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  • Writer's pictureKris Krohn

What Is Equity In A Home

What is home equity. Because I talk about equity so commonly in my videos, I get lots of questions about what it is. It's very important to understand and makes all the difference in real estate investing.

The difference between a investment property with equity and one without equity, is the difference between a treasure chest full of money vs. one that is empty.

Hopefully this video clarifies how important it is to invest in properties that have equity waiting for you.

Kris Krohn here with Limitless tv. And guess what? Today we're gonna be answering that question that so many of you are asking, what is equity? And, oh my goodness, this is so important to understand, you know why when I bought my very first house, it had $40,000 of equity. Guess what that means?

That meant that I found a treasure chest filled with $40,000 of booty in it. And that's equity. We're gonna teach you what it is, how to leverage it, how to use it, how to grow it to get you on that way and path to financial freedom.

What is equity? Alright, I'm gonna draw you a picture here that I think you're gonna like this. Guess what it is? It's a house. I wanna tell you something about this house. Um, this house has a value of $100,000, but I moved into it 15 years ago and I've been paying my mortgage and the principal's getting paid down. And now after 15 years, I owe $75,000 on the house. So it has a value today of a hundred thousand.

I owe 75. And if this is my meter of 0 25, 50% paid off, 75 or a hundred percent, take a look at this right now, I have a gap of what I owe is 75 and what it's worth is a hundred. And there's a gap right there of $25,000. It also has to be 25%. I've got a 25% equity position in this house. Now, let's say that I live in the house longer and I receive a little inheritance and I decide that I pay my house down to $30,000.

How much equity do I have? Well, I owe $30,000. It's worth a hundred thousand. So guess what? There's a, there's an equity position here of $70,000. Equity is the difference between what you owe and what it's worth. And that's also what you use to calculate your net worth. So for example, if all I owned was this asset and nothing else, and someone said, well, what are you worth? Well, I don't know.

My job, I make $40,000 a year. Cool, but what are you worth? Well, I'm worth $70,000. How'd you arrive at that? Well, my house is worth a hundred thousand. I owe 30,000 on it. I have $70,000 of equity and that also translates into my net worth. So here's where the applies to real estate investing that I absolutely love. Let's say that we were treasure hunting in the market. 'cause this is the way I use that term equity in all my videos.

And let's say that I found a home that I was able to purchase for $200,000. And let's say that it had a value of $300,000. If I can buy it for $200 and it's worth $300, then how much equity is there? A hundred thousand dollars. Okay? And because the moment I buy it for $200,000, I'm worth that much more money.

If I were to sell it in the market for $300,000, you know, other than, uh, some, some costs and seller costs and this and that, there's roughly how much money that I would get. A hundred thousand dollars. So equity is not always usable until you do something like sell the asset. Or I could go to my bank and say, I don't want to sell the house, but I wanna refinance it with a home equity line of credit. And the bank says, well, we'll give you a home equity lineup to $240,000.

So check it out. I owe $200,000. It's worth $300,000. They'll give me a checkbook or a credit card linked to this that would allow me to go up to two 40. So the difference between what I purchased it for, which is what I owe, and this line of credit of $240,000, there's a gap there of $40,000. That's $40,000 that I could use as a down payment on another house. I could use it to buy something different.

I could use it to invest with. And when I use it, I will add my payment and I will decrease my equity. So equity is that amount that you have. And where I really utilize this is in treasure hunting because you know what? I don't like to buy a house for a hundred grand. That's worth a hundred grand. You know why? Because I didn't, I didn't walk into any magic money when I do that transaction.

That's how novices transact. They might be doing that because they see the cash flow. I look for two primal primary basics. When I look at any deal. Number one, what is its equity? And number two, what is its cash flow? Let me give you a realistic scenario, uh, to kind of finish up this video with, to give you an idea. I, um, just finished looking at a house that has a value of $150,000. It's a home that I can purchase for $120,000. How much equity is there?

$30,000. Good. You're catching on fast. Okay, good job. $30,000 is how much equity I have and this is what percentage of $150,000 value. 20%. My equity isn't just a, cannot just be reflected in a financial amount, but also it expresses in a percentage. And this is what's really important to me when I'm walking into a deal, because this house in this scenario has $30,000 of equity or a 20% equity position.

So when I look at a deal, I wanna know how much equity and what is its equity position. These are those numbers. And now you are a master at equity. Some might say go build some equity. I'm gonna invite you to go find it 'cause it's out there and it's available. Thank you so much for joining us today on Limitless tv.

And tomorrow we are gonna be talking about how to love yourself when you don't know how, this is something that people are out there searching for. They want to get this answer to how do you step really into that feeling of self-love coming tomorrow?

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