Equity Fund

Finance a la Shmoop what is equity well its ownership that's

what here's equity here's equity and here's [Vehicle with a paid sticker on the windscreen]

equity this is your equity in the pie your share of ownership your one

ten-millionth ownership of whatever dot-com which just went public example

you buy a home for 500 grand putting down a hundred thousand dollars and [Chalkboard with price of a home in front of a house]

taking out a loan or mortgage of four hundred grand over the next eight years

you pay down that mortgage to be just three hundred grand and in the mean time [A payment chart graph]

the value of your house has grown to seven hundred grand

someone actually knocks on your door and offers to pay you that much in cash that [Man knocks on door and offers to pay for the house]

day all right what's your equity ownership in the house worth well you

have seven hundred grand as the price of the thing you own you have three hundred

grand in loans against it so if you sell you have to pay back the loans generally

speaking and you're left with four hundred grand as the value of the equity

you have in your home so let's spin things differently instead of the bank [A number wheel spinning]

loaning you debt money to buy your home the bank decides to partner with you as

[Bank shakes a womans hand] a co investing equity player well together you buy a condominium for 250

grand with you putting down 100k and the bank putting down 150 K both in equity

time passes tick tick tick and you sell the condo a decade later for $500,000 [Woman sells condo for $500,000 and hands over apartment]

okay now who gets what well now the bank was your equity partner instead of your

debt partner or lender so when you bought the condo you owned a hundred

divided by 250 of it or 40% and the bank owned a hundred fifty over 250 of it or [Woman doing math calculations on a chalkboard]

60% nothing changed your ownership stakes remained flat at forty sixty so now

at 500 K you sell and you keep 40 percent or two hundred thousand dollars

and the bank keeps sixty percent of five hundred K or three hundred grand and you [Woman and bank stand as dollar signs fall from the sky]

both doubled your money and note the power of debt or leverage in this model

had the bank loaned you the 150 K as debt instead of being your equity [Bank hands money to woman]

partner you would have probably paid off $50,000 or so of that loan in the ten

years you had it so you'd owe a remaining hundred

thousand dollars but you'd have sold it for the same five hundred grand and

after paying off the loan you'd have four hundred thousand dollars in your

pocket instead of two hundred thousands and yes there were interest payments

that went along the way as well as upkeep and risk and other things but in [Interest payments of 351,000 dollars on chalkboard]

theory you could have rented the home and hopefully you'd have broken even in

rational real estate rental market sorry we usually don't put that much math in [Lots of numbers on a pie as girl takes a slice]

our pie