How much attention should real estate investors be focusing on their net worth?
Net worth is essentially how much you are worth. Your assets minus your liabilities. So if you own $2 million in real estate, and owe $1million in mortgage loans, your net worth is $1 million. Many will also have vehicles, credit card debt, and cash to consider as well.
Note that your primary residence is not normally counted in net worth calculations. This is specifically true for calculating net worth to qualify as an ‘accredited investor’. To qualify for certain investment opportunities, accredited investors need to have a net worth of at least $1 million (not including their personal residence), or at least $200,000 in income for the last two years.
For many, investing in real estate is all about net worth. It isn’t just about comfort or making enough money to survive, or being able to retire. It can accomplish those milestones along the way, but for many it is about competing, and clocking up ‘success’. That’s what the Forbes’ richest lists are all about, right? Neither Bill Gates nor Warren Buffett really need any more money. However, you can imagine that they enjoy being at the top of the list.
What Doesn’t Get Measured, Doesn’t Get Improved
Clocking your net worth can be fun. It not only tells you where you are, but if you are headed in the right direction, and if you are doing the right things. After all; net worth is like anything else in this arena: it is either going up, or down. If you aren’t watching it, you simply don’t know where you are, and if you are making the right moves. If you are tracking it, you can see when you may have made bad moves, are potentially putting your net worth at risk. More importantly, you can identify some ways to improve your financial position.
Perhaps you can retire a little more debt, need to focus on more aggressive growth investments, or demand better spreads on your investments. May be you need to do more of what you were doing two years ago. Or even find a new strategy altogether. Maybe you need to stop financing yourself to the throat when it comes to car payments. Whatever it is, keep track of it.
Does Net Worth Even Matter?
On the other hand, there are those who are increasingly questioning the value of net worth. This includes notable authors and at least one Harvard professor who poses that net worth can be virtually worthless in retirement. Then there is the question of the value in measuring paper gains or assets.
Right or wrong, if a high net worth is your ultimate goal, it gives you your value, and should be tracked vigorously. For others, it will absolutely be a building block of freedom, and a crucial tool for achieving what they want and feel is even more important than money in the bank.
However, even if real estate investors don’t really care where their net worth is today, it is important to watch. This applies to the paper gains, the rankings against peers, and your personal residence. Why? Because this will play a big role in where your finances will be later, and the degree to which you can do the things you like, and how your finances will provide for you when you aren’t working.
What’s More Important than Net Worth?
On a personal level, every real estate investor likely has items that are more important that net worth. This might be more time off to spend with family, the freedom to fulfill other aspirations like travel, or even helping more people. Sometimes it might simply be consistent improvement.
What About Cash Flow?
For many, cash flow is becoming more important than net worth. This is driving more to real estate and the passive income. Positive cash flow can often deliver on all of the above. It can fuel feel good spending, time off, giving, retirement, and more. In fact, if cash flow was never pinched, it may certainly be far more important than net worth. Net worth’s highest and best use may be its ability to be converted to cash flow. However, it is important not to lose sight of true net cash flow, and liquidity. There is certainly good leverage, and bad levels of leverage over the long-term.
Summary
Net worth is important, but there are others things to watch. Don’t get lost in it, but check out your net worth on a quarterly, semi-annual, and annual basis, and find ways to improve all of these items.
