What is equity?

Any security representing an ownership interest.

In real estate, equity generally refers to the amount of value that a property owner has in the specific property. Equity can be measured as the amount of capital a property owner (sometimes referred to as a “sponsor”) invests into a property at purchase. It can also be measured as the difference between the current market value of the property and the amount owed on any outstanding debt. Therefore, valuing a property accurately is an important factor in determining how much equity exists in an investment.

Investments in real estate equity allow investors to capture potential upside gains in property value and future cash flows after all liabilities have been paid. This upside, in theory, can be unlimited based on the “value” of the property (unlike debt which has a fixed principal amount).

Equity can come in different forms, but typically can be broken into a few categories which generally are differentiated based on the priority in which potential profits are paid out, for example: common equity and preferred equity.