Money

If you own your own home, you probably have equity. Money editor Susan Edmunds explains what that means – and how to boost it.

When we talk about equity in a financial sense, we are usually referring to one of two things – investing in a company via shares, or investing in – or simply owning – property. In a share investing sense, “equity” represents what shareholders would get if a company was liquidated, all its debt paid and all its assets sold. It’s the same concept when you’re talking about equity in your home or a property investment: What would be left to the owners if the place was sold and all the debt was paid off?

If you had a $1.2 million house and a loan of $1m, for example, you would have equity of $200,000.

I often hear from people who want to know how to boost the equity they have in a property. In times when prices are going up quickly, this takes care of itself – the longer you hold on, the more equity you have.

But when prices are flat, like they largely are at the moment, it takes a bit more work.

Paying off the loan is a straightforward way. The more you pay down your mortgage, the more your equity should increase, provided prices are not falling at a faster rate.

Another way is to improve the property in such a way that either a valuation returns a higher value (giving you an on-paper equity boost) or a buyer is willing to pay more (if you’re selling and want to turn your equity into cash).

Steve Goodey, a property investment coach, said people who wanted to improve their equity in their own homes should look at the houses selling around them.

“The way valuers value properties is predominately on a comparable sale basis. They’re looking at three suburbs around you and sales made in the last 90 days, three bedrooms like your house is… something like that, something comparable. So the easiest way is to compare to a better quality home – you take your ugly, scruffy house that needs modernising, and modernise it like a property that’s sold for a higher value nearby.” He said the cheapest way to improve a place was usually paint and carpet. “It gets more expensive as you go through from there. When you get into anything with plumbing or wiring.”

Things that were maintenance, like replacing a roof, would generally not add value, he said. “If a property has a roof that’s old but works it’s the same value as a roof that’s new that works. Maintenance is important but if you want to add instant equity it’s about upgrades and modernisation.

“If you take a very average 1960s house with carpet that your mum and dad had and pull that out and go modern colours, clean fresh, good smells, paint, carpet, go that way – you will normally add considerable value to it.”

He said some people “got excited” and went beyond their initial budget. Sometimes a valuer could look at a list of planned upgrades and give an indication of what value they would add to the property, which could help to determine what was worth doing, he said. Goodey said people should remember that it was not usually possible to push the value of a property far beyond those of neighbouring properties. “There’s no point putting a Remuera mansion in the middle of South Auckland, it’s not going to work.”

Another property investment coach, Graeme Fowler, said it was harder to add value to a newer property, or one that was already tidy. “Unless you can add value in other ways such as building another room on, building a garage if the property doesn’t already have one, subdividing a section off if the section size allows it. There are other ways but those would be the most common.”

Goodey said people who owned rental properties could improve the value of them with anything that allowed them to charge higher rent. “Ask tenants what they want – what would make you pay an extra $50 a week? They might come back with something super cheap… a $500 dishwasher and it suddenly pays itself off in five minutes.”

Maintenance is important but if you want to add instant equity it’s about upgrades and modernisation.

Property investment coach