Net worth doesn't get as much attention as it deserves. Many investors set a goal of increasing net worth 10, 20, or 30 years down the road. But that's because many people relegate building net worth to paying down their personal residence and contributing a bit extra to their retirement account.
Those things can and will improve net worth over time, but increasing your net worth by investing in real estate can make that long-term goal much more achievable on a shorter timeline while opening doors to new investment opportunities at the same time. Here's a closer look at why real estate is such a valuable tool in building net worth.
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Why net worth matters
Net worth is a snapshot in time of your financial standing. It takes the total value of your assets -- including things like real estate, car, furniture, stocks, bonds, or other investments -- and subtracts the liabilities, which are debts owed.
Ideally, the goal is to have a positive net worth. The higher the better. Having a high net worth means you are more financially stable with regard to things like retirement, you have a higher accumulation of wealth, and you can access better investment and financing opportunities. That is particularly true if you are considered an accredited investor, which is an individual with a net worth of over $1 million (excluding primary residence).
The average net worth of Americans will vary greatly, usually increasing as your salary grows or you get closer to retirement. But there are ways to supercharge your net worth outside of your salary alone -- one way is to invest in real estate.
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Boosting your net worth through real estate
For the vast majority of us, our home is one of the most valuable assets we own. As we pay the mortgage down or the property increases in value, equity is built, which adds to total net worth. However, if you want to reach accreditation status to access special investment opportunities, you'll need to use real estate investing to build your net worth.
Buying and renting a vacation home or single-family property, or even investing in commercial real estate, can help you build your net worth in the same way as a personal residence while also benefiting from certain tax deductions, opportunity to earn cash flow (or passive income), and leverage. Unlike your primary residence -- where you are responsible for paying the mortgage and building the property's equity, thus increasing your net worth -- the tenants' rents will help pay this expense for you.
One real estate investment can notably increase your net worth, but it's easy to see how owning several real estate properties can help you become an accredited investor in a short period of time without having to use your own salary to do it.
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Don't let high-incomes fool you
Increasing your net worth via real estate is a great way to create financial security, but it still takes making smart purchasing decisions -- for the real estate and for the rest of your lifestyle -- to equate to true growth. Managing your debts and making sure you aren't overleveraging yourself is key. There are plenty of seemingly high-income earners who have low net worth because they finance all their purchases and max out credit lines, washing out the value of their assets.
If you want to use real estate to grow your net worth, choose properties located in areas that are likely to appreciate and have strong rental demand. It's also a good idea to put 20% down to help hedge against potential loss in value from market conditions. As with any purchase, you must do your due diligence to make sure that the numbers work for you and the purchase makes sense and that you are prepared for the responsibilities and risks associated with owning investment real estate. If it all works, you will be able to set yourself down the path to financial stability in no time.
