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The Pandemic and Your Net Worth

Wednesday, June 2, 2021   /   by Troy Schlicker

The Pandemic and Your Net Worth

COVID-19 and the global pandemic has had a pronounced effect on every aspect of our lives. In early 2020, when shutdowns started there were many factors that made it look like the next year would be a rough one for your net worth. With looming layoffs, a stock market in decline and a stalling housing market we looked ready to be in a prolonged recession.

Many people believed that a recession would mean a decline in home prices and negatively impact their net worth. As I mentioned over a year ago, in my January 2020 blog on the real estate outlook, having a recession was unlikely to negatively impact housing prices because homeowners today are in more secure financial positions, have built up more equity in their homes and financial institutions have been more careful with their lending policies.

Among its many impacts, COVID-19 has had a pronounced effect on the housing market, but not in the way many people initial imagined a recession would. Instead, low home inventory and high buyer demand have driven home prices to an all-time high. This has given an unexpected financial boost to many homeowners during a challenging time. However, for some renters, rising home prices are making dreams of homeownership feel further out of reach.

Staying on top of your financial health is important for you and your family. One of the simple ways to do this is to understand your net worth. If you’re a home owner, knowing your home’s value is an important factor in determining your net worth as your home is likely your most expensive asset. It’s also value to understand how an investment in real estate, whether as your primary residence or as an investment property can help you grow your net worth, build wealth over time, and gain a foothold in the housing market to keep pace with rising prices.

What is Net Worth?

Net worth is the balance of your assets and liabilities at one point in time. Calculating your net worth takes into account all of your sources of wealth minus the debts you owe. Regularly calculating your net worth helps you get a feel for where you’re at with your finances and gain insight into ways to improve your financial life.

Assets include the cash you have on hand and in checking and savings accounts, investment accounts like retirement accounts, saleable items like jewelry or a car and, of course, your home plus any other real estate you own.

Liabilities include your total debt obligations like car loans, credit card debt, the amount you owe on your mortgage, and student loans. In addition, liabilities would include any other payment obligations you have, like outstanding bills and taxes.

Once you understand the value of your assets and liabilities, calculating your net worth is very straightforward.

Total Assets – Total Liabilities = Net Worth

Keep in mind that your net worth is a snapshot of your financial position at a single point in time. Your assets and liabilities will fluctuate over both the short term and long term. For example, after you buy that car and drive it off the lot it starts to depreciate in value meaning it could be an asset or liability depending on how much your loan is. An asset that is invested in stocks or bonds can be even less predictable, as it’s subject to daily fluctuations in the market. Figuring out how much your home is worth can be even more challenging especially in a state like Texas. Because Texas is a non-disclosure state none of the final sales prices are ever recorded publicly, meaning that third party sites like Zillow or the county assessment office are notoriously bad at providing an accurate market value of your home.

Ready to calculate your net worth? Contact us to request an easy-to-use worksheet and a free assessment of your home’s current market value!

Why is Net Worth Important?

Net worth is important for a few key reasons. First, it’s a snapshot of your financial health. By tracking your net worth over time, you can understand if you are on track to achieving financial goals. Knowing your net worth will also help you to refocus on what is important to you over time, in much the same way that tracking your weight will give you an indication of your physical health.

Similar to your weight though it’s important to understand the components associated with your net worth and not just get stuck on a number. It’s also important to take a longer-term view and not worry too much on the changes day to day as that will lead to short term behavior that may not be good for your financial health in the long term.

A second critical reason net worth is important deals with the macro net worth of American families. When the median net worth of the American family is increasing that indicates good things for the American economy as a whole. This is why even though U.S. employment remains 7 million below it’s pre-pandemic levels our economy has bounced back quickly, thanks to record highs in the net worth of American households with soaring stock and home prices.

While we never want to diminish the impact that the pandemic has had on many workers and small businesses that are struggling, it’s important to understand how economic factors and net worth are impacting the economy and the housing market.

Record levels of equity in homes for owners has helped fuel the record net worth levels for many Americans households. This translates to a very different outlook for the housing market than in 2007 when we had a sharp 20% increase in the median home prices over the previous 3 years. While the past 3 years have seen an even larger 25% increase in median home prices this increase has been fueled by significantly less debt due to larger down payments, more homes being bought with cash and stricter lending guidelines.

