Everything You Need to Know About Maximizing Investment Property Equity

ATTOM, a curated real estate data titan, recently released the second quarter 2024 U.S. Home Equity & Underwater Report. And if you own property in the United States, things are looking up. 49.2% of mortgaged residential properties are considered “equity-rich.” This means these properties have a combined estimated loan balance under half of the property’s estimated value.

So homeowner (and real estate investor) wealth is on the up and up!

While these equity increases were felt across the country, gains were most notable across the Midwest and South. In fact, some of the greatest gains were in states home to REI Nation markets, including Missouri (St. Louis), Oklahoma (Oklahoma City, Tulsa), and Alabama (Birmingham, Huntsville, and Tuscaloosa).

But why does equity really matter? And what can real estate investors do to ensure they maximize their equity?

Here’s everything you need to know.

What is Home Equity Anyway?

Real estate equity is the difference between the current market value of a property and the amount owed on the mortgage plus any liens against the property. Equity determines your profit should you sell the property or the available leverage in refinancing.

4 Ways Real Estate Investors Gain Equity

#1 – Down Payment

The down payment made by the investor represents immediate equity in the property. For example, if an investor buys a $200,000 property and puts down $40,000, they start with $40,000 in equity. The larger your downpayment, the more equity you have from the jump. Additionally, larger downpayments mean lower monthly mortgage payments. This is why zero percent down, while accessible, isn’t the best move to make.

#2 – Appreciation

Over time, property values tend to increase. This increase in market value adds to the equity in the property. This is largely why, as ATTOM reports, many owners are currently “equity-rich.” Property values have rapidly appreciated since 2020. Though appreciation has slowed, it’s still considerably higher year-over-year than in the past.

#3 – Mortgage Payments

As the investor makes mortgage payments, a portion of each payment goes toward paying down the principal balance. This reduction in the loan amount increases equity. And this is where SFR investors really benefit. You pay off the mortgage with rental payments, effectively using someone else’s money to grow your equity. Should this remain consistent, you’ll achieve full ownership of the property only having put the downpayment towards it.

#4 – Improvements and Renovations

Making strategic improvements or renovations to the property can increase its value, thereby increasing equity. For example, upgrading the kitchen or adding a new bathroom can enhance the property’s market value, boosting equity. Just guard against over-renovating. You may find diminishing returns if the property outpaces its comps, especially in the same neighborhood.

Strategies for Maintaining Long-Term Equity

Strategy #1 – Proper Property Management

Quality property management is worth its weight in gold. They ensure property conditions are pristine and significant repairs and expenses are mitigated. They also secure quality residents who take care of your property.

Strategy #2 – Avoid Over-Leveraging

Be wary of taking on too much debt. Your debt-to-income ratio is critical here! Be wise about tapping into your equity too soon. For example, refinancing to access cash can reduce equity and increase the risk if property values decline.

Strategy #3 – Location and Market Selection

Say it with us…location, location, location! As we see in the ATTOM data, despite having lower property values overall, the South and Midwest have seen the most significant equity gains. Where you invest matters – what are community development prospects? Local amenities? School district quality? Job opportunities? These all contribute to property values.

Strategy #4 – Hold for the Long Haul

The buy-and-hold strategy is the best for growing and maintaining equity. Property values typically increase over time. Buy-and-hold investors have the patience to wait through downturns, too. They bide their time to ensure they get the most out of their property’s value!

Further Reading: 10 Compelling Reasons to Keep Holding Your SFR Properties

Risks That Threaten Investment Property Equity

Risk #1 – Market Declines

A decrease in property values due to a market downturn or economic recession erodes equity. If the market value drops below the outstanding mortgage balance, owners become “underwater,” a common phenomenon at the height of the Great Recession.

Risk #2 – Rising Interest Rates

Rising interest rates can increase mortgage payments if an investor has a variable-rate mortgage. Fixed-rate mortgages aren’t perfect, but at least investors can avoid unpredictable fluctuations in interest payments.

Risk #3 – Poor Property Management

A property in poor condition is worth less. Your property management team should do their best to maintain value through diligent maintenance and management.

Risk #4 – Over-Leveraging

Taking on too much debt, whether through refinancing or multiple loans, leaves investors vulnerable if property values decline or financial difficulties rear their ugly heads. It can cause investors to go into foreclosure.

Risk #5 – Economic Downturns

Broader economic issues like unemployment spikes or reduced demand for housing can negatively impact property values and rental income. This is why the strength of your investment market matters!

Invest with the ones who have turnkey real estate down to a fine art – REI Nation!