I do have a question that seems so basic to me but I am not sure what should be the right answer & hence posting it here :-)
When calculating Networth, how to enter the value of a property?
a) If I do have a property with market value of 100K,
should I enter 100K
(or) 90K by deducting closing costs
(or) 85K by considering the volatality, uncertainity plus closing cost
(or) something totally different by taking 'liquidity' factor in to consideration - In other words, liquidity factor on SFR in a busy area is totally different from an undeveloped land located in a remote area --> How to calculate in order to factor that in to the number that we are entering in to networth calculations?
If I do have 50K loan on this property, I believe that I have to reduce that from the above number. Correct???
Thanks in advance for your input.
In a very basic sense, your "net worth" is your "net equity" position in ALL of your financial positions. That is, your total assets, minus your total liabilities = your net worth.
In your example, you have a property worth $100,000, and a loan for $50,000. Therefore, you take your asset ($100,000) and subtract the liability ($50,000) and get your "net equity position" of $50,000. [$100,000 - $50,000 = $50,000]. In order to get your total "net worth" you would add up ALL of your assets (real estate, stocks, bonds, cash, etc,) and subtract out the debt (credit cards, mortgage, student loans, car note, etc.) in order to get your overall net worth position.
What an awesome question.
- Accounting View
From an accounting perspective, according to US GAAP you use the BOOK VALUE of the house to calculate your Equity position. (Book value refers to the price that you originally paid for the asset, Market value refers to the current price at which you can sell an asset). You do not account for capital gains until you actually sell the asset and incur profit/loss.
- I Want to Know my Net Worth for Funsies
Technically, you don't need to hassle with stuff like closing costs, volatility, uncertainty when calculating your net worth. Your net worth in the example above is simply 100k (A) - 50k (L) = 50k (SE).
However, you very astutely noticed that this 50k would not be a very accurate figure if you were to try and liquidate your home position to cash.
You can account for this by bucketing your assets and liabilities into Current Assets/Liabilities (Cash, Stock, Credit Card Debt, Current Portion of Mortgage/Car/Other Loan) and Long Term Assets/Liabilities. This way you can see your liquid net worth and your aggregate net worth. This should give you a much clearer view of your financial situation.
I would second that. In that scenario, if the house has an estimated value of 100k and you owe 50k, you have a net worth addition of 50k. You do not need to account for the closing costs, make ready rehab, etc.
Thats just how its done when filling out personal financial statements for lenders anyway. They don't ask how much you'd owe for closing costs. At the end of the day, you have 50k in equity in that house today so that is your net worth.
In reality though, you're right. If you had 10 houses with 50k in equity apiece, you couldn't actually get to 500k by selling them. You're going to have rehab costs, lost rent during the sales period, closing costs, etc, etc.
But in terms of calculating net worth for a personal financial statement, its a simple calc of how much do you owe and how much would it appraise for? The difference is your net worth.
Are you trying to figure if you're a millionaire yet from a net worth standpoint? :-)
Free eBook from BiggerPockets!
Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!
- Actionable advice for getting started,
- Discover the 10 Most Lucrative Real Estate Niches,
- Learn how to get started with or without money,
- Explore Real-Life Strategies for Building Wealth,
- And a LOT more.
Sign up below to download the eBook for FREE today!
We hate spam just as much as you
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing