Net Worth Explained

Net Worth Explained

how to calculate your net worth so you can be a real estate investor that's today's show let's dive in hey everyone I'm Clayton Morris I am the founder co-founder of Morris and best rehab thousands of homes and we own many many dozens of properties I'm Clayton Morris you are Natalie Morris am i the other co-founder I guess are you the co-founder I don't know I kind of founded the company oh well before you got on board what do you mean by that that I guess that's not a conversation for us to have an upon cap I don't know what you even mean well I just mean like you know i woked you into being a part of this podcast I guess is what I mean like a while ago oh well yeah when it comes to okay yeah and this show is the unwitting coag's I am NOT I'm the silent partner that's not so silent I guess yeah okay so on today's show we are going to talk about something we just got an email in from someone I thought hey actually you you I think what's your ID so why don't we do a whole show around this very issue and is it great because this will answer a question that we just had from one of our listeners one of our viewers who asked this question quote do you have a rule of thumb for the maximum amount of debt that you carry relative to the net worth of your portfolio and or how fast you like to pay off your HELOC loans your home equity loans so can you put that in plain English for me can you ask that question another way me yes or the other person you ask no not the person that sent it in to me it's a very technical question but right and you put it in layman's terms so I can understand it okay so what this person wants to know is when you make an investment that you don't use cash for then you're going to carry debt on an investment either it's you know an investment in the business or the investment in a real estate piece of property and so they want to know do we sort of balance what we owe in general as a family versus what we own so that we are not carrying too much debt relative to our assets so so what he wants to know is how or she I didn't look at the name of the person that it came from how we balance assets versus liabilities and then when we continue to gain assets do we make sure that we're not too heavy on the liability side right and so that's the founding principle of net worth and I and I asked Clayton well have we really gone over net worth in a very basic level because that might be a worthwhile thing to do so that everyone sort of goes through this exercise so that they can make a decision on how to invest right I mean we kind of look at this with the freedom number we talking to talk about the freedom number cheat sheet that people can download it Morris invest calm slash freedom it's totally free it's three pages long in that cheat sheet though what we're looking at is we're adding up all of our monthly expenses but that's totally different then really I think understanding your liabilities and how that offsets your assets that negates your assets so you can figure out your overall net worth right like write your monthly expenses your Netflix bill you're going out to eat and having dinners out entertaining that's totally different right right your network you can sort of think about like in the zombie apocalypse if you had to sell everything that you own right now and pay off all of your liabilities how much cash would you have that's your net worth so you can say I'm worth 10 million dollars that doesn't mean that you have readily accessible ten million dollars that means that you add up what you own you subtract what you owe and that's what you would have left over right and so we like to in our family we recalculate our net worth at least two or three times a year so because we have goals we want our net worth to be growing and so from one time to the next like say three four five months in between we can tell a story of where that number has gone it's sort of it's like the days of your lives it's a numerical I don't know like a numerical tale right it's a beautiful story is a beautiful story you can stop stables only in Excel spreadsheets only like in Scrooge McDuck swimming through gold coins that's how you want to live so we want to live what we all of course want our net worth to grow and you know I learned this lesson this fable if you will a few years ago understanding that wealthy people you know don't sit there and stare at their cash flow and their piles of cash that means little to wealthy people what what does mean much to wealthy people is their net worth so on paper how much are they worth what is their net worth on paper that they can leverage and really this question from this listener this viewer was around leverage and leveraging your net worth how do you know what formula you should use to figure out how much debt you're carrying so that's a great question so let's dive into understanding a little bit more about about net worth and some of the mechanics of it so what is what are some of your assets what is an asset ok so here's what you have to do is you gather up all of your assets and you make a list of them funny story is that my father used to make me do this when I was just 12 years old because he really wanted me to understand the idea of worth and you know the end of the idea of only taking on as much liability as you can afford and so when I was 12 I would list out my assets and it was like I had some money in a money market for college savings and then I would list whatever else I had like a Nintendo a bicycle I had an NES zapper like and I would start it he wanted me to estimate what those things were worth like if I sold them to somebody else there was no Craigslist back then but if I just went out and sold it how much cash would I have he made me even sort of Calley up how much my clothes were worth if I were to donate them so I mean this is not something I do now I don't think of our more tangible assets I don't go around our house and say like oh this stapler is worth five dollars let's add it that up and you know this like my son's bicycle is worth $100 let's add that up so now I sort of go for those a higher level stuff but when you're just getting started you can see how that's a good exercise for a child to just add up what they own right what's in their piggy bank and then what's in their room now it's a little bit more complicated than that so I'll take you know what savings accounts we have what stock accounts we have what tax protected savings accounts we have like a 401 K or an IRA what college savings funds we have like in 529 and then you add up everything that you've got that's either liquid or could be liquid in cash right you tally those