What is the calculation for equity in real estate?

In real estate, equity represents the ownership interest in a property. It is calculated by determining the current market value of the property and subtracting any encumbrances, such as mortgages or liens, that are secured against it.

The reason for this calculation is straightforward: the market value indicates what the property could be sold for, while encumbrances represent the debts owed on the property. By subtracting the encumbrances from the market value, you arrive at the amount that the owner truly possesses—or the net value that would be available upon sale after settling any outstanding debts. This concept is essential for understanding an owner’s financial position regarding a property, as equity directly influences decisions around refinancing, selling, or leveraging the property.

Other calculation methods, such as addition, division, or multiplication with encumbrances, do not accurately reflect the financial interest or ownership stake in the property, therefore leading to incorrect assessments of equity.