Real Estate Investments Can Balloon Net Worth

Determining your net worth provides any tax-paying person a snapshot in time of how you’re doing in building wealth. As one gets older, this snapshot becomes more and more important. Will there be enough money at the end of my life to pay for prolonged care and living expenses without having to work to the Last Day? Fortunately, we do have some control in the matter.

Saving, of course, is a primary means of building this net worth, combined with reducing expenses. Getting out of and staying out of debt also serves as a great builder of wealth. The calculation of your net worth is actually pretty simple. In essence, you add up all your assets (home equity, personal property owned, savings accounts, investments, etc.) and reduce them by your liabilities (mortgage balance, credit card and other consumer debt balances, etc.) Several websites have charts and tools to use to calculate your net worth. Below are a couple links to websites with charts you can download pretty easily:

For most people, their home will be their largest asset AND their largest liability. However, with the way that equity grows in real estate (especially as we are entering a renewed economic boom) you can see with the sample below how owning investment real estate can build your net worth quicker than nearly any other investment.

Owning a home in a market headed upward, even just by one or two percent per year, grows your monthly payment into a huge wad of wealth. For example: the average home price last year was roughly $175,000 nationwide. Using an average down payment of 10 percent and adding in $200 per month for taxes and insurance, the average payment would then be about $1,144. While we may hate the mortgage payment, folks, it is probably the most effective forced savings plan out there.

Going in, the homeowner of the above property has equity of $17,500. Doesn’t sound like a lot, but look at what happens over the next five years with just seven percent growth — the national average over the last few years.

First, the equity growth. At seven percent per year over five years, the value of the home will increase from $175,000 to $245,446 — a gain of $70,446 in five years. Even if the growth was only 3.5 percent per year, you can see that your gain would still be quite a bit — $32,845.

Meanwhile, your equity is growing by the slow drop in your mortgage amount because of the monthly payment. Over five years, the mortgage amount would drop from $157,500 to $146,560, thus the equity in your home would now be $98,886. That’s pretty impressive.

As you can see, real estate investing can grow your net worth slowly but surely over time. I’m always concerned about people who write me looking to make wads of money flipping properties. The true rich people will hang on to the properties and let the equity grow.

When you consider investment property, the results are even more astounding — especially when you consider that all the net worth growth mentioned above occurs using other people’s money. With the average payment shown above, a rent payment of $1,200 per month would grow your net worth in an investment property over the next five years to $98,000 — and all you’ve put into it was the down payment.

While most people concentrate on income to grow their net worth, they really need to work on slowly reducing liabilities and increasing assets. To do that, here are some simple, actually, boring — but effective — tips on growing your net worth and some online resources to help you plan your financial future:

Get out of debt. If credit card industry stats are accurate, this move alone would increase the average person’s net worth by $9,000.

Save more. Just $50 a week turns into $2,600 per year in savings before the interest kicks in.

Reduce your mortgage. Adding a small amount per month reduces your interest payments and builds equity.

Get your first investment property. This takes time and money. As you start saving, get with a mortgage professional to learn about various loan programs, then build your investment team with a professional Realtor to find your first investment property.

The best way to build wealth is one month at a time. Simply spending less than you earn and applying the difference toward investments and debt reduction is the best way to start.