up then you continue to add up your assets which include property vehicles real estate investments art also counts what else do you think assets as assets assets assets a boat if you've got a boat that's pedals how so I guess I'm curious it doesn't have to be paid none of this stuff has to be paid off you're only estimating in the value column what it would be worth if you sold it okay so it's not what you own on it this is not equity this is just market value now it and it may not even be for instance you know it's in our assets we'll call out we'll get to the liability part later later later got you okay so it's the worth of that car the market value of that claim if I were to go to the open market or Kelly Blue Book value and sell that car right so for instance when we secure a home equity line of credit on a property they'll do a new appraisal and if that's significantly higher or lower than what we paid on the house I'm going to change that in our asset column because it tells me that my real estate has appreciated or depreciated of course I'm going to take it for a grain of salt because not all appraisals are worth their weight in gold but I'm going sort of more well right so but you know I'm still going to list that in my asset so you're just again you're taking everything and gathering it into a big pile this is the closest that you can get to the Scrooge McDuck vault of gold like this is everything you've got all of your investments all of your stock all of your liquid cash all of your anything worth anything you're going to put on this sheet and then you're going to get a number you're just going to do a sum at the bottom have your Excel spreadsheet tally it up and that's going to tell you everything that is yours in your name that you could sell that you could gather up it you can touch that's your assets column so let's just say for the benefit of this podcast let's just say your assets amount to $300,000 okay in value okay a car not paid off your home not necessarily paid off your art collection hopefully paid off hopefully you're not putting out on a credit card your 401k it's all your money so that should be paid off since it's all your cash and that amounts to $300,000 okay great so then let's move on to liabilities what exactly is a liability again it's not your cable bill right it's not or your your gas bill for the month netflix liabilities are not your expenses liabilities are just the debt you own on your assets okay so you have $100,000 house but you Oh still $50,000 $50,000 is what your current debt is that's your current liability right right um so what do you owe on your car what do you owe do you have a home equity line of credit put that down what are your credit card debts put those down in there what other loan you might have student loans that's a liability right anything that you can get a payoff balance for right you can't go to the cable company and say what's my payoff balance meaning I never have to pay you again but I'll always get cable it just doesn't work that way those are just monthly expenses we're talking about what is an actual balance on some kind of bank account that's a liability against something so you take those and you add those up right now you've got two sums one sum of assets one sum of liabilities your net worth is just the difference between the two so you subtract your liabilities from your assets that tells you what you're worth if you were to sell everything and then pay off your creditors you would have this lump of cash that's your net worth obviously this informs your decision-making every time you then get an investment right so if Clayton has before come to me and said well you know I found this great property in New Jersey hmm and you know it seems like it'll sell for this much but you know it we have to buy it for this much and there's an oil tank in the front and it needs eighty thousand dollars worth of work and probably the Foundation's cracked and we need to secure private money on it and I said well okay we're going to buy this and it will be worse maybe four hundred thousand dollars but our liabilities on it will be about three hundred ninety thousand dollars we're not doing that right because it doesn't really increase our it may increase our net worth by ten thousand dollars but I don't know that because that's based on an approximate market value that's not a good so we're again we're making decisions on increasing the asset column decreasing the liabilities column so that the net worth is always going up well you bring up a great point so that when people ask me well do you flip houses what about are you in the flipping game like no I I don't I don't do that you know I don't buy New Jersey homes for 200 and then spend six months rehabbing it to sell it for 270 it's never you know I've not not to say that I haven't done it I certainly have done it I just choose not to because exactly that I want to be adding assets to my asset column cash you know be able to do that based on the appreciation and grabbing $10,000 $20,000 is great for that little influx of cash but I want to be adding to my net worth column with these assets they're going to produce cash flow for me down the line so that's a great point where we've looked at some of these investments we had one in whatever was at West Orange number that one and yeah yeah I mean on the surface or we ran the numbers we did all the due diligence we had our contractor go through and you know I think we're going to buy it for 270 and put like a hundred thousand into it and try to sell it for five something I you know I don't know what a wide it in the holding cost the holding time of like eight months and it just was not other taxes were at least $20,000 for the year and we couldn't guarantee that we could finish it within a year plus a 12% private money note and I thought well we're going to eat out maybe $10,000 for a year and a half of work it just felt like and because that's not our primary business so we didn't just have contractors here in New Jersey that we trusted to move this forward in a timely manner and if they didn't we pay $40,000 in taxes for holding it for two years so we just couldn't make that work so we're trying we're not trying to do transactional business here we're trying to have passive income through by building that asset column right right exactly so when you figure out your net worth as you say this is often referred to as equity that's your number the the difference between the two now so in that example where we had 300,000 as our example 300,000 and let's just say – I don't know what's a good number 250,000 worth of liabilities I think if you have well I mean I'm trying to yeah I guess