The median net worth of an American is about $91,000. But what does net worth mean? And can I increase my net worth by purchasing properties? The short answer is Yes. Here’s how –
How to Increase Net Worth Through Real Estate?
What is Net Worth
It represents the monetary value of all the assets a person owns minus all his or her liabilities. Sometimes, this term is denoted as the shareholders’ equity. However, don’t mix the net worth with your annual income.
Your net worth is calculated by the value of your house, properties, bank balance, and total investments.
Say the value of your primary residence is $200,000, your total investment portfolio is $100,000, and another asset class contributes around $20,000. So, your total assets will be $320,000.
Now, for purchasing your primary residence, you have taken a mortgage loan of $100,000, and you have a car loan of $15,000. So, your total liabilities will be $115,000.
So, your net worth will be $320,000–$115,000 or $205,000.
Types of Net Worth
Net worth can be categorized into two types – positive net worth and negative net worth. If your total assets are more than your liabilities and debt, it is called a positive net worth. But if your total assets re less than your total debt, it’s a negative net worth.
3 Ways to Increase Your Net Worth by Investing in Real Estate
1. Taking Leverage Through a Mortgage Loan
By taking on leverage, you can maximize your return on capital. In real estate, you can take on leverage through a mortgage.
This strategy is not only used by regular real estate investors but also by big companies. If the price of your property increases, you can easily multiple your money in a short time. However, if there is a housing market crash or the value of your property declines, you can go into debt. That is why many consider it a risky strategy to increase your net worth. However, depending on your risk appetite, you can select your leverage.
2. House Appreciation
House appreciation can also increase your net worth. However, if you own a single-family house, the probability of appreciation may be minimal. But, if you have a multi-family property, the value of the property can appreciate much more than a single-family house.
Still not clear how your net worth can increase with appreciation?
Say you have a $100,000 mortgage, and after appreciation, the value of your house becomes $200,000. Now, the difference between these two, or $100,000, will be added to your net worth. Even if you have a mortgage of $80,000; your net worth still increased $100,000 but your return on your investment is much higher than 2x since in this simple example; you invested only $20,000 to gain appreciation of $100,000. For a property to increase 2x, you most likely did work to the property but we will leave that out of this simple example.
3. Investing Carefully
The best way to increase your net worth is by investing in the right type of real estate property. For example, when you invest in vacation rental real estate, you can increase your net worth quickly; but while investing, ensure that the property has all essential amenities nearby and has demand.
