While many people consider real estate to be a wealth source, it is not included as an asset category in most personal finance books and courses. This can sometimes make pre-realtors feel like they are missing out on important information that could help them succeed in the industry!
In this article we will discuss why including real estate in your net worth calculations is so important. We will also take a look at some easy ways to include real estate in your income statements and calculate net worth.
Disclaimer
The content of this page does not constitute investment or financial advice. Even though he has been a professional investor for a decade, Ryan Hurley (that would be him here) is by no means qualified to give investing tips nor offer any legal rules under securities laws. Never invest more money than you can afford to lose and always do your research before diving into anything related to investments.
Net worth is simply a way to measure how well off one individual is compared to another. It is typically calculated using two components: equity (what you own) – and debt (-s). Many individuals may have a large amount of debt which makes their net worth less than what it should be. By calculating both equity and debt, you get an accurate picture of just how wealthy or poor someone is.
Ryan’s background includes working as a mortgage broker, commercial loan officer and housing market analyst. In his spare time, he enjoys reading business books and traveling with his dog.
What is net worth?
Net worth, or net assets, are your property (real estate included) plus what you have invested in to run your business such as cars, furniture, and bank accounts. This includes things like house payments, credit card debt, and savings accounts.
It is important to note that no matter how rich someone seems, they may not include their home in their net worth. While some people feel an emotional connection to their homes, this can be limited by how much money they make and how large their home is.
Does net worth include property?
Technically, no it does not. You cannot add real estate to your net worth unless you are actively investing in properties or renting an apartment that you own. When calculating net worth, what is excluded is any depreciation of your home.
You can also exclude the value of all non-rental assets if you do not have income coming from them. This includes cars, boats, investments, etc. These things make up part of your net income, but they are still considered non-income because you need to keep them for work or personal use.
Net worth excludes depreciable items such as homes.
It should be noted that this varies slightly depending on whether or not you consider yourself highly affluent. For example, most people would include their house in their net worth, whereas very few would not!
This article will focus more on the importance of excluding property from net worth. If you want to know how much money you have, then including the cost of your house is totally acceptable! But if you are trying to understand your true financial position, then looking at both pieces of information is important.
Does net worth include stocks?
Stocks are definitely an important part of wealth, but they make up only half of most people’s net worth. Investing in the stock market is great and can be very lucrative, but it takes time to grow rich from investing.
Net worth includes all your assets (what you own) minus all your debts (what you owe). This excludes things like homes that some people consider to be investments. A house is typically considered a debt instead.
Stocks are usually described as a form of investment, which is why including them in “net worth” may seem correct. However, this definition of invest means to earn money or gain value. It does not refer to spending money to increase their value.
Some individuals may include stocks in their net worth due to the way it is calculated. By including both growing income and asset growth, stocks play a big role in building wealth.
A person with little to no savings and large credit card bills may include high-dividend paying stocks in their net worth because they get paid every few months. These dividends add to your overall income.
By excluding stocks from net worth, you are leaving out one of the most significant parts of wealth.
Does net worth include retirement accounts?
Many people consider real estate to be a wealth source, but it is not included in most definitions of net worth. This can cause some confusion as there are different ways to define net worth.
Retirement savings like IRAs and 401k’s are typically excluded from calculations of net worth because they don’t “lend” money to you. A portion of those funds is taxed immediately due to being considered income, but the rest is left untouched (and thus protected) until you access it.
This is why many people are confused about how to value real estate when calculating their net worth. It is important to remember that what defines rich and poor is dependent on your personal goals and expectations.
What if I owe money?
It is important to understand that what is included in net worth can be tricky, especially when it comes to real estate. Just because you have a house does not mean it is automatically part of your net worth. For example, if you use this house as an income property and rent it out, then it is not counted as part of your net worth.
Net worth includes all assets (property including houses) minus all liabilities (debts). This means that even large debts like mortgages are excluded from the calculation, unless they still carry significant credit card debt or other loans.
It is very common for people to include their homes as part of their net worth, but this is incorrect. Because although owning a home adds to your wealth, it also increases your monthly payments, which reduce your overall savings.
In fact, many wealthy individuals do not own a car! They rely on public transport or pay using cash for things instead.
Should I list my assets or my liabilities?
A common question that most beginner real estate investors get is whether to include their home as an asset, or if it should be listed as a liability instead. This article will talk about why having your house considered an investment property is a great idea and some easy ways to do this!
To give you a little more context, when we refer to net worth, we are looking at all of your financial resources and investments. This includes everything such as cash, savings accounts, retirement accounts (such as IRAs and 401ks), houses, cars, boats, etc. All things taken together make up what we call “net wealth” or “net income”.
Most people when they think of investing money limit themselves to just buying stocks, selling real estate, or both. However, there are many other types of investments out there that can add substantial value to your portfolio. Investing in these different types of assets is another way to increase your net worth.
Should I list all my assets or only the most valuable?
As we mentioned before, excluding certain types of income can skew your net worth numbers slightly. But what if doing so makes you feel uncomfortable?
Assets such as cars, homes, and business investments are not just pieces of paper that hold value. They’re part of your personal net worth.
In fact, many experts believe including these items in your net worth is actually more accurate than listing them separately. This is because they consider the cost to buy or sell each one, as well as its potential use in earning money.
This article will talk about some easy ways to include the real estate asset category in your net worth.
Will my net worth increase or decrease?
The definition of ‘net worth’ is how much money you have compared to what you don’t have, so whether your real estate wealth increases or decreases depends on what state you are in with respect to both equity (what you own) and debt!
It’s very difficult to say if this will be an increase or decrease because there are no clear benchmarks for real estate that talk about it. Some define net worth as total assets minus total liabilities but none do exactly that so we can’t use that as our benchmark here.
Another common comparison used when calculating net worth is income versus expenses. If your monthly income rises while your monthly spending stays constant, then your net worth will rise. A similar situation would be if your monthly spending drops, resulting in a lower net value.
When talking about rising and falling net values, remember that most people who refer to their net worth also include other non-real estate items like cars, savings, etc. In fact, many experts recommend not defining real estate as part of net worth due to its variability.
