Do you know where you are personally?
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
How many of you are aware of your personal balance sheet? While, I don't worry about pennies, I do track my balance sheet.
A personal balance sheet is slightly different than a business balance sheet.
Major Elements
Assets - Liabilities = Net Worth
It can be easy to think of investing as just the assets we buy, there is much more to it than that. Assets are great, but if your debt is to high it really doesn't matter.
Bottom line, I want to know that my net worth is growing and that I'm counting real assets and fully recognizing any debts that I have.
Mike, don't throw out the baby with the bath water...just because the originator decides not to be honest with themselves and over estimate what something is worth does not mean there is no value to a personal balance sheet.
You always have a choice. You can fool yourself into thinking your RE is worth so much more than it really is or you can give it a realistic value. Same goes for all your other assets and liabilities. Sure, for rental properties NOI is king but they are still an asset.
I think it really comes down to whether net worth (an honest one) is important to you or not.
Charles,
I track my balance sheet fairly closely, even the pennies lol. I have always had trouble with valuing the real estate owned against the debt. How do you value your real property? Historical cost? Comps? Based on rent and market cap? An average of the three?
On a personal balance sheet you want to consider market value rather than historical cost. This is the main reason I don't track to the penny. I use comps and know my market areas fairly well so I have a decent feel for what my real estate is worth. There are some assets actually much more difficult to determine a FMV on and I end up just using a conservative number. It is easy to to be precise with cash and most debt, but when the other numbers are not precise the pennies become meaningless.
Like you, Charles, I always have a good grasp of what my personal balance sheet looks like -- to me, this is much more interesting than my business balance sheet, as the business balance sheet treats some assets in a way that aren't useful for assessing my financial situation (for example, using market value of the assets as opposed to basis).
Plus, my lender requires us to do a personal balance sheet every year, which forces us to break things down to the penny as well...
Yan, I think it is a good question and it is certainly a mjor element of the balance sheet.
I do strive to build my net worth. While I do not specifically purchase RE assets for appreciation, I do expect over the long run. I always have some kind of value add play in mind as well. I have no desire to own 500 million in assets with debt nearly equal or greater than that. Net worth is an important part of the balance sheet.
Yan, I'm happy to see a 1-3% growth in my net worth over the course of a year. I'm still growing my assets and there are years that my net worth declines slightly which is okay because fundamentally I know my assets are producing and paying down the debt so in time net worth will grow even more.
When you invest in commercial properties or have a real estate business like J Scott's, you will be required to have personal financial statements for lending purposes.
We're still newbies at this, but I do have a spreadsheet I update every month. It was interesting to get your perspective on how you value your real estate. That's been something I've been unsure about - I've been using zillow since it seems reasonably accurate in the areas where my properties are - but I'm not 100% comfortable about this.
I agree with Charles. I recently met with a potential lender and that was one of the things he asked for. Fortunately since I track this on a quarterly basis it was fairly simple to put together.
But most importantly your personal balance sheet is the most important thing to track because that is the whole purpose of real estate investing - to increase your net worth.
If you invest in real estate and your profits don't translate into an increase in your net worth then IMO you really have not made any progress, you are not any better off.
The important thing is not how much you make but how much you keep.
We track all sorts of metrics on our personal net worth every week. I agree that tracking it down to the penny is tough because some things are hard to value, but we do so anyway.
We also track is debt to equity and other liquidity figures. I find these are useful in trying to figure out whether growing or shoring up our balance sheet is the right course of action at any point in time.
We have also received kudos from banks when we showed them this in the process of trying to get loans.
One of the things that I have found is that is gets harder and harder to have an accurate accounting as our business grows so I shift more of this to our accountant who does our books monthly. Capital accounts, stock options, etc. are either volatile or difficult to value in a privately-held entity. This uncertainty suggests that tracking things to the cent is likely worthless....we can't be that accurate.
I absolutely know where I stand financially and track it on an almost daily basis via Quicken.
I run just about everything through Quicken to include stocks. Quicken has the ability to update stock prices on demand, and I do that almost daily.
I do not include depreciating assets such as cars, boats and motorized 'toys' in net worth calculations. I don't borrow when purchasing vehicles, and the ones we own are worth a decent amount, but I leave them out of the equation.
The only debt I have is on real estate and I have a minimum of 30% equity on each property I own.
As far as net worth growth, I have a dollar number in mind that I shoot for annually. I'm able to save a significant amount from my full-time job which in itself contributes to decent monthly growth.
