As a real estate investor, building your wealth is probably the most obvious reason you have joined the real estate business. But with a growing real estate investment portfolio, it is hard to keep up with the numbers without knowing your net worth. More importantly, a real estate investor would find him/herself in a position where knowing his/her net worth is crucial for assessing different real estate investment strategies and opportunities. Moreover, knowing your net worth lets you understand your current financial situation and gives you a reference point for measuring progress towards your goals.
What Does Net Worth Mean?
In a nutshell, your net worth is everything you own of value (total assets) minus everything you owe in debts (total liabilities). Your total assets include cash, or anything that could be sold for cash, investments, real estate properties, cars, stocks, jewelry, well you get it, everything you own. Total liabilities are what you owe on those assets such as your home mortgage and other bank loans.
Calculating your net worth is very important, especially if you are a real estate investor. Your net worth allows you to measure your financial health because it is basically a metric that shows how much you would have left if you sell all your assets and paid all your debts. Therefore, every financial move you make, and every investment decision you take, should be aimed at increasing your net worth.
How to Calculate Net Worth
The net worth formula is really a simple one,
Net Worth = Total Assets – Total Liabilities
There are plenty of net worth calculators available online that can help you calculate your net worth. However, as a real estate investor, you should be able to calculate your net worth on your own. To find your net worth, you will first need to collect information about everything you own and everything you owe.
Information to collect:
- Real estate properties ownership
- Bank account statements
- Credit card statements
- Mortgage statements
- Current values of automobiles you own
- All investment statements
- Bank loans statements
- Student loan statements
- Value of significant items you own (jewelry, furniture, art, etc.)
Is calculating net worth important for your career as a real estate investor? Definitely yes!
As a real estate investor, a good starting point to really know how much your assets are worth is by evaluating your real estate properties. This can be done with the help of a real estate appraiser or you can do it yourself, just follow our guide on how to evaluate real estate properties. Once you have collected all the information needed, you can begin calculating your net worth by first making a list of all your assets or everything of value that you own. Again, for a real estate investor, it is important to prepare all the information related to your real estate investments.
Here is a full guide on everything you have to know to become a real estate investor: How to Become a Real Estate Investor Using Mashvisor
To simplify the calculation of your net worth, it is advised to divide your assets list into four categories:
- Tangible assets
- Equity assets
- Cash and cash equivalents
- Fixed-income assets
Tangible assets are items of value that have physical properties. In other words, assets that you can touch. Make a list of all your tangible assets and assign a monetary value to each. Tangible assets include items such as:
- Your primary residence
- Your real estate investment properties
- Art and other collectibles
Equity assets are your ownership in businesses, which include:
- Investments in partnerships
- Indirect investments in real estate such as REITs
- Business investments
- Retirement accounts such as 401(k), IRA, 403(b)
- Life insurance cash value
Cash and cash equivalents refer to cash you own and other short-term highly liquid investments. Typically, this category includes:
- Currency and coins
- Checking accounts balance
- Saving accounts balance
- Certificates of deposits
- Money market accounts
- Treasury bills
Fixed income assets are long term investments that pay a fixed amount of interest on a fixed schedule. They include:
- US government bonds
- Corporate bonds
- Municipal bonds
Once you have listed all the above items, calculate your total assets using the following formula:
Total Assets = Tangible Assets + Equity Assets + Cash and Cash Equivalents + Fixed Income Assets
The next step would be calculating your total liabilities; think about everything you owe. For further simplification, you can divide your total liabilities into two categories: secured debts and unsecured debts. Secured debts are debts that are backed by an asset, known as collateral. Under the terms of a secured loan, the lender is allowed to seize the collateral in case the borrower defaults.
- Car loans
- Home equity loans
- Second home mortgage
- Credit card debt
- Personal loans
- Student loans
- Taxes due
- Medical bills
- Other debts
Add secured debts and unsecured debts; the sum equals to your total liabilities. Finally, apply the net worth formula to calculate your net worth
Net Worth = Total Assets – Total Liabilities
Are you a real estate investor interested in learning more about real estate investing and how to make money with it? Make sure to read our guide: How to Make Money in Real Estate: Follow Our Guide
The Bottom Line
Calculating your net worth is a very important part of your financial planning as a real estate investor. It is always good to know where you stand financially in order to plan your real estate investment strategies and to assess your progress. On the other hand, updating your net worth annually shows you if your liabilities are increasing more than your assets, which could be an indicator that it is time to change your investment strategies to get out of debt.
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