up pretty good I would say if you have a 300 let's let's say yeah let's say someone has $100,000 worth of debt including mortgage in a car in a credit card right so that's a third right right so you'll have $200,000 of equity to work with right so your net worth is 2,200 thousand dollars that's what you're worth on paper right now that's also the beauty of this is in your borrowing potential so if you are working with a private lender you're working with other lenders they're going to look at your net worth and your debt-to-income they're going to look at your debt versus what you make and this is exactly comes back to the question so I'll reread her question do you have a rule of thumb for the maximum amount of debt you carry relative to the net worth of your portfolio and how fast you pay off your home equity lines of credit do we have a rule of thumb I mean the rule of thumb is that you want to actually have some chunk of debt right otherwise in your operating is to cash rich right then you're not proper leveraging Metcash in order to continue to grow your portfolio or grow your business right so this goes to all right I mean growing a business like your dad likes to say who owns a very large landscaping company as what like a couple hundred employees and all kinds of million-dollar diggers and tractors and you know things that rip apart the ground where he'll he will literally go buy like a million dollar toy you know that he then uses for 30 years you know for his company he looks at that to see okay am i expanding and growing the company and you could you could transpose company for your personal family business right your personal assets and putting more properties into your asset column that is a family business right you have an LLC that is a business so are you putting additional assets into that column or are you just sitting on cash and not using it properly and building your net worth right so what I did in this spreadsheet is I just did a simple Excel calculation as I divided my liabilities by my total assets and that gave me a debt to equity ratio right so not not debt to income but debt to equity that means how much debt am I taking on versus what I own am I using what I own to take on an acceptable amount of debt our current debt to equity ratio I can just tell you this right now is thirty-four percent thirty four point oh eight percent that's our debt that's our debt to equity yep so based on what we've got right now on our liabilities only represent thirty percent of what we own so what we own right now we are increasingly this is a weird way to say it we're owning it more and more every month right because we're paying down those liabilities now we're paying down liabilities that we don't want so that we can take on liabilities that will grow our net worth let me explain that so we don't necessarily want to hold a car payment or a or a house payment on our primary home or let me let you know what else here yeah the car we don't own a boat would right Clayton really wants to buy a boat so that's why he keeps saying that and he keeps coming home and I'm like we're not buying a boat I keep kind of work it into the podcast like oh we can we can fit a boat in there like let me just add a line like a boat in there yeah stick another line item in there well no even like our kids schooling right we added that to our our liabilities column because no we know we can't listing you can't you can't put expenses and your liabilities column right but alright you know we kind of know how much we will pay every year for this school those things can change and I can't pay it all now I can't go to them and say here's a big old check for you know my son schooling from 1st to 8th grade it just doesn't work that way right so gosh I wish we could but we can't so this is only these represent like bank accounts right because your mortgage is nothing more than a bank account your mortgage has an account number and you can put money into it it's just a bank account that's in the red basically right so these are these are things with an estimated payoff amount right your home your car your boat those kind of things so what we're trying to do is knock out those liabilities that represent sort of our personal living because you know our home mortgage doesn't really add to our network that's not a that's not leveraging our debt for anything other than the ability to live in this house so we want to get rid of our home mortgage so that we can use that debt to build the asset column does that make sense right exactly so what like if you look here on this liabilities column we have our home mortgage but we also have Lima 1 capital loan which is a portfolio loan that we took out in order to buy a package of eight properties I think it was about 7% I want more of that kind of debt because that debt was awesome it gained us eight properties they cashflow $5,000 a month our debt service on it is only about $2,000 a month so that Nets $3,000 a month even though I'm paying off that liability I want more of those and less of like the car payments and the house payments and the credit card payments make sense exactly because it's not done in time liabilities but they're their liabilities and then there are liabilities and I want the liabilities that add to my asset column right so when you're looking at let's say you own five properties free and clear and then you get a portfolio loan or you go to a private lender and you get a portfolio loan for 7% and they're going to give you 75% the value of those five properties right so now you're able to pull out let's say the value of those five properties is just for round numbers is $500,000 right and then you're going to go to a bank and they're going to give you 75 percent that's what three hundred and fifty thousand value of that right the three fifty fifty so going in three hundred and fifty thousand dollars right and then you could take that now you've got the equity pulled out you're able to use those home equity loans that portfolio loan however you do it and buy an additional three properties or four properties with that money and then you're adding those four properties now to your net worth column and so that's what we've become laser focused on over the past few years is building that net worth column up from a meager amount right because we had a lot of debt we didn't have a lot of assets Billy not call them up so it's really strong now and to your point it's about you know it's it's like 70/30 from assets to liabilities and that's a really good place to be when you're thinking about leveraging and pulling money out if you're going to open a home equity line of credit on your primary mortgage right in