Which number should you take to you measure a successful investment?
Which number counts the most as an investor?
This is a questions I kind of have often from new clients or random prospects as they want to know how to calculate how much money they can make with an investment.
In fact, not every investor see number in the same way: is your goal to have the more properties you can get? Do you want to maximize return on deposit made? Are you looking for capital gain?
Here is my opinion about it.
Net Worth
For me, what qualifies a wealthy investor or wealthy person is the net worth.
In real estate you usually take the market value – mortgage balance = equity (gross worth). If you really want to have the net net worth you could then subtract the taxes on capital gain + brokers fees + other fees related to sales. But let’s use the simplified formula here.
In order to have you net worth you take all your assets – liabilities.
Yes it will then depend on your age + income which is Thomas Stanley, author of “The Millionaire Next Door” came up with a simple formula (note that this formulas has been criticized but let’s share it here)
(Age * Annual income) / 10 = Expected Net Worth
From there, you’re categorized in one of three ways:
Under accumulators of wealth (UAWs) are those whose real net worth is less than one-half of their expected net worth.
Average accumulators of wealth (AAW) are on par with their expected net worth.
Prodigious accumulators of wealth (PAWs) have a net worth twice their expected level.
This should give you an idea where you “should be” based on your age and income.
Income
Is it better to have 2 positive cash flow properties or to have 5 properties with negative cash flow.
As an income investor, income should also be considered when looking at how successful you are investing. Nowadays, it becomes harder to be positive cash-flow with only the minimum down payment required 20%.
Return on investment
Are we talking about rental income/deposit made? Deposit/new market value? There are so many ways to calculate a return on investment that people start to have their own definition.
Number of properties
Some investors are defining their success with the number of properties. This also depends on how you made the money work for you.
Overall, this article is meant to say that there is many ways to define how successful investor you are. You might start with a downpayment of 100,000 and now have a multimillion dollars portfolio by only refinancing et renting.
I’m curious to see how do you measure your real estate investment?
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