How is personal net worth calculated with rental properties?

Question

Whats up BP. I have a quick question about net worth and REI. Are rental property mortgages calculated in net worth? For example, If I purchase a 100k rental property for 20k down and take on an 80k mortgage, would my net worth after this purchase be -60k? And with similar purchases would I would go deeper and deeper in the negatives for net worth? Or is only the 20k equity counted? Am I looking at this wrong? Thanks.

Ravi P. · Answer

@Robert Jones

Based on the example you gave your net worth/equity would be 20K.  You can  calculate net worth by taking Value of the Asset minus the Liabilities. In this case it would be the 100K - 80K = 20K.

If the Value of the real estate appreciated to 105K, then your net worth would be 25K.  105K - 80K= 25K.

Also, If the value increased to 105K and you paid the mortgage down to 78K and your net worth would be 27K.

This does not take into account the cash flow. Money in the bank is an asset and would increase your net worth.

Hope this helps.

David D Painter · Answer

Equity is the current value of a property minus outstanding mortgages so mortgages definitely affect it.  The equity is your net worth. Forget your 60k figure. Your property is valued at 100 minus a mortgage of 80 equals 20. 20 is your equity and net worth. This is assuming the property is indeed worth $100.

Justin Fox · Answer

If the home is worth 100,000, then your net worth would be affected +20,000 by selling the property.  If you sell it for 20,000, put that towards the mortgage, lose your down payment and subsequently keep the remaining liability, then your net worth would be affected by -60,000.

Patrick Liska · Answer

@Ravi P. spelled it out the best for you. and that Net Worth will help you when you go to the bank and they check your dept service coverage ratio when applying for your next loan.

John Thedford · Answer

Assets-liabilities = net worth.This goes not only for your rentals, but also your primary residence (if owned--then the value of the home minus any mortgage balance). Your net worth can increase over time with rentals two ways: the reduction of the mortgage balance and also any increase in value of the property. These two factors can occur at the same time. Your investment property could go up 10% in a year while your mortgage balance goes down during that year as payments are made.

Mike Dymski · Answer

Assets = $100 (real estate, stocks, bonds, retirement plans, bank accounts, cars, annuities, etc)

Liabilities = $80 (mortgages, car loans, credit cards, etc)

Net Worth = $20

IMO, it's an important financial practice to maintain a monthly personal balance sheet.  It helps guide all financial decision making, from what investment property to purchase to buying a smart phone.  You start to think in terms of what will best drive up that net worth (or what to eliminate that drives it down) and it helps guide all of those decisions.

Ravi P. · Answer

Glad this helpled.

Also if you get a chance, Google "Personal Financial Statement". You should become familiar with a PFS form since most require one.

Robert Jones · Answer

@Ravi P. @Justin Fox @David D Painter thank you guys so much this helped a lot

Robert Jones · Answer

@David D Painter @Victor Nelson So equity increases your net worth but mortgages do not decrease it?

@Marcus Johnson 20k equity (asset) - 80k mortgage (liability) = - (negative) 60k net worth

How is personal net worth calculated with rental properties?

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