Equity is the difference between the market value of the property and the loan amount.
In a normal scenario, you would get a loan from bank to buy a property. Over the time, your property cost will increase and as you are paying some principle amount in every loan repayment, your overall overall principal amount is decreasing. in this scenario, your equity is increasing.
For examples, if current market value of your property is $400,000 and you owe $200,000 to your bank, then the equity is $200,000. Decreasing loan amount or/and increasing property price will give boost to the equity.
You can use equity from one property to buy another property. This is also regularly referred to in investment circles as “tipping“ equity into another property or “pulling” equity.
Benefits of equity: You do not have to pay any LMI (Loan Mortgage Insurance) if your equity is more than 15% of the new loan amount. And you do not have to pay any deposit to get a new loan if your equity is more than 10% of the new loan amount.
It is best to keep in touch with your bank or keep a check on your bank statements to stay updated with the amount you owe and keep a check of the market value of the property to stay aware of the current equity.
Benefits of equity do not end here, equity can also be used to fund some other things in life such as your next holiday, renovating your old house, or even fund your retirement.
It is very important to understand the concept of equity if you want to make fortune in real estate or if you want to buy more than one investment properties. Many real estate millionaires made good use of equity to buy more than one properties. Some of them hold a massive investment property portfolio worth somewhere around 10 million dollars.
End of the day, it is the decision of an individual whether to keep the property and make use of equity to buy another one or sell it to keep the profit.