High Net Worth vs. investing your Equity?

Question

Jeff C. · Answer

@Paul DeSilva

If making another investment decreases your net worth you've done something wrong.

Randy E. · Answer

@Paul DeSilva, I don't think it's correct to assume that leveraging a property that is paid off to purchase an additional property will result in your your net worth decreasing.  If done correctly, it should increase your net worth.

Example: John owns one rental that we will call SFH1.  SFH1 is worth $125K and he paid his final mortgage payment on July 1.  He borrows against his equity in SFH1 and now has $100K.  He purchases a distressed property for $60K, rehabs it for $30K, and puts the remaining $10K away for a safety net.  The new property, SFH2, is worth $115K after the rehab.

John now owns SFH1 which is worth $125K, SFH2 which is worth $115K, and has $10K in the bank.  Using only these assets and liabilities, John's net worth has increased from $125K (SFH1, no debt, no savings) to $150K (SFH1 + SFR2 + savings - LOAN).  Further, his net worth will increase year over year as the loan is repaid and the properties appreciate.

Let's assume the PITA for the $100K refinance is $800 and market rent for SFH2 is $1100.  John has now increased his monthly earnings from his RE investments from $1200 (SFH1) to $1500 (SFH1 + SFH2 - LOAN).

As long as John screens properly and installs the right sort of tenant, he will ride this to greater prosperity.  And there should be no imminent big CAPEX costs because SFH2 was recently fully renovated.  And even if John runs into a bump in the road, he has a $10K cushion to help him through it.

BONUS: John could repay the loan, using the rent from the two rentals only, $2000/month, and have the $100K loan paid off in roughly 5 years.  BING!!

*I am not a financial professional.  This is simply my opinion.

Account Closed · Answer

I would rather have a higher liquid net worth.  I think it depends on your risk profile.

Paul DeSilva · Answer

@John Fortes Thanks, I think that taking advantage of the high appraisal and getting a HELOC can put me in a good position for when the correction happens.

High Net Worth vs. investing your Equity?

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