It’s possible to accelerate equity growth, even in California, which is home to some of the costliest real estate markets in the country.
Success is found in several specific strategies, and at Bell Properties, we are always working with our owners and investors to increase their earnings in both the long term and the short term.
Our focus today is building equity. Equity is the portion of the property that is truly owned, outside of any debt that’s due or expenses that are gathering. It’s the difference between a property’s current market value and the remaining mortgage balance. The more equity an owner has, the more leverage is available to scale an investment portfolio, refinance at better terms, or sell for profit.
As California property managers, we’re gathering data and analyzing insights all the time to provide our owners with smart, actionable strategies for accelerating equity growth.
Buy Smart: Start with Equity on Day One
In California, positive cash flow isn’t always easy to achieve in the first year (or even several years) of owning an investment property. But building equity can begin before a tenant is even placed or a rent check is collected. The deal that’s closed at purchase time will shape equity growth for years.
Here’s how owners can help themselves.
Invest in undervalued properties. Expand potential acquisitions to emerging neighborhoods, especially those on the edges of rapidly appreciating markets. Not sure where to find these markets? Contact us at Bell Properties and we’ll help to identify opportunities.
Buy below market value by connecting to off-market deals, foreclosures, or distressed properties. These types of investments provide instant equity if the property can be renovated and brought up to tenant standards.
Negotiate closing costs and other seller concessions to reduce the required upfront investment.
Smart real estate investors will tell you that they make their money when they buy, not when they sell.
Leverage Strategic Renovations
One of the fastest ways to increase a property’s value (and therefore its equity) is through strategic renovations. But not all upgrades are going to deliver the same results. We always recommend that owners focus on improvements that deliver the highest return on investment. It’s better for equity, for rental value, and for attracting the best long-term tenants.
Kitchens and Bathrooms
Updated appliances, countertops, and fixtures offer some of the best returns in both single-family and multi-unit rentals. People spend a lot of time in their kitchens. It’s going to be either a huge selling point or the reason that a tenant doesn’t rent the home. Prioritize kitchens. And don’t forget the bathrooms. Small spaces are cost-effective to upgrade.
Energy-efficient Upgrades
In California, energy savings are highly valued by tenants and by buyers. Consider solar panels, insulation upgrades, and smart thermostats, especially if the market points to an environmentally conscious pool of renters. Even changing out light bulbs and installing LED bulbs can have an impact.
ADUs (Accessory Dwelling Units)
California has relaxed zoning laws, making it easier to add rentable units to a property, and an extra unit on a property will instantly increase both income and equity.
Always run a cost-benefit analysis before taking on renovations, and understand what improvements make sense for your specific market.
Use Rental Income to Pay Down Principal Faster
It’s simple math: the faster a loan is paid off, the higher the profits when it’s time to sell or refinance. When an investor has a property that is cash-flowing well, we will often recommend using some of that income to pay down the mortgage principal faster. This builds equity much more rapidly than just relying on appreciation.
Strategize to make biweekly mortgage payments instead of monthly payments. Just restructuring finances to making half-payments every two weeks will result in one extra payment a year. That shaves years off a mortgage term.
Large, lump sum payments can also be beneficial. Use bonuses, tax returns, or surplus rental income to make additional payments directly toward the principal.
If rates drop or credit improves, refinancing can free up more cash for extra payments. It’s even worth considering a cash-out refinance to reinvest in new properties.
Over time, a faster pay down can significantly increase equity positions while reducing total interest paid.
Tap Into Equity and Grow a Portfolio
With equity strong, it’s easy to leverage that into a deal when it’s time to finance another acquisition.
Two main strategies will work here:
Cash-Out Refinance
An owner will refinance the property based on its new, higher value and pull out a portion of the equity in cash to invest elsewhere. This works well in high-appreciation markets.
Home Equity Line of Credit (HELOC)
A flexible credit line based on available equity. Ideal for flipping or BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategies.
In high-equity markets throughout California, many investors scale their portfolios rapidly using these tools. Just ensure that any new deal has the cash flow to support the added debt.
Capitalize on Market Appreciation
California is known for its high property appreciation, but relying solely on the market is risky. There’s more to equity than that. But, investing in the right location at the right time means that appreciation can supercharge equity.
Invest in markets that are attracting new residents. Invest in markets that are putting resources towards infrastructure and transportation.
Appreciation is speculative, but when it’s paired with cash flow and the other proactive equity-building strategies that we’ve mentioned, the growth is stable.
Optimize California Rent Increases
California’s rent control laws can complicate this strategy, but there are still smart ways to boost rental income and with it, value and equity. As property managers, we have the best and most accurate data when it comes to rents. Contact us at Bell Properties when it’s time to raise the rent. We’ll have a great understanding of the local market and the nuances of the neighborhood where your property is located.
Higher rents not only increase cash flow but also raise the appraised value of your income property, enhancing your equity.
Understand and Maximize Tax Benefits
Smart real estate investors know that taxes can make or break equity growth. California has high income taxes, and rental income has to be reported. There are plenty of bright spots when it comes to tax benefits and equity growth, however. There are plenty of strategies that can be used to a rental property owner’s advantage.
Depreciation: Offsets taxable income even while the property continues to appreciate in real terms. The depreciation deduction is generous by IRS standards, and can have a real impact on what is earned and owed.
Cost Segregation. Accelerates depreciation on certain parts of the property, increasing deductions in the early years.
1031 Exchanges. Defer capital gains tax when selling and reinvesting in another “like-kind” property.
Working with a CPA experienced in California real estate is critical. These tax benefits can preserve cash flow, which can then be reinvested to pay down debt or expand a portfolio. We can help with income and expense documentation by providing accurate and detailed financial reports. Contact us at Bell Properties.
Build Relationships with Local Professionals
Equity growth is much easier to achieve when an investor is working with the right team. A solid network helps with identifying good deals, assists in avoiding costly mistakes, and helps owners capitalize on opportunities a lot faster.
Contractors and lenders will be important professional partners to have. A good CPA or tax accountant helps, too. As your property management partner, Bell Properties can keep your rental properties occupied by good tenants, generating the income you need to continue growing in value and equity.
As an important part of your professional team, we’ll also help you stay educated and agile. The California markets are always changing. We’re making sense of new legislation, calculating what zoning shifts mean for potential, and studying interest rate changes and economic cycles. All of these things affect equity-building strategies. The best investors are the ones who continuously learn and adapt.
Building equity in a California real estate investment requires a clear set of investment goals, some smart strategizing, and careful planning. The execution of those plans is also critical.
Making a plan to increase equity is a forward-thinking move that positions investors for long-term success. By injecting more equity into a property, investors reduce reliance on costly debt, strengthen the potential rental value and property value of their investment, and enjoy a bit more peace of mind during uncertain market shifts.
The stability and resilience that comes with increasing equity is also a huge benefit. There’s more flexibility for growth initiatives, and debt repayment is less pressurized.
For investors who are deep into a strategy of building a portfolio, we can help maximize returns through higher equity. For those investors who are new to California and unsure of how well they’ll be able to earn equity, pay down their loan, and think about future opportunities, we can provide some growth-minded strategies.
Let’s make good decisions together. Contact us at Bell Properties for all your California property management needs.
