Equity
The difference between a property's market value and the outstanding balance of all loans against it.
Definition
Equity is the ownership stake you have in a property — calculated as market value minus all debt secured by the property. If a home is worth $300,000 and you owe $200,000 on it, you have $100,000 in equity.
Investors build equity through three mechanisms: (1) appreciation — the property's value increases; (2) principal paydown — tenants pay your mortgage down each month; and (3) forced appreciation — value-add renovations increase the property's worth above cost.
Equity itself doesn't generate cash unless you access it through sale or refinancing. 'Dead equity' — large amounts of untapped equity in a property — can be put to work through a cash-out refinance, a home equity line of credit (HELOC), or by selling and exchanging into more properties via a 1031 exchange. Wealth-building investors think carefully about whether equity should be extracted and redeployed.
Related Terms
Appreciation
The increase in a property's value over time, either through market forces or investor-driven improvements.
Loan-to-Value (LTV)
The ratio of a loan's balance to the property's appraised value, expressed as a percentage.
Refinance
Replacing an existing loan with a new loan — often to access equity, lower the rate, or change loan terms.
BRRRR Method
Buy, Rehab, Rent, Refinance, Repeat — a strategy to recycle capital into multiple rental properties.
Leverage
Using borrowed capital (debt) to increase the potential return on an investment.
Net Operating Income (NOI)
A property's total income minus all operating expenses, before mortgage payments and taxes.
Also in "E"
Earnest Money
A deposit paid by the buyer to demonstrate serious intent — held in escrow until closing.
Escrow
A neutral third-party account that holds funds and documents during a real estate transaction.
Exit Strategy
The plan for how and when an investor will eventually sell or dispose of an investment property.