Increasing Your Net Worth as a Passive Real Estate Investor Part I

Passive real estate investors the world over are looking at opportunities regarding how to increase their net worth.  Every discussion I have with passive real estate investors revolves around which opportunities will do that best job of increasing both passive cash flow and net worth.

But, let’s start with the basics.

What is Net Worth?

Net worth is defined as the difference between the value of the assets you own less any liabilities or debt that you may have.  The difference between assets and liabilities is net worth.

Net worth is one of the most important concepts involved in investment.  Your net worth determines how much money you can borrow and how much you have available in a liquidation to pay back any creditors that have loans against the assets.  You can also use net worth as a base to understand your annual rate of return from your productive investments compared with the overall size of your net worth. 

How Do You Calculate Net Worth?

Calculating net worth is quite simple.  It is the addition of all of your assets including cash in the bank stocks, bonds, real estate, any notes receivable, any accounts receivable, the value of your personal possessions and household items, the value of any and all businesses you control or are invested in, and any other investments you may have.

You then need to look at all of your debt, or liabilities, which is the total amount of debt you have and any monies that you owe.  Your debt includes amounts that you owe for credit cards, auto loans, business loans, accounts payable, notes payable, and real estate debt.

After calculating the total of your assets and the total of your liabilities, you are then able to subtract your liabilities from the value of all your assets.  That equation yields your net worth.

If you have more assets than liabilities, your net worth is positive.

If your assets are equal to your liabilities, your net worth is neutral.

And if your assets are worth less than your liabilities, your net worth is negative.

The goal in your real estate investing career is to get your passive cash flow and your net worth as high as you possibly can, so that you can take care of yourself and your loved ones long-term in order to live a great lifestyle and leave a lasting legacy for your loved ones and/or the causes that you care about.

Do All Assets Increase Your Net Worth?

The short answer to this question is no.  There are two different types of assets that you have to consider. 

The first type of asset that you have to consider are those assets that are operational in nature, meaning that they cost you money to maintain those assets each year.

Examples of operational assets would include cars, planes, boats, and even your personal residence.  Cars, planes, and boats are operational assets because they cost money to operate, store, fuel, insure, and maintain.  These assets also generally depreciate in value over time.  They are worth less than what you paid for them immediately after driving, floating, or flying them away from the place of purchase. 

A house that you use as a personal residence is also an operational asset.  While personal residences can and do appreciate over time, to the extent that you live in the personal residence, the property will cost you money each year.  You will have to pay money for the upkeep, repairs and maintenance, real estate taxes, insurance, and mortgages that may be owed to the bank secured by the property.  A personal residence can appreciate in value and may give you a nice pop in equity.  However, you have to look at a personal residence as an operating cost because you have to be comfortable making the payments and keeping up with the ongoing costs associated with the property.  If you view the personal asset as an appreciable asset, you could be disappointed if you have issues keeping up with the ongoing expenses related to the personal residence. 

The second type of asset that you have to consider are those assets that are accretive to your net worth.  There are a number of other assets that generally are accretive to your net worth over time because they add cash to the asset side of your personal financial statement and because they have the potential to appreciate over time.  These investments include cash flow real estate investment properties, business investments that you control directly or indirectly, loans, and stock and bond portfolios.

Generally speaking, these assets are accretive to your net worth, as the expectation is that these types of assets general current cash flow and can appreciate over time.

How Can Passive Cash Flow Real Estate Investing Increase Your Net Worth?

Passive cash flow real estate investing increases your net worth in a multitude of ways.  But there are really five ways that are the most important to consider.

Idle Cash Becomes and Asset

The first way that passive cash flow real estate investing increases your net worth is with the cash you use to invest in a particular deal.  While you already have the cash in the asset column of your financial statement, it moves from idle cash to an investment, which also resides in the asset side of the ledger of your personal financial statement. 

Ability to Generate a Preferred Return

The second way that passive cash flow real estate investing increases your net worth is that cash flowing real estate investments that are in the asset column on your personal financial statement generally carry a preferred return or dividend that you will receive on a monthly, quarterly, semi-annual, or annual basis.  That preferred return or dividend that gets paid to you gets added to your available cash on the asset column in your personal financial statement.  That cash is usable and can be used to cover your living expenses or to reinvest in additional passive cash flowing investment deals.

Value of Equity Increases Through Principal Paydown

A third way that passive cash flow real estate can add to your net worth is that, in many instances, there is a loan affiliated with the cash flowing asset.  The loan can be secured against a particular asset or within a Fund depending on the investment that you made in that real estate property or portfolio.  The loan has an amortization schedule, and assuming that the loan is not interest only for the entirety of the loan, the amortization schedule means that the principal of the loan gets paid down in agreed to periodic increments.

That reduction in the loan balance gets reduced assuming that the value of the property has stayed the same or increased, thereby increasing your net worth.

