Real Estate Return on Equity
Return on equity is a really helpful tool for smart investing in real estate. It helps you figure out how well your investment is doing compared to how much money you've put into it.
So, what's equity in real estate? It's basically the cash you'd get if you sold your property right now.
Think about a property you've owned for a while. How much do you think it's worth now compared to when you bought it? That's your equity.
Example Equity Calculation:
Imagine we have a rental property that we bought 5 years ago for AED 1,000,000. We put down AED 250,000 in cash and took out a mortgage of AED 750,000.
On the day we bought it, our equity was AED 250,000 which was our down payment. We're ignoring other costs for now.
Over the 5 years, two things have happened:
The mortgage balance has decreased.
The house (hopefully) went up in value.
Our current equity is our original equity (AED 250,000) plus what we've paid off on the mortgage and any appreciation.
Over 5 years, we'd have paid off about AED 124,000 principal on the mortgage (assuming AED 750,000 was borrowed at a 5% interest rate for 20 years). If the house went up in value by 3% on average each year, it would now be worth approx. AED 1,159,000
So, our total equity now would be:
Equity = AED 250,000 (original down payment) + AED 124,000 (paid towards principal) + AED 159,000 (appreciation) = AED 533,000
Now, instead of owning a AED 1,000,000 house with AED 250,000 in equity, we have a AED 1,159,000 house with AED 533,000 in equity.
Even if we didn't make any profit during those 5 years, our net worth has still increased by AED 283,000 (AED 533,000 - AED 250,000) – not bad!