Even though home prices were rising from 2004-2007 the net worth of many families was not rising at the same levels since they were incurring debt in the form of mortgages that were equal to or sometimes more than the values of the homes they were purchasing. The additional cash and equity today’s home owners have mean that a decline in home price would not set off a chain reaction of foreclosures and a continued decrease in home prices.

Is Real Estate the Right Way to Increase Your Net Worth?

Real estate can be a great way to put your cash to work to grow your net worth, generate cash flow, and even fund your retirement for doing something you already do. Living somewhere. There are a few ways that real estate can increase your net worth.

Property Appreciation

Generally, property appreciates in one of two ways: either through changes to the overall market or through value-added modifications to the property itself.

1. Rising prices

This type of property appreciation is the one that many homeowners are enjoying right now. Buyer demand is at an all-time high due to a combination of record-low interest rates and limited housing inventory. At other times, rising home prices have been attributed to different factors. Certain local conditions—like a new commercial development, influx of jobs, or infrastructure project—can encourage rapid growth in a community or region and a corresponding rise in home values. Historically, home prices have been shown to experience an upward trend punctuated by intermittent booms and corrections.

2. Strategic home improvements

Well-planned and executed home improvements can also impact a home’s value and increase homeowner equity at the same time. The type of home improvement should be appropriate for the home and in tune with the desires of local buyers.

For example, a tasteful exterior remodel that is in keeping with the preferences of local home buyers is likely to add significant value to a home, while remodeling the home to look like the Taj Mahal or a favorite theme park attraction will not. A modern kitchen remodel tends to add value, while a kitchen remodel that is overly expensive or personalized may not provide an adequate return on investment.

Investment Property

You may be used to thinking of investments primarily in terms of stocks and bonds. However, the purchase of a real estate investment property offers the opportunity to increase your net worth both upon purchase and year after year through appreciation. In addition, rental payments can have a positive impact on your monthly income and cash flow. If you currently have significant equity in your home, let's talk about how you could put that equity to work by funding the purchase of an investment property.

1. Long-term or traditional rental

A long-term rental property is one that is leased for an extended period and typically used as a primary residence by the renter. This type of real estate investment offers you the opportunity to generate consistent cash flow while building equity and appreciation.

As an owner, you don’t usually have to worry about paying the utility bills or furnishing the property—both of which are typically covered by the tenant. Add to this the fact that traditional tenants translate into less time and effort spent on day-to-day property management, and long-term rentals are an attractive option for many investors.

2. Short-term or vacation rental

Short-term rentals are often referred to as vacation rentals because they are primarily geared towards recreational travelers. And as more people start to feel comfortable traveling again, the short-term rental market is poised to become a more popular option than ever. In 2020 alone, in the thick of widespread travel bans, the short-term rental platform Airbnb’s market share of the hospitality industry reached as high as 41 percent.

Investing in a short-term rental offers many benefits. If you purchase an investment property in a top tourist destination, you can expect steady demand from travelers while taking advantage of any non-rented periods to enjoy the home yourself. You can also adjust your rental price around peak demand to maximize your cash flow while building equity and long-term appreciation.

To reap these benefits, however, you’ll need to understand the local laws and regulations on short-term rentals. We can help you identify suitable markets with investment potential.

Things to take under consideration when deciding if real estate is the right way to increase your net worth. If you’re deciding to buy a home instead of renting your flexibility and mobility to move or relocate can be more challenging. Having your own home will also require more work and money as repairs and upkeep will be your responsibility.

If you are considering an investment property it is harder to cash out a portion or all of the investment than it would if the money was invested in the stock market or other more liquid investment. With investment properties it’s also important to take into account the high property tax rates in and around Austin, TX. This can significantly limit your ability to positively cashflow the home from day 1. The strict limitations on short-term vacation rentals by the city of Austin may also eliminate your ability to participate in this income stream.

It’s important to understand your situation and what your plans are so that you can make the investment decision that are the best for you.

WE’RE HERE TO HELP

Ready to calculate your personal net worth? Contact us for an easy-to-use worksheet and to find out your home’s true current value. If you want to learn more about growing your net worth through real estate, we can schedule a free consultation to answer your questions and explore your options. Whether you’re hoping to maximize the value of your current home or invest in a new property, we’re here to help you achieve your real estate goals.

The above references an opinion and is for informational purposes only. It is not intended to be financial advice. Consult the appropriate professionals for advice regarding your individual needs.