JUST IN: AltExchange Wins Wealthmanagement.com’s 2024 Wealthies Awards

How to Calculate Net Worth in 2022 if You Own Real Estate

Many real estate investors in 2022 are looking at their net worth with absolute glee. The real estate market is surging, with property values increasing at rates rarely, if ever, seen before. Thus, some investors have seen a significant increase in their net worth (at least on paper). 

But, some property owners are questioning how to calculate their true net worth during such a sharp rise.

Here’s how real estate investors can accurately calculate net worth despite the fluctuations in property values. 

A simple net worth calculation

The first place to start is a simple calculation of net worth as it stands at this moment. Here’s a simple net worth estimate explanation from NerdWallet: 

“Calculating your net worth requires you to take an inventory of what you own, as well as your outstanding debt. And when we say own, we include assets that you may still be paying for, such as a car or a house. For example, if you have a mortgage on a house with a market value of $200,000 and the balance on your loan is $150,000, you can add $50,000 to your net worth.”

This is a perfectly reasonable way to determine your net worth. But, it may not provide the most accurate view of where your wealth is likely to stand in the nearby future.

Why might this be the case? Because property values have climbed so rapidly, it’s challenging to know what your properties could realistically sell for. An excellent way to overshoot your net worth is by overestimating their value.

Simple calculation example

Say you’re a real estate investor who owns three properties. One is your primary residence. Two of those three properties are entirely paid off. The third has a mortgage with a remaining balance of $100,000 and a monthly payment of $750. 

You’re currently renting one of your properties for $1,000 per month. The other property sits vacant at this time. 

You have $250,000 in cash in your bank account and another $100,000 in stocks and investments. You had your properties appraised two years ago, with values at: $200,000 (your home), $150,000 (your renter’s home), and $150,000 (your vacant home).

So, let’s break this all down: 

  • Bank Account: $250,000
  • Investments: $100,000
  • Personal Home: $200,000
  • Renter’s Home: $150,000
  • Vacant Home: $150,000 (has a $100,000 mortgage balance)
  • Monthly Rent: $1,000

If you just totaled all of those figures up, you might estimate a $750,000 net worth, with $1,000 in rental income coming in and $750 in mortgage payments going out. But there are problems with this calculation.

A dynamic net worth calculation

When you have multiple assets, you need to perform a more dynamic net worth calculation. Referencing the above example, several factors could radically change the bottom line net, including:

  1. They had not appraised their properties in two years. 
  2. They live in one of their homes, making it impossible to sell right away.
  3. They have $100,000 in investments such as stocks and bonds that could fluctuate rapidly.
  4. It is unclear how well-maintained the various properties are.

In this scenario, the individual’s net worth is likely HIGHER than the $750,000 calculated initially because of inflation to the value of their real estate. However, until appraised again, it’s unclear. Additionally, while their net worth is likely to be higher, it cannot be readily liquidated since most is in real estate.

Estimate conservatively and hope to be surprised

At this time, markets are very volatile. So it’s challenging to determine where your property value truly stands at the moment. 

To nail down the most realistic number, hire an appraiser to accurately value your properties. Since the market is hot right now, selling your properties shouldn’t be too challenging in most scenarios.

Finally, brace yourself. Current conditions could all change very rapidly. Markets can’t rise forever, and real estate investors who estimate their net worth in 2022 based on the best possible outcomes will likely be disappointed when the tide turns. The best course of action is to estimate your net worth conservatively. Hopefully, when it turns out higher than you expected, you’ll be pleasantly surprised.

Schedule time with our team