order ental properties which is a killer strategy there are a couple of obviously there's many different ways to skin a cat right so I guess you know when you when you ask about making decisions on how fast we want to pay down that HELOC and you know how we add to the liabilities column yes once that HELOC is maxed out and we've sort of traded interest for our primary mortgage we want to build that he lock up as fast as we can and so we're trying really hard to leave as much of the paycheck in the HELOC so that is growing so that we can do that again and so we sort of set a set a goal for like how many paychecks until we can do this again until we can use it again but it is and in my mind this is very acceptable debt now some sort of financial gurus will say no debt is acceptable I don't believe that this is really acceptable debt because I'm trading debt for debt like a okay debt for a better debt and so you don't want to just have a bunch of assets and no liabilities because then you're sort of you're not using your money in order to make more money you're not using your equity in order to build right it's worth going back to episode episode 141 where we did here on the podcast called rich rich people buy assets rich people buy assets not liabilities it's worth remembering because the power of that leverage and not being over leveraged but also being smart with those assets in order to you know buy more real estate and build your net worth continue to keep the process rolling and moving and shaken right so I do have a giveaway on my website if you go to how to calculate your net worth and make it fun on Natali Morris calm but I don't have in that giveaway this was written last year I it's just a simple how to you know assets minus liabilities but I can update this for the one that we give away on the podcast if you want and do that debt to equity ratio so that we just make sure that you can once you put it all in you'll see how much debt are you carrying on your assets and it's very enlightening it's very eye-opening you don't want it to be you know if you're leveraging like seventy percent you're like whoa I have way too much debt this is not the time then to look into a portfolio loan you need to save some cash right and so you know that you want to have just healthy robust members and I think I've said this before on the podcast that you know money it's it's just an abstraction these these are bank accounts that have my name on them that I can log into on the internet this cash does not exist in a vault and so you don't have to be afraid of these accounts list them all out and really know in your head that money likes to go to people who like to take care of it so if you're counting it and if you're watching it and you're watching it grow and you're believing in your ability to grow this spreadsheet it's going to happen yeah so totally believe that money is a manifestation when you place your intention on it I you know I got an email today from someone one of our investors actually he wrote today and I haven't heard from him in a few months and he said look I'm ready to take take action I now have a HELOC in place and I'd like to become a real estate investor with Morris invest we spoke a couple of months ago and I said I would contact you when my when I got my house in order and my funding was in place and now it is and I'm ready to take action like he knew he was going to make it happen he took many many months something like six months to get his house in order and he did and he's ready to take action so I'm you know I was $70,000 in debt with a foreclosure and had all my assets frozen and I said uh-uh that's not going to be my life I'm going to turn it around and I'm going to make it happen yeah I started focusing on that I started making a vision board I started meditating on this and I really started to take action and move incrementally towards that goal so anyone who's listening or watching can absolutely go out and do that sure for sure so okay well we hope this wasn't scary and if you have any questions about it let us know because we can help you figure out your your spreadsheet and yeah take care of your numbers it's like a garden you just tend to your garden you know pull out the weeds the things you don't want and prune the things you do and these numbers will grow and you know the way we use it is every three or four months I tell Clayton sit down I'm going to tell you how our numbers have changed and he comes over and now when we first got married he was like what the heck is this but now he knows is how to read the spreadsheets and he's like okay great that's what I feel good about that and he knows that this is the story of how we have grown and well you know not every month is a growth but how we've grown from one one the next well also I remember how scared I was when we were first looking at that stuff because it was it was not fun because yeah you know and it is now fun because you know we have like marching orders we sort of meet once a month we discuss where we are where we want to go how many properties we want to acquire how do we want to build our portfolio and we make it a battle plan and and it's exciting where in the beginning it was like oh don't show me that I don't want that call up to your your office to look at these numbers like it's scary I'm going to cry like I'm working my tail off you know I know you know and so it was scary back then but it's a different animal now and it's exciting and so it you can you can also see that growth even if it's just a small amount you know ain't just a small amount is it doesn't matter it's one step in front in front of the other it's a get there so good stuff so thank you so much for checking out we'll have tons of show notes here as well on this podcast for you as always go over to our website Morris and Vess comm slash episode 163 type it in all lowercase letters so it'll take you right to the show notes page for this episode and meanwhile while you're there if you're ready to book a call with our team and you ready to pick up your first rental property and you want saw a team to do it all for you that is rehab it place a tenant in it so you can just create net assets and have cash flow every month that's what we do that's the whole thing that's what we do my old team so go over there to our website Morris invest calm click on the schedule a consultation button if you'd like and if you don't that's fine too we've got tons of great resources over there blog posts tons of podcast episodes for you to check out and to help you become a better investor so until next time everyone go out there take action and become a real estate investor we'll see you bye everyone

