Equity buildup is the increase in the property’s equity as a result of its owner’s making monthly mortgage payments, which include both principal and interest.
Equity buildup applies to both the homeowner and the real estate investor.
For the homeowner, each monthly payment reduces the loan balance by the principal portion of the payment. In the first year of the loan, very little of the payment amount goes toward the principal. In the last year of the loan, very little of the payment amount goes toward the interest.
At any point during the term of the loan, the homeowner’s equity can be determined by adding the homeowner’s initial down payment to the amount of accumulated principal paid (equity buildup).
For the real estate investor, the equity buildup for a property during its first year of ownership is used to calculate the equity buildup rate. The equity buildup rate equals the equity buildup (for year one) divided by the initial cash investment. The equity buildup rate is paired with the cash on cash return to determine the total return on a property in year one.