In working on a possible next real estate deal my realtor urged me to begin incorporating my property equity into my net worth. I had resisted doing that, but I was able to talk myself into it by including the total equity as its own line, but leaving the mortgages as a liability against my cash net worth. So I’ll continue with my current net worth figure, but I’ll also have net equity available as a data point and a net worth including equity total.
I did the calculations in April, and I’ll add that information below and to future updates. But first I’ll explain a bit about what the numbers are and how they were derived. The total equity was provided by my realtor, and is developed using the automated valuation model (AVM). The other way I could have gone would be to use the county assessor’s value, but since I’m buying good deals that would skew my numbers too low. The biggest example of this is my Harris house. That has an assessed value of $27,300 but an AVM value of $71,800. There are more minor differences like this for the other properties as well, so the AVM makes more sense in getting an accurate picture of market price.
Using the total equity I’m coming up with three additional data points: my AVM net equity, my portfolio’s loan-to-value ratio (LTV), and a new total net worth. My prior net worth figure before adding equity I’m terming as non-equity net worth and the calculation there will stay the same. Going forward I’ll probably fiddle around with which points I’ll include on my monthly updates, but here’s the April snapshot of those data points:
- AVM total equity: $227,300
- Total Mortgage Balance: $112,529
- AVM Net Equity: $114,770
- Portfolio LTV: 49.51%
- Non-equity net worth: $27,705 (this is the number I’ve been sharing, and is my total cash, retirement funds and everything minus all liabilities including the mortgages)
- Total Net Worth (including equity): $255,005 (this is AVM Total Equity plus my non-equity net worth basically. My first impulse was to use my non-equity net worth plus my AVM net equity, but I think that would be deducting the mortgages twice. I may still use that going forward as that’s a more conservative number, but for now that’s what it is)
So, boom, just like that my net worth jumps to over a quarter of a million dollars! Seriously, though, this is more a thought exercise than anything else. That equity figure is large, but I can’t use it to buy anything at the moment. But it is a good indicator of the overall strength of both my portfolio and real estate business. It also demonstrates my ability to buy property in a profitable manner – which was the point of the whole thing. If a lender is looking at me as a prospective borrower, they’re going to see that I have a 50% LTV across a portfolio of 15 year loans that I only really started building in 2015.
This doesn’t help me build immediate cash flow for early retirement, but over time it’ll be an accelerator of wealth generation. As my mortgage balances go down, my cash flow and ability to retire early goes up. But at the moment my cash position is very low because it’s being used on paying down and repairing those properties. We’re getting close to the lease up period in town, and when that’s done I’ll do a bit of a deeper dive into the real estate business. In the meantime, feel free to ask questions!
