a balance of $300,000, the equity in the property would be $200,000.
Equity can grow over time as the property value increases and/or as the mortgage balance decreases (as the owner pays it down). Investors can use equity in a property to secure loans, such as a home equity loan or a line of credit, or to finance other property investments.
Where it becomes valuable is when you are looking to grow your property portfolio. You can use a percentage of your equity (normally 80%) and loan that to purchase further properties.
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