Equity in real estate is the difference between what the owner owes on the house and what the house is worth on the market. Owning real estate comes with major benefits for the property owner. Wealth building in real estate is among the top reasons people acquire real estate property. Equity is a key wealth building strategy. Let’s explore the benefits of homeownership and home equity.
Why Do We Buy Real Estate?
What exactly do people gain from owning their homes? Buying real estate is something that most people do. So, let’s take a moment to understand why someone would buy real estate. Shelter is one of the base human needs but this reasoning goes further than that. People buy real estate because they have the right to do so and because of the financial benefit.
What is the Bundle of Rights?
One of the most common reasons people buy homes is for the legal privileges that come with it. This is commonly referred to as the bundle of rights. These privileges include the right of enjoyment, right to possession, right to transfer, and right to encumber. Below are the bundle of rights homeowners possess:
The “Right of Enjoyment”
“Right of enjoyment” or “right of control” both allow homeowners to use the home however they please, within legal limits. The right of control gives the owner the right to build or rebuild whatever they would like on the property within the zoning and land use laws. The right of enjoyment states that owners can enjoy and use their property without interference from outside parties, within legal limits.
The “Right to Possess”
“Right to possess” simply means that the buyer is the owner of the property. The owner has the right to come and go as they please. The owner also has the right to remove people from the premises.
The “Right to Transfer”
The “right to transfer” gives the owner the ability to sell, gift, or leave their property to someone in a will. Property owners have the ability to take loans out of the house’s value, or the ‘right to encumber’. This bundle includes many of the perks that current and future homebuyers gain from homeownership.
The “Right to Encumber”
The “right to encumber” means the homeowner can put encumbrances on their home. The homeowner can encumber the property with easements, liens, or other legal or financial encumbrances. They have this right because they own the land.
We Can Build Equity in Real Estate
Another reason that homeownership is so popular is the ability to earn equity. For example, imagine a buyer purchases a home for $100,000. After five years, the home is now worth $120,000. The homeowner has $20,000 in equity. Homeowners can use real estate equity as a bank account to gain financial leverage as their home increases in value.
Why Is Equity in Real Estate Important?
Homeowners can financially leverage their equity. Homeowners with enough equity in real estate could sell their home and use the excess funds as the down payment on a new home or to buy one outright.
Additionally, demonstrating that the home has increased in value allows people to acquire loans. In this case, equity is used as collateral. For example, if a family needs money to send their child to college they could borrow against the home equity to help pay for tuition.
Investors are great at utilizing the equity in real estate. The investor will use their home’s equity to get a down payment for another property. Once the home is purchased, the owner makes the home a rental property. This finances the mortgage payments with passive income. When the second property accrues equity, the owner can repeat the process with a new home.
How to Improve Real Estate Equity?
Homeowners have control over their property’s equity. They can take immediate action to improve the equity and, therefore, the worth of their home. This involves lowering the mortgage amount and beautifying the property. Here are the most effective ways to improve real estate equity:
#1. Increase Mortgage Payments
Increasing mortgage payments helps homeowners pay off the mortgage quicker. The loans on the house restrain the home’s equity. Therefore, more payments are an aggressive way to improve the home’s equity. This process requires a hard look at budgets to find how you can make more payments.
#2. Larger Down Deposit
Similar to increasing mortgage payments, homeowners can reduce their mortgage with a large down deposit. Paying more money upfront will lower the overall loan amount. Therefore, homeowners can reduce their payment with an upfront lump sum.
#3. Boost Curb Appeal
If a homeowner cannot reduce their mortgage quicker, then they can touch up the home’s appearance. Boosting the curb appeal will mean beautifying the property. This will make the property more appealing and, therefore, increase its value. To do this, homeowners can take on some outdoor renovation projects. Some examples include installing a new deck, adding a new coat of paint, or doing some garden designing.
#4. Improve Home’s Structure
The home’s structural integrity is also crucial to building equity. A dilapidated house will have a lower equity than a similar house with structural well-being. Hiring a home inspector could help the homeowner find important blemishes that need repair.
#5. Remove Clouds on Title
Removing encumbrances is also another way to increase the value and equity of the home. Clouds on the title report can burden the homeowner and anyone they sell to. Therefore, if the homeowner removes the clouds, the house will become more marketable.
Using Equity as a Lead Strategy
Final Thoughts on Equity in Real Estate
Equity in real estate is one of the most important benefits of homeownership. Equity is the difference between the amount of money owed on a property and its current market value. Therefore, homeowners with positive equity can leverage their properties as another source of income.
With the right to encumber, owners can use their home equity as collateral for loans. Real estate agents can search for homes with large amounts of equity in order to find clients who may be interested in real estate investing or selling their property to cash in the equity.
Question: What are some additional ways that property owners can leverage real estate equity?