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How To Build and Generate Equity for Your Home

Help make your home-investment work for you and build equity by securing a home equity loan, renovating your house, and building an ADU.

Updated

January 1, 2018

Your home is one of the most important real estate investments you can make. How you decide to finance your property or generate equity for your home can make or break whether you get a significant return on your potentially valuable asset.

It’s understandable how this can seem daunting to new homeowners budgeting around California’s increasingly expensive housing.

Luckily, there’s a wealth of things you can do to generate equity for your home, including home equity loans, home improvement projects, renovations, renting out an ADU (accessory dwelling unit), and even simpler touches that won’t require as much construction. Let’s look at some of these ways to generate equity for your home.

Building Equity: Start With Your Down Payment

If you’re going to purchase a new home to build equity and make a return on your investment, start working toward that from the very beginning with your down payment.

It’s no secret that this is one of the most significant expenses in buying a home, and many struggle to afford it, usually relying on long-term savings or help from family.

While a big down payment may seem daunting initially, it helps to consider them an initial investment. With the way housing prices are soaring in California, most properties will already generate equity over time.

Your down payment can eventually get back into your pocket, as your home generates an amount of equity beyond the lump sum of your mortgage loan.

Find a property that won’t break your budget, allowing you to invest more money into renovating or expanding your home.

Good News: California Wants More Homeowners

Luckily, California legislators are working to make this expense less of a burden on new owners to encourage more people with middle or lower incomes to invest in property during the housing crisis, rather than being stuck in a cycle of renting.

On top of this, California has already introduced several mortgage loan programs, down-payment assistance programs, and grant programs to aid prospecting homeowners.

Legislators recognize that home ownership in California is a significant factor in gaining upward mobility for lower-income families and those who the housing market has left behind in the past.

That being said, many things can still be done to generate equity with even more efficiency and higher returns.

Refinance Your Property With a Home Equity Loan

A home equity loan is a great way to acquire financing early to work on home improvement projects and other renovations that will build equity. Home equity loans, also known as second mortgages, are a great way to raise the return on your investment and generate equity more efficiently.

These refinancing loans are usually taken out after you’ve paid your down payment, had a mortgage for some time, and built equity on your property.

How does a home equity loan work?

Where conventional mortgage loans help you front the cash to purchase a home, home equity loans help you cash in on the appreciation of your property. When you take out a home equity loan, you’re borrowing against the equity in your home, meaning you’re increasing your debt. Home equity loans are often taken out to pay for something — such as a home improvement project like an ADU.

This way of using home equity loans — leveraging equity for cash, then funneling the money back into your property for home improvement — increases the value of your home. Since equity is tied to the market value of your property, borrowing against your equity, for this reason, can be a way to increase your equity long-term.

How a Home Equity Loan Is Quantified

Lenders base home equity loans upon your property’s equity. Equity is the difference between the market value and the remaining mortgage balance. So, for instance, if your home is worth $300,000, and there’s a remaining mortgage of $100,000, then your equity would be $200,000.

It is that equity that then becomes your collateral for a loan. You are, in practice, getting access to that equity early to build further and grow it.

It’s essential to have a good plan on how to generate equity before you think about this kind of loan, as they usually have higher, fixed interest rates than a first mortgage, along with some service fees. You also want to be sure your home will continue to generate value beyond the scope of your loan.

Fortunately, many great ways are outlined to help you pay that loan while generating surplus income and equity.

Home Equity Lines of Credit

Home equity lines of credit, or HELOCs, are another option for homeowners looking to invest further in their property. HELOCs are like a lender-issued credit card, allowing the homeowner to access funds as needed more flexibly.

The homeowner can access these funds via a card, check, or online transfer. It may go without saying, but the amount a homeowner can borrow depends on how much equity they’ve built up.

Whether you choose the home equity loan or HELOC route, you can tap into whatever equity you’ve generated already. This makes your money work for you, developing even more equity, all growing from the equity you’ve already built.

Fortunately for investors, there are many ways Californians can build their equity and eventually earn a return on their investment.

Home Improvement Projects: Renovations To Build Equity

Whether you’ve got your financing secured from a home equity loan or another method, making that money work for you is another matter. There are a few great ways to increase the value of your property, one of the more simple and less labor intensive being home renovations.

Here’s a short list of some home-improvement projects you can try to build equity:

Renovate extra rooms or space to create an attached ADU (accessory dwelling unit), which will increase the value of your home while also providing income as a rentable space.
Repaint walls and ceilings, regrout or restain floors, replace or repaint window and door frames, and replace carpets to give your home a fresh, modern look and increase its value.
Build a fence, patio, or porch to add ambiance and sociability to your yard.
The first rooms many buyers care about are the kitchen and bathrooms. Renovations like adding a new shower, tile floor, a kitchen island, or replacing appliances can make a home feel fresh and improved, and impact value.
Paint and finish garages and basements to add more rooms and storage space.
Powerwash driveways, stone surfaces, and patios to keep your outdoor spaces looking new and clean
Replace roof shingles and siding to give the house a fresh exterior without significant structural changes.

Build Equity Efficiently and Affordably With ADUs

Accessory dwelling units are a great way to generate income and build equity in your investment. These units are essentially additional living spaces on a shared property, intended either for a family member, a renter, or yourself.

During a housing crisis, California legislators are working to encourage the practice of building ADUs by making such projects more affordable. Building an ADU can provide affordable housing for a renter or family member.

The California government already provides several grant programs for homeowners looking to build an ADU.

Additionally, building an ADU doesn’t necessarily mean undertaking a lengthy construction process on your property or breaking the bank.

There are many different types of ADUs to explore:

Conversion ADUs are units that are part of an existing structure, such as a room in a house, an attic, a garage or a basement. By renovating these spaces, you can rent them out to tenants as ADUs.
Attached ADUs are an attached structure to the home that operates independently from the rest of the property. It functions as a separate home but is part of the same structure. These are ideal for family members and renters alike.
Detached ADUs exist separately from the property's main structure, such as a cottage. These are most appealing and valuable to renters and can actually be cheaper than conversion projects because they don’t have to tie in to home’s existing walls and utilities, which may or may not be suited for a structural addition. This type of ADU is also ideal for small businesses needing an office or storage space without paying for another property.

Building one of these ADUs will not only build equity by increasing the value of your property but can generate income and provide financing for repayment or further improvements.

Keep Communities Alive and Thriving With ADUs

ADUs are a healthy option for the housing market in California for more than a few reasons.

First, ADUs can provide affordable housing in neighborhoods that may have become too expensive. They can also attract new residents to areas that may have previously been too inaccessible financially.

ADUs give more incentive to people to invest in property, as they provide a viable means of income that can make monthly mortgage payments much more realistic and affordable. Once you have that extra money, making monthly payments doesn’t have to be as damaging to your personal finances.

By making homeownership more affordable, lucrative, and accessible, ADUs give opportunities to communities that may not otherwise have had the means to grow and thrive. Homeownership is an opportunity that, coupled with extra income from an ADU, can make upward mobility much more realistic for many people and families.