So, you’ve got some cash to invest but are trying to figure where and how to invest it. If you have followed the right steps to get started in real estate investing then you have begun to consider the different type of investment strategies you could use. One of the questions that you have probably kept coming across was whether you should invest for cash flow and on-going income or to grow your net worth via appreciation.
If you are new to this whole investing thing cash flow and income may be familiar to you as it is similar to how you currently get paid regularly by your W2 job. This concept of net worth on the other hand may seem a bit more foreign. It should not be understated how important net worth is for building generational wealth for you and your family.
What is net worth?
Yes, that job that provides you high income is great, but is it enough? While a high income is great, net worth focuses on the overall picture of your financial health.
Net worth, put simply, is the difference between the value of things you own and things you owe. Put technically it is the difference between assets (possessions that have value) and liabilities (debts that you owe to creditors). This difference may also be referred to as equity. Depending on what context you are in there may be certain exclusions from what assets and liabilities you would include in that formula.
Even if you lose that high income job (and it’s very possible you may), your net worth may be very valuable to you as a resource in continuing to build wealth and get cash flow despite your employment prospects. A high net worth allows you access to better financial opportunities such as loans or select investment opportunities that would in change continue to grow your income and net worth.
If you are not sure about what your net worth is, you should be sure to take time and find out what your status is.
How to increase your net worth in your 20s, 30s, 40s, 50s and beyond!
There are many ways that you can increase your net worth. The most basic way to increase your net worth is to increase your income and assets and decrease your expenses and liabilities. Below are some suggestions on how you can use both of those strategies to increase your net worth.
Asset and income increasing activities:
Get a higher paying job
Get an additional job or side hustle
Save more of the money you make
Invest in assets that produce additional income (stocks, real estate, businesses etc.)
Expense and liability reducing activities:
Pay off debt or change the terms to lower liability
As we are a real estate investing group, we will focus on how you can see outsized results via real estate investing that allow you to double, triple and more your net worth in a very short time frame.
Let’s talk about equity – how to double your net worth in one day
Equity is a very powerful tool. You may have heard about such things as homeowner’s equity loans where homeowners can leverage the value of their homes to get money. Your net worth (effectively your personal equity value) can do the same for you.
Equity comes in two different flavors when investing in real estate; principal pay down and appreciation. These 2 flavors become available to you once you purchase a real estate asset. There is a third type of equity however that we will call “built-in” equity.
See, one of the great things about real estate investing is that real estate it is a fractured market. That means that you can purchase real estate investments at a price under its current value. Sometimes sellers are in distress because of financial or family issues and will sell a property below value to get cash quickly. This means that you are able to purchase an asset for less than what it’s worth which allows you to take a portion or all of the equity that that the previous owner built. This built-in equity is the difference between the value of the asset (usually verified by an appraisal) and the price you paid for it.
Because you are using leverage and purchasing the investment with a loan of less than 100% there will be some additional equity that you bring to the table. If you were so hardworking and lucky to find the right investment deal you could in theory double your net worth in one day. Let’s assume that you are a renter with no debts and have $100,000 saved in the bank. All you have to do is find a $200,000 property that is being sold at 50% of it’s market value (which may happen more frequently than you think due to various motivations of the seller.) Assuming you bought that property all cash on the day you closed on that property you would now have a $200,000 net worth (double what you had the day before.) Of course, there may be some closing costs or rehab you have to do subsequently but for simplicity sake you would be roughly twice as wealthy that day.
When you use leverage the potential for this effect is magnified. Imagine you purchase a $700,000 apartment complex for $500,000 (i.e. it is 30% under value and has $200,000 built in equity). You would still bring your same $100,000 of equity to purchase the building but now you are getting and additional $200,000 of built in equity making your total equity position $300,000. You just tripled your net worth in one day! How’s that for increasing your net worth quickly?
Investing for cashflow and income vs investing for equity and growth in your net worth
Your investment strategy is impacted by your goals and your current financial and personal situation. Depending on your age, employment status, current ongoing income/cash flow, family responsibilities, dependents that you have, lifestyle, risk tolerance etc. you may need cash now or you can afford to wait to have cash later.
One of the key differences between cash flow and equity is that cash flow is “money now” but equity is “money later.” Equity has the ability to be increased exponentially while cash flow increases are usually more stable and predictable.
Equity, in the terms of real estate investing, is unrealized value that you have in the investment property. This is the difference between the debt on the property and value of the property. That means you can not access that value until you perform some sort of capital action such as selling the asset or taking out a loan against the equity.
For someone who would rather get a smaller amount of money now that is recurring and predictable then it makes more sense for them to invest for cash flow. This person is most likely more focused on capital preservation than growing their capital.