Remember the story of The Little Red Hen?
She wants to bake bread, and at every step asks her friends for their help, but they all find excuses to avoid helping. Eventually she gets it all done herself and when her friends want to help her eat the bread, she says no.
The hen created something of value through work. She put in all the sweat equity over time – and she got to reap the reward.
Real estate equity works similarly. It takes knowledge and labor to find good deals on rental properties, and some work to manage them. But that knowledge and labor creates a barrier to entry, preventing every Tom, Dick, and Harry in the world from competing with you to invest in real estate.
Which in turn means you can earn higher returns on real estate investments than easy, universally accessible investments like stocks and bonds. Higher returns in the form of monthly real estate cash flow, higher returns from flips, and higher returns through building long-term real estate equity.
Here’s what you need to know about building equity in your properties, why building equity in your home is a good thing, and how you can build real estate equity faster.
What Is Real Estate Equity?
Real estate equity, whether in your home or an investment property, is quite simply the difference between what you owe on your mortgage and what the property is worth.
For example, if you own a property worth $150,000, and you owe $100,000 on the mortgage, you have $50,000 in equity.
Keep in mind that real estate equity exists on paper only. Tapping into it and actually accessing real cash from it requires you to either sell the property or borrow against it, both of which take time and cost money.
This means that your equity on paper and the actual cash you could access remain two very different things. If you were sell that property worth $150,000, you might incur $10,000 in closing costs such as Realtor fees, recordation fees, and other costs. So despite having $50,000 in equity on paper, you couldn’t actually walk away with $50,000 in your pocket by liquidating.
Reasons for Building Equity
Real estate equity offers multiple benefits to you as the owner, depending on your goals. You’ll have the opportunity to sell the property for capital gains of course, since that equity is essentially going into your pocket as a nice check at the time of sale. But the advantages don’t end there.
Another option is to tap into equity to buy more properties, using either a HELOC (try Figure, which even offers rental property HELOCs) or a blanket loan (try Visio). You get to leverage the equity you’ve accumulated in your existing rental properties or home to keep building your portfolio of assets.
If, for example, you wanted to use the equity in your home to purchase another home as a rental unit, you could use a HELOC and would only be required to make interest-only payments for the first ten years. This allows you time and flexibility for building real estate cash flow and any upgrades that might need to be made in the beginning.
You can also tap into real estate equity to take out a blanket loan instead of making a down payment. The lender secures a lien against your property with equity in it, in lieu of requiring a down payment.
Or maybe you’re looking to reach accredited investor status. Unlike home equity, equity in investment properties counts toward your net worth for qualifying as an accredited investor.
Building equity in your home is a good thing because the more equity you have, the more of your home you actually own, and the more money you’ll have available to invest and keep growing your wealth.
Other Creative Financing Options For Creating Equity
There’s a whole world of creative financing options that you can explore to build your equity. Don’t feel the need to limit yourself to the ones you know; explore your options and find out what fits better for your situation. Here are just some of them.
| Financing Option | Description | Pros | Cons |
|---|---|---|---|
| Seller Financing | The seller of the property provides financing to the buyer, acting as the lender. | Easier qualification, flexible terms | Potentially higher interest rates |
| Lease-to-Own Agreements | The buyer leases the property with an option to purchase it in the future. Part of the rent goes towards the purchase. | Builds equity over time, trial period for property | Higher monthly payments, risk of losing equity if not bought |
| Home Equity Line of Credit (HELOC) | A revolving line of credit secured by the equity in your home. | Flexible access to funds, low interest rates | Requires sufficient home equity, risk of foreclosure |
| Cash-Out Refinance | Refinancing an existing mortgage for more than the owed amount and taking the difference in cash. | Lower interest rates than other loans, one loan payment | Extends mortgage term, closing costs |
| Hard Money Loans | Short-term loans from private investors or companies, based on the property value rather than creditworthiness. | Fast approval and funding, flexibility | High interest rates and fees, short repayment period |
10 Ways to Build Real Estate Equity
Like the Little Red Hen, there are plenty of ways you can boost your equity and build it faster in your properties. Here are ten creative ways to build real estate equity fast.
1. Make Property Updates
Adding value directly to the property will immediately build equity in a home. Cosmetic updating, rather than renovating, usually offers the highest rate of return, according to the research by Remodeling Magazine. Rather than gutting an entire kitchen, which only adds an average of 51% of its cost to the value of a home, simply painting a neutral color and updating fixtures and appliances brings an 81% return.
Everyone wants to live in a modern-feeling home, but not everyone agrees on style decisions, so keep it neutral and new.
Storage space is always a hot commodity. No one likes hanging their best suit or formal dress in the unfinished basement with the smelly shoes, so extra storage and organization will always add value.
For more information, consider these preferred upgrades:
| Aspect of House | Description |
|---|---|
| Kitchen | Kitchen remodels offer a high return on investment, modernizing this space can significantly increase home value. |
| Bathrooms | Updating bathrooms can greatly enhance a home’s appeal and value, especially if they are outdated. |
| Exterior (Curb Appeal) | Improvements like landscaping, exterior painting, and door replacements can boost a home’s first impression. |
| Energy Efficiency | Upgrades such as better insulation, modern windows, and energy-efficient appliances can make a home more attractive and eco-friendly. |
| Usable Square Footage (e.g., finishing a basement) | Adding living space, such as finishing a basement, increases the functional square footage and appeal of a home. |
Making smart property updates will not only increase the value of a home, but will help the property sell for a higher rental price if you’re currently using it as a rental. There is an upper limit though, so stick to property upgrades that are genuinely necessary, not vanity projects.
2. Adding a Rentable Unit
Remodeling a space over the garage, the basement suite, or adding an income suite or accessory dwelling unit can help you produce more rental income. You can even do this with your own home to house hack and live for free!
You can take that extra income and add it to your current mortgage payment every month to accelerate building equity in your home.
By boosting the income your property can generate, it boosts your rental property’s value. Income suites also add to the value of your home, as accessory dwelling units continue to grow in popularity.
Of course, these are cost/benefit dependent. Generally, the basement suite or apartment over the garage are a much less expensive investment, since the structures already exist. However, adding an accessory dwelling unit in your yard gives you a little more privacy in your space. And nowadays you can even buy relatively affordable kits on Amazon that you can build yourself within a few days.
Either way, the extra money added to your mortgage every month is paying down the principal and building that home equity fast.
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