The debt to net worth curve -- what's yours?

Question

I'm kind of new to REI and wondered what happens to folks debt to net worth ratio's after 5-10 years.  Do RE investors always maintain a high debt/nw ratio because they keep adding properties? Is there a point where you sell off some property to gain all the equity and have a better balance of debt to net worth?

I'm also wondering about this due to looking into some commercial real estate investments. I'm wondering about my own debt/net worth from a financing perspective.

Any insights from anyone on this ?

JD Martin · Answer

Net worth doesn't actually mean a whole lot in the day to day grand scheme of things. It might be a quick snapshot of how you are supposedly doing but doesn't account for your ability to live well. Consider someone with a net worth of $500k with a primary house they own without a mortgage worth $475k and $25k worth of cash and other investments, and a monthly income of $2k from Social security. They're not going to be living too well compared to the person with a net worth of $0, 5 houses worth $100k each with $500 mortgage/expenses each but bringing in $1k per month income ($2500 total). I wouldn't want to be either person, but person #2 will eventually have $500k net worth and $5k monthly income. A lot of older people find themselves as person #1, where they reverse mortgage the home or sell and try to go to something cheaper so they have enough money to survive.

You will find this stuff does matter when you are trying to get more loans, but beyond that it tends to be a feel-good number. I also know people with "net worths" into the millions but barely enough cash flow coming in to cover their debt ratio.