I'm glad to see quite a few are doing this. Kudos, because it is far easier to improve on your personal situation when you no where you are at.
Depending on the assets that you have it can be fairly time consuming to determine a market value more than say quarterly. In my experience quarterly works well.
When you have the basic information and regularly collect it then it is possible to perform metrics as Bryan said to have a better understanding and make some choices based on it.
Kevin, I don't know what your balance sheet looks like, but if you are growing it by double digit percentages each year then that's amazing. It is of course impossible to sustain for more than a short while.
I'm still growing my assets and am quite happy to have a modest percentage increase each year in net worth.
Charles - I'm able to bank about 30% of my gross salary annually, and that currently can increase my net worth by double digits annually.
In 2008, my net worth took a pretty good hit, erasing all the savings contributions and then some.
It's all back now plus more, but that hit added a year or two to a significant goal I was on target to achieve by 2013.
Indeed, double digit growth will be hard to maintain as net worth increases. The dollars will remain the same, but the percentages will certainly trend down.
My guess would be the majority of people have no idea of their net worth.
In many cases, even if they did, they'd probably see it was negative AND moving in the wrong direction.
Great to hear that you are able to bank so much. I also live significantly below my means which allows me to build cash for investments and otherwise put the money to work.
I hope though when you say banking 30% you are not literally put it in the bank and not putting it to work for you. If nothing else there are great ways to safely get 6-8% interest on your money unavailable in the bank.
Unfortunately, I mean literally banking it, getting a measly 1.x% in interest.
I don't want any risk with this money, so it sits until I find a suitable investment for it.
If I don't find something suitable and have far too much there, I'll pay off a rental, or pay down a large chunk of our personal residence.
Ultimately, my goal is to hold paid off properties, both our personal residence and investment properties.
Building a large reserve is OK by me, if nothing comes along when the balance reaches a certain point, I'll use large chunks of it to pay down mortgages.
I also like old muscle cars, sold one I had a couple years ago to a man in Australia, more than doubled my money (I held it for around 4 years). I'm on the lookout for another one, if something catches my eye, I'll buy it, with cash of course.
Cash is OK by me, gives me tremendous flexibility. If there were a no-risk, or very very low risk avenue where I could earn 6 to 8% I'd be interested, but I'm not aware of those vehicles.
Kevin, it sounds like you are doing an awesome job building a safety in your investments. You know your risk tolerance better than anyone else. Using the bank to hold your cash while waiting for good RE opportunities is definitely not a bad thing. All cash gives you an opportunity to buy at larger discounts than might otherwise be achieved.
I run just about everything through Quicken to include stocks. Quicken has the ability to update stock prices on demand, and I do that almost daily.
I do not include depreciating assets such as cars, boats and motorized 'toys' in net worth calculations. I don't borrow when purchasing vehicles, and the ones we own are worth a decent amount, but I leave them out of the equation.
The only debt I have is on real estate and I have a minimum of 30% equity on each property I own.
As far as net worth growth, I have a dollar number in mind that I shoot for annually. I'm able to save a significant amount from my full-time job which in itself contributes to decent monthly growth.
I keep track of my RE through my accounting, but while I'd hope for appreciation on my property I'm not overly concerned about the equity of the property as long as the mortgage gets paid down.
Jordan, it sounds like you use some of the elements of Quicken. Do you prepare a personal balance sheet periodically so as to know your net worth situation?
I am one of those people who find a Balance Sheet to be exactly what it's initials are. 99% of assets are either over valued or under valued. While some assets, such as stocks and bonds, have a value that can be estimated closely, even their value changes second to second.
If I say I have $5M worth of real estate but need to FIRE SALE them and sell for $2M, how valuable was my Balance Sheet? Worthless. But if my properties bring in $50,000 a month in rents, does it matter whether they are worth $2M or $5M?
Mike, don't throw out the baby with the bath water...just because the originator decides not to be honest with themselves and over estimate what something is worth does not mean there is no value to a personal balance sheet.
You always have a choice. You can fool yourself into thinking your RE is worth so much more than it really is or you can give it a realistic value. Same goes for all your other assets and liabilities. Sure, for rental properties NOI is king but they are still an asset.
I think it really comes down to whether net worth (an honest one) is important to you or not.
A small fibbing on the value of your real estate is probably okay if you don't plan to sell it. I figure that we will lose around 5-10% of the asset in transaction costs if we have to sell the real estate, but we don't plan to sell any of it.