13 thoughts on “Net Worth Explained

  1. I can’t thank you two enough for this series! I have one rental and this have given me the knowledge to purchase more and really empower me!

  2. So when you take a loan out to buy a rental property, and say your monthly payment on the loan is $1,000 a month and you're charging your tenant $1,500 a month. Are you keeping the $500.00 a month or do you take a percentage of what you're making off your tenant to pay down the loan and keep some for your monthly earnings?

  3. Hello, I love the videos! For the past 2 weeks I've been starting and ending my day with 3 real estate investment videos. I would love to get started but I still have questions. Could I contact your team to discuss my options and get the ball rolling? Thanks so much for the videos I really appreciate them!

  4. Why not get the boat and charter it out when you guys aren't using it? Then you add another cashflow producing asset in another asset class, and some additional write-offs. There are charter companies that manage the whole process, similar to property managers. You can schedule to use it whenever you want to. People do it with airplanes and boats all the time. I have flown on a number of private jets owned by celebrities and business leaders, who simply charter them out when not using them. It's a perfect scenario for assets that carry high maintenance, repairs and storage costs. In addition, with Airbnb and the like, another potential asset are properties that you could own in areas you like to vacation in and Airbnb those out when you aren't using them. These types of "fun" assets can also come in handy for use by potential clients and business partners, family or friends, while still producing cashflow and keeping them out of your personal liabilities column. Cheers! 😉

  5. The IRS already has a decent version of this worksheet in Pub 4681. They call it an insolvency worksheet. But it can also be used to calculate net worth if you are solvent.

  6. Hey guys, I love your podcast and all that you do to educate us about real estate investing. Both of you explain things very clearly and it's usually easy to follow. This is a great topic, however, in the future could you use a white board or some other visual tool to explain? I'm a visual learner and I'm sure a lot of your listeners and fans are too. #my2cents

  7. Great video guys. Gives me a great deal to consider as I have been primarily considering my monthly income verses payments.  Would you consider doing a video on student loans as well? While I have invested in some real estate I still have a great deal of outstanding student loans from law school. Since the debt is so great and the interest is so high it almost seems easier to increase my net worth via real estate investing rather then solely attempting to pay it off. Can you do a video attempting to discuss a strategy relating to holding off on paying debt is certain cases? thank you.

  8. Hello Mr and Mrs Morris. Love your videos. Thank you for all the info. Do you guys have videos on how to start real estate investing with no cash? what is private financing? Is seller financing a good idea for a first investment property? im in Ventura County CA. Thank you

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