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 has given an unexpected financial boost to many homeowners during a challenging time. However, for some renters, 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, 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 me 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 me 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. I 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 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 carefully 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
Traditional or long-term
tenants usually translate into less time and effort spent on day-to-day
property management and less wear and tear on the property, making long-term
rentals an attractive option for many investors. 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.
- 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 and requires more attention due to the
weekly change of tenants. If you
purchase an investment property in a top tourist destination, Like Santa Cruz
or Capitola, 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. I can help
you identify suitable properties or markets with investment potential.
I’M HERE TO HELP
Ready to calculate
your personal net worth? Contact me 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, I can 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/
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