Value Enhancement at the Property

The fourth way that passive cash flow real estate can add to your net worth is when value is being added at the property through upgrades to the property, better property management, better financial oversight, refinancing, redevelopment, or repurposing the property to another use, to name a few.

The value of the asset will likely increase over time with that additional value add created at the property.  Additionally, the market for real estate typically appreciates over time through inflation, which also provides an opportunity for the property value to increase.

Tax Benefits from Real Estate Investing

The fifth way that passive cash flow real estate can add to your net worth, which we are not going to discuss too much, but which does have an impact on your net worth, are the tax benefits that you potentially receive by investing in cash flowing real estate deals.

What are the Benefits of Having a Larger Net Worth?

When you have a larger net worth, you are able to make more investments in additional cash flowing deals.  You are able to buy more of the things that you may want in your life – those material possessions that you have desired.  You have the ability to pay for the experiences, vacations, and dream trips that can provide lifelong memories for you and your loved ones.

When you have a larger net worth, you are able to grow your business or your investment portfolio faster because you have more cash available, you will be able to take on more loans, and more investors will recognize that you have been a good fiduciary of your money and that you have the capability to assist them with growing their passive cash flow and aid them in increasing their net worth. 

Another benefit, which is extremely important, and one that we discuss nonstop at Guardrail Finance is that having a larger net worth provides you with the financial security that you need to do and have what you want in your life.

Another parallel benefit to having a larger net worth is having financial freedom because having a larger net worth provides you with the freedom to do what you want to do when you want to do it.  Having a larger net worth allows you to be able to take time off to do the things you love, and having a larger net worth allows you to spend time with those that you love.

What are Some Ideas that You Can Utilize to Increase Your Net Worth?

One of the ideas that will benefit you is being able to diversify some of your net worth into a multitude of deals.  We believe in diversification into multiple asset types in various geographies and with a number of Sponsors. 

Another idea that we strongly believe in is what we call equity leverage.  Equity leverage is a concept that is somewhat different than the normal leverage discussions.  Equity leverage is taking the equity that you have to invest in deals, and investing that equity in larger deals alongside other sponsors and co-investors.

We all know the term leverage related to debt, which is when you put a loan on a property, and thereby need to put in less equity on each deal.  But equity leverage is a little bit different concept in that you may have a property that you invest in.  There is debt secured at the property level.  And the equity comes from a number of different sources.  Each investor has to put in less equity, which effectively is leverage on leverage.  The property is leveraged, which can enhance investor yields, and with multiple smaller investors, the investors actually leverage their equity and can also enhance their returns that way.

Using the leverage strategy described above, let’s assume we have a $1 million property, and you have $50,000 of equity to invest in that $1 million property.  We will assume that we put 70% debt on the property and 30% equity is needed to close.  That would mean that there is a $700,000 loan and $300,000 of equity needed.  In this example, if you wanted to put $50,000 into the deal, you would be $50,000 of the $300,000.  So, you in turn would have 1/6 of the equity.  And instead of having to put in 100%, you would be a 16.6% owner of the asset.  But you would be leveraging your equity to buy into a larger deal that you may not have been otherwise able to do without the additional investors.

What are Some Strategies that You Can Utilize to Increase Your Net Worth?

There are a whole host of strategies that you can utilize to increase your net worth.

The overarching strategy that we employ is called AIRR.  AIRR is an acronym that stands for Analyze, Invest, Recapitalize, and Re-invest.

A strategy that we utilize is investing directly.

Another strategy that we use is investing passively with other sponsors.

A third strategy that we use is investing in funds, where we may be able to get access to more deals quickly in more geographic locations in asset types that we may not necessarily see otherwise.

Yet another strategy that we utilize is investing internationally, both directly in property and also in debt investments.

Where Can You Find Attractive Investment Opportunities to Increase Your Net Worth?

There are a number of places where you can now find real estate investing opportunities.

Crowdfunding is a recent source.  But you must be careful that you do the analysis on the deals presented on the platforms.  My experience has generally been good on crowdfunding, but I have had one deal that did not turn out the way I wanted it to.  That deal is undergoing legal action related to the Sponsors not following through on what they were supposed to.

Other places where you can find attractive investment opportunities are with friends and family who are involved in the real estate investment industry.

Another area to find attractive investment opportunities are with large privately and publicly traded REITs.

A fourth avenue where you can find attractive investment opportunities, and that we would be happy to discuss with you, is a membership in the Passive Real Estate Investor Wealth Club.

We are looking at both direct and indirect investments across the country where we believe we can provide a solid cash-on-cash return, as well as in deals where we can provide upside through a number of different avenues.

In conclusion, you owe it to yourself and your loved ones to increase your net worth.  Your net worth does not define you.  However, it will help you with providing the level of financial security and financial freedom that you and your family deserve.

Until next time, let’s continue growing our passive cash flow and net worth together.


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