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What metric do you use to determine your financial health? Income? Passive income? Assets? Debt? Net worth? Rental properties? Something else?

Posted by John T. Reed on

Net worth and a declining loan-to-value ratio on your portfolio. There is a huge difference between having a net worth of $3 million in free-and-clear real estate and the same net worth in a portfolio of $20 million of real estate where you owe $17 million in mortgages.

Also, don’t just pick an impressive round number like I did. More is not the goal. Enough is.

How much is enough? Show me your shopping list of stuff you need but cannot now afford. Most people laugh that they would have no trouble sending $ million or so. “Show me your shopping list,” I insist, handing them a pencil and paper. They cannot.

There is a price to high net worth goals: it is time and risk. 

Everyone gets 24 hours a day. You cannot buy more time. You can only spend it of net worth seeking or family or friends or your health. You can change the width of one pie slice at the expense of another, but not the amount of hours in your day.

The big producer of net worth in real estate if you succeed is leverage. But leverage can also bankrupt you. Your loan-to-value ratio and debt-coverage ratios are the measures of how much you can survive in terms of adverse conditions. I lost $750,000 in the S&L Debacle and heard the sound of the bankruptcy “bullet” whiz by my ear. And I had put 25% down on those two apartment complexes.

My wife and I are multimillionaires now. But we did not get there by some linear, planned process. Stuff happens, both good and bad. It you take adequate care of risk management, you survive the bad.

If you gotta have that extra five or ten million net worth, take the risks. But it would be a shame to bankrupt yourself and your family pursuing some impressive round number that you did not really NEED.

1. Be a good spouse.
2. Be a good parent.
3. Be a good friend.
4. Be a good real estate investor or whatever.

Trying to be #4 may cause you to fail to be #s 1, 2, and 3. Life balance is more important than net worth.

By the way, you do not need a computer app program to keep track of your net worth. You should round off to the nearest hundred thousand or million. You can do that in your head.

If you need to ask how much a yacht costs, you can’t afford it. And if you are asking what your net worth is to the nearest ten thousand or thousand, you are violating the “There’ll be time enough for counting when the dealin’s done” rule.

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