Wealth Creation in Real Estate Investing Boils Down to Net Worth
Wealth Creation in Real Estate Investing Boils Down to Net Worth
Wealth Creation in Real Estate Investing Boils Down to Net Worth
By Kalinda Rose Stevenson, PhD
Wealth creation in real estate investing is first of all a matter of net worth In business, net worth is the difference between assets and liabilities. It is enlightening to make the same calculation for your personal financial situation. If your objective is to increase your wealth, make it your goal to increase your net worth not simply to acquire more assets.
It might seem obvious, and yet people don’t always consider costs when they make decisions about wealth creation activities.
Consider buying an investment property with a FMV (fair market value) of $100,000. You buy it for 70% of the FMV, which is $70,000. Just to keep the math easy, let’s say that you buy the property with no money down, and take a mortgage of $70,000. You now own an asset worth $100,000.
The question is: How much has this $100,000 asset increased your net worth? It is the difference between $100,000 and $70,000. Your net worth has increased by $30,000.This sounds like profit you can take to the bank in the kind of transaction that will rapidly increase your wealth.
The problem is, you have not considered costs. Before you can take your money to the bank, you also need to consider taxes, interest payments, insurance, upkeep, and repairs.
What if you buy the property and then discover that you need to make $30,000 in repairs? Now you have to subtract an additional $30,000 from your net worth These numbers show that your investment property has not increased your net worth at all. And you still have to consider taxes, interest payments, insurance, upkeep, and the possibility of other repairs.
When the dust settles after this transaction, you see that all of your trouble has done nothing to increase your net worth And when you calculate other expenses, the great deal of buying this property at 70% of the FMV with 100% financing, plus the added cost of taxes, interest, insurance, and upkeep, actually decreases your net worth.
To make a long story short, the critical insight here is that it is imperative for you to calculate the effect of any financial decision on your net worth Wealth creation boils down to net worth not the value of your assets. Real estate investments that seem like a good deal can actually decrease your net worth if you don’t consider all the costs.
Do you want more money to buy real estate? Discover how to “Partner For Profits” in a real estate investing book about joint ventures with like-minded investors. Become a No Money Limits investor.
Kalinda Rose Stevenson, PhD.
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Thank you so much for this article!!!
unlike some blogs i have read which are really not good. i also found your posts very interesting.
this is very helpful information delivered with wit and style.