Equity (E) is the value you have in your real property investment. It is actually "net value," because it must be calculated.

E = FMW - MPO - L - OD, where

E is your Equity in the property

FMV is the Fair Market Value of the property,

MPO is the Mortgage Payoff Amount,

L is Liens on the property, and

OD is Other Debts on the Property

If you bought a $210,000 Duplex, paying $50,000 down, $5,000 closing costs, and getting a $160,000 mortgage, then your Equity in the property is $55,000 (50,000 plus 5,000)

At the time of purchase, the FMV is presumed to be what you paid for the property, and you paid $210,000 to the Seller and $5000 to the closing agent and others, for a total of $215,000.

E = FMV - MPO - L - OD

E = 215,000 - 160,000 - 0 -

E = $55,000

Even after you buy the property, you can calculate your equity at any time with the above calculation.

If you've held the property for at least a year, two of the four elements making up Equity have probably changed, and possibly all four. Let's say you have held the property for three years.

By looking at comps, you determine that the FMV is now $255,000. This is because the property has appreciated in value about 6% each year, and because you have added a new furnace.

You have made 36 mortgage payments and the principal portion of these payments have reduced your payoff by $6,500.

You replaced the furnace at a cost of $6,000 and the company is allowing you to make payments on the bill in return for you granting them a lien on the property until it is paid, and the balance is $4,500.

Your property taxes will be due shortly, and that amount will be about $1,200.

So, the calculation now looks like this:

E = FMV - MPO - L - OD, where:

E is Equity,

FMV is Fair Market Value,

MPO is Mortgage Payoff Amount,

L is Liens, and

OD is Other Debt.

E = 255,000 - (160,000 - 6,500) - 4,500 - 1,200

E = 255,000 - 153,500 - 4,500 - 1,200

E = $95,800

Your Equity has gone up from $55,000 to $95,800 in three years, an increase of $40,800.

The increase is due to asset appreciation and mortgage paydown.

The $40,800 increase in Equity represents a 74.18% increase in three years, which is almost 25% per year. Of course, that does not take into account the time value of money.

Here's a quick video to help explain the time value of money before we continue discussing the equity aspect.

And, of course, this Calculation is for your Equity in the property and assumes that you plan to hold the property for more years into the future.

The amount of Equity that you would realize if you sold the property now is a different number.

You would not get a $95,800 check at the closing table.

You would have transaction costs such as Sales Commission, a Survey, a Title Insurance Policy for the Buyer, legal costs for document preparation, escrow fees, and others.

The total costs could be as high as $18,000.

That would still you with Equity of $77,800, and increase of $22,800.

Your three-year increase percentage would be 41.45% instead of 74.18% and your annual increase would be 13.8% instead of 25%.

Remember, in the truest sense, Equity is the actual value that you have in your real property, which is expressed in the number of dollars you could put in your pocket if you sold it.

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