Could
Rising Home Prices Impact Your Net Worth?
Learn how to
determine your current net worth and how an investment in real estate can help
improve your bottom line.
Among its many
impacts, COVID-19 has had a pronounced effect on the housing market. Low home
inventory and high buyer demand have driven home prices to an all-time high.1
This "perfect storm" has given an unexpected financial boost to many homeowners during a
challenging time. However, for some renters and other first-time buyers, rising home prices are making
dreams of homeownership feel further out of reach.
If you’re a
homeowner, it’s important for you to understand how your home’s value
contributes to your overall net worth. If you’re a renter or first-time buyer, now is the time for
you to figure out how homeownership fits into your short-term goals and your
long-term financial future. An investment in real estate can help you grow your
net worth, build wealth over time, and gain a foothold in the housing market to
keep pace with rising prices.
What is net worth?
Net worth is the
net balance of your total assets minus your total liabilities. Or, basically,
it is what you own minus what you owe.2
Assets include the
cash you have on hand in your checking and savings accounts, investment account
balances, salable items like jewelry or a car and, of course, your home and any
other real estate you own.
Liabilities include
your total debt obligations like car loans, credit card debt, the amount you
owe on your mortgage, and student loans. In addition, liabilities would include
any other payment obligations you have, like outstanding bills and taxes.
How do I calculate my net worth?
To calculate your
net worth, you’ll want to add up all of your assets and all of your
liabilities. Then subtract your total liabilities from your total assets. The
balance represents your current net worth.
Total Assets – Total
Liabilities = Net Worth
|
Ready to calculate your net
worth? Contact us to request an easy-to-use worksheet and a free assessment
of your home’s current market value! |
Keep in mind that
your net worth is a snapshot of your financial position at a single point in
time. Your assets and liabilities will fluctuate over both the short term and
long term. For example, if you take out a loan to buy a car, you decrease your
liability with each payment. Of course, the value of your asset (the car) will
depreciate over time as well. An asset that is invested in stocks or bonds can
be even less predictable, as it’s subject to daily fluctuations in the market.
As a homeowner, you
enjoy significant stability through your monthly real estate investment, also
known as your home mortgage payment. While the actual value of your home can
fluctuate depending on market conditions, your mortgage payment will decrease
your liability each month. And unlike a vehicle purchase, the value of your
home is likely to appreciate over time, which can help to grow your net worth.
Right now, your asset may be worth significantly more than it was this time
last year.3
If you’re a homeowner, contact us for an estimate of your home’s market value so that you can factor it into your net worth calculation. If you’re not a current homeowner, let’s talk about how homes in our area have appreciated over the last several years. That way, you can get an idea of how a home purchase could positively affect your net worth.
How can real estate increase my net worth?
When you put your
real estate dollars to work, it’s possible to grow your net worth, generate
cash flow, and even fund your retirement. We can help you realize the
possibilities and maximize the return on your investment.
Property Appreciation
Generally, property appreciates in one of two ways: either through changes to the overall market or through value-added modifications to the property itself.
- Rising prices
This type of property appreciation is the one that many homeowners are enjoying right now. Buyer demand is at an all-time high due to a combination of record-low interest rates and limited housing inventory.4 At other times, rising home prices have been attributed to different factors. Certain local conditions—like a new commercial development, influx of jobs, or infrastructure project—can encourage rapid growth in a community or region and a corresponding rise in home values. Historically, home prices have been shown to experience an upward trend punctuated by intermittent booms and corrections.5
- Strategic home improvements
Well-planned and
executed home improvements can also impact a home’s value and increase
homeowner equity at the same time. The type of home improvement should be
appropriate for the home and in tune with the desires of local buyers.
For example, a
tasteful exterior remodel that is in keeping with the preferences of local home
buyers is likely to add significant value to a home, while remodeling the home
to look like the Taj Mahal or a favorite theme park attraction will not. A
modern kitchen remodel tends to add value, while a kitchen remodel that is
overly expensive or personalized may not provide an adequate return on
investment.
Investment Property
You may be used to thinking of investments primarily in terms of stocks and bonds. However, the purchase of a real estate investment property offers the opportunity to increase your net worth both upon purchase and year after year through appreciation. In addition, rental payments can have a positive impact on your monthly income and cash flow. If you currently have significant equity in your home, let's talk about how you could put that equity to work by funding the purchase of an investment property.
- Long-term or traditional rental
A long-term rental
property is one that is leased for an extended period and typically used as a
primary residence by the renter. This type of real estate investment offers you
the opportunity to generate consistent cash flow while building equity and
appreciation.6
As an owner, you don’t usually have to worry about paying the utility bills or furnishing the property—both of which are typically covered by the tenant. Add to this the fact that traditional tenants translate into less time and effort spent on day-to-day property management, and long-term rentals are an attractive option for many investors.
- Short-term or vacation rental
Short-term rentals
are often referred to as vacation rentals because they are primarily geared
towards recreational travelers. And as more people start to feel comfortable
traveling again, the short-term rental market is poised to become a more
popular option than ever. In 2020 alone, in the thick of widespread travel
bans, the short-term rental platform Airbnb’s market share of the hospitality
industry reached as high as 41 percent.6
Investing in a
short-term rental offers many benefits. If you purchase an investment property
in a top tourist destination, you can expect steady demand from travelers while
taking advantage of any non-rented periods to enjoy the home yourself. You can
also adjust your rental price around peak demand to maximize your cash flow
while building equity and long-term appreciation.
To reap these benefits, however, you’ll need to understand the local laws and regulations on short-term rentals. We can help you identify suitable markets with investment potential.
WE’RE HERE TO HELP
Ready to calculate your personal net worth? Contact us for an easy-to-use worksheet and to find out your home’s current value. And if you want to learn more about growing your net worth through real estate, we can schedule a free consultation to answer your questions and explore your options. Whether you’re hoping to maximize the value of your current home or invest in a new property, we’re here to help you achieve your real estate goals.
The above references an opinion and is for informational purposes only. It is not intended to be financial advice. Consult the appropriate professionals for advice regarding your individual needs.
Sources:
- National Association of Realtors -
https://www.nar.realtor/newsroom/housing-market-reaches-record-high-home-price-and-gains-in-march - Forbes -
https://www.forbes.com/advisor/investing/what-is-net-worth/ - The Washington Post -
https://www.washingtonpost.com/business/on-small-business/your-net-worth-is-americas-secret-economic-weapon/2020/08/20/70df5b92-e2d4-11ea-82d8-5e55d47e90ca_story.html - Bloomberg -
https://www.bloomberg.com/news/articles/2021-04-09/home-prices-soar-in-frenzied-u-s-market-drained-of-supply - Federal Reserve Economic Data -
https://fred.stlouisfed.org/series/MSPUS - Propmodo -
https://www.propmodo.com/what-the-growing-short-term-rental-market-means-for-multifamily-real-estate/