Charles...we have made in excess of 30% annual gains for three of the past four years. We missed last year with the horrible economy, but hopefully we will come close again this year. As our equity grows this gets harder, but I still feel it is doable without crazy high risk for now.
As we age and grow our net worth I find myself wanting to be more conservative and shore up our balance sheet some more. One of our main goals for the year is to reduce our debt to equity ratio to one. We should be able to do this fairly easily this year if we stick to our plan.
I agree with those that said keeping track of things is a useful exercise. Rounding and estimating are a big part though as things get more complicated!
If I say I have $5M worth of real estate but need to FIRE SALE them and sell for $2M, how valuable was my Balance Sheet? Worthless. But if my properties bring in $50,000 a month in rents, does it matter whether they are worth $2M or $5M?
Mike, I agree that some people produce BS in an attempt to fool themselves or outside parties. A balance sheet though doesn't have to be BS. It can be a real tool, if you used wisely and you make conservative estimates of FMV. When you prepare your own balance sheet you decide what the most meaningful assessment is for yourself. Sometimes a balance sheet is necessary for outside parties, it is still a good idea to use conservative numbers and avoid the BS.
Your income statement can tell you how well you are doing in the short run. Your balance sheet indicates how your overall strategy is working or not working. It also can tell you if you are going to meet your retirement needs.
The balance sheet is just a tool. You can choose to use it or not use it. When I prepare my balance sheet, I go out of my way not to overvalue my assets because it doesn't help me to get a real picture of where I'm at.
When you have a large number of assets it can get quite cumbersome to evaluate especially if you have multiple entities that you own and/or multiple assets types. IMHO it is still worthwhile for me to see at the very least on a yearly basis how I'm progressing on my long term financial goals.
If I say I have $5M worth of real estate but need to FIRE SALE them and sell for $2M, how valuable was my Balance Sheet? Worthless. But if my properties bring in $50,000 a month in rents, does it matter whether they are worth $2M or $5M?
A Balance Sheet will only be as accurate as the numbers feed into it, and yes, a fire sale will take the wind out of the sails for sure.
Then again, 50K in monthly rent doesn't mean anything either. I could buy an Apt complex that grosses 50K in rent per month, but if my expenses were 55K per month, where does that put me?
Assume two investors:
Investor A has 3 properties that gross 5K a month.
Investor B has 30 properties that gross 50K a month.
Who is better off?
Who has more net worth?
Who is wealthy?
There is no way you can tell from the information given, but a balance sheet would sure shed some light on it, even if the balance sheet was not 100% accurate.
Hard to fudge on what is owed, and if the value is fudged, due diligence would uncover that.
Charles...we have made in excess of 30% annual gains for three of the past four years. We missed last year with the horrible economy, but hopefully we will come close again this year. As our equity grows this gets harder, but I still feel it is doable without crazy high risk for now.
As we age and grow our net worth I find myself wanting to be more conservative and shore up our balance sheet some more. One of our main goals for the year is to reduce our debt to equity ratio to one. We should be able to do this fairly easily this year if we stick to our plan.
I agree with those that said keeping track of things is a useful exercise. Rounding and estimating are a big part though as things get more complicated!
Your personal balance sheet is your tool, how you use it is completely up to you. I choose to use conservative numbers based on reasonable comparables.
I'm getting the sense from some comments that some may misunderstand what I mean by percentage growth in net worth.
Here is an example of what I'm talking about.
Asset - Liabilities = Net Worth
Year 1 Assets (100,000) - Liabilities (85,000) = Net worth (15,000) in this situation net worth is only 15% of your assets
Year 2 Assets (200,000 - liabilities (160,000) = Net worth (40,000) net worth is now 20% of your assets a growth of 5%.
I think some are misunderstanding what I mean by growth. I sense that most of you are comparing the 40K to the 15K. Nothing wrong with looking at that metric, but I think it is also important to consider where you are at least yearly net worth as a percentage of your assets.
I've done balance sheets for 20 years for my IT business. My bankers have typically also wanted personal financial statements, which are basically personal balance sheets. If you think valuing RE on a balance sheet is a challenge, try valuing a small services company. The key is to come up with an accepted methodology, explain it, and stick to it. Accurate? Who knows until a transaction takes place. The banks have never gotten hung up on this.
I have an app on my iPhone called Net Worth. It is a quick little balance sheet app.
Very interesting topic. How much detail do you put in to your balance sheet? I don't put regular monthly expenses such as gas, groceries, electricity etc, these to me are part of the household budget and don't belong on the balance sheet, am I going about this all wrong?