Why is net worth important for buy and hold investors? Or is it?

Question

I keep hearing that net worth is very important. My particular strategy is to acquire buy and hold cash-flowing properties with at least some appreciation potential. As such, I'm not clear why the specific number of my net worth represents anything but bragging rights. Is this simply for future selling purposes/exit strategies? Why should I care about this particular number? Or should I? What does my net worth allow me to do? Can someone help me see what I'm missing?

Thanks as always! Cheers!

Eric

Thanks as always! Cheers!

Eric

Theo Hicks · Answer

As long as you stay with residential rentals (1 to 4 units), it doesn't matter so much. Net worth is one of the factors taken into account on commercial mortgages. Generally, the lender wants to see a net worth equal to the principal balance. However, it get around this, you can bring on someone with the net worth requirements.

Additionally, if you ever become interested in passively investing in apartment syndications that accept accredited investors only, you'll need to meet the net worth or income requirements.

Jay Hinrichs · Answer

for one off SFR's with conventional mortgages not that critical .. but if your going for larger loans its a must

or if your going to do other type of real estate like developing or building new construction.

I know in my loan covenants I have minimum Net worths I have to maintain ..  and  20% equity in half a dozen 100k rentals don't cut it..

but if your goal is to just own that type of product then I really don't think that net worth is quite as critical.

I think cash flow and experience is critical and some decent cash reserves.. lenders will want to see that for rentals.

when your looking at big commercial loans a lot of time the bank or lender wants to see the sponsor or co sponsors' have a net worth of at least the size of the loan.   so when going for a multi million dollar loan that's were net worth comes into play.. maybe some of the MF guys can chime in on that .. not my area of expertise but I have heard that mentioned.

Jonathan R McLaughlin · Answer

Just one example of this in practice. qualified net worth and equity of over 1M in a recent deal allowed  an interest rate swap on the loan which gave the bank much more flexibility in managing its portfolio/risk.

Mike Dymski · Answer

Net worth >= loan amount is a requirement for certain commercial loans.

Personal net worth (invested properly) can provide financial freedom.

Tracking your personal balance sheet is a good discipline.  It holds us accountable for our personal and financial decisions.

Russell Brazil · Answer

I honestly cant wrap my mind around why someone wouldnt think its important. (Someone into investing or finance at least)

Would you rather have a million dollars or zero dollars? That just seems pretty simple to me.

Nick D. · Answer

As many have said, it plays a part for commercially structured loans. I work for a CMBS lender and net worth is one of the criteria we consider when issuing out a quote. We target 25% of the loan size in net worth for our portfolio term loans and 20% of the loan size for our acquisition & fix and flip lines of credit.

Dustin Beam · Answer

I've been a personal guarantor for my two loans (and will be again on my refinance and likely will again for the property I purchase from the cash out lol).... But what about the larger loans?

I've been under the impression that once the loan size was large enough (in my mind I assumed $5M, but I don't know why that number is in my head), they basically become non-recourse loans as the loaning institution acknowledges the property must be able to support itself. I may be way off base here though. Would love to be corrected if I'm wrong!

Marc Winter · Answer

If you will not be using a bank or mortgage company for financing, and just using your own cash, seller financing, or some sort of personal/private (Mom and Dad or very close friend) 'syndication', probably no one will be asking about your 'net worth' balance sheet.

If you will have to fill out a formal loan application from a certified/licensed lender (bank or s&l) they will most likely want to see that you have/control more net assets than your total liabilities.

If you were in the business of lending money, would you approve someone whose income/savings/assets were less than their total debt, in other words, totally under water, would you make the loan?

Why is net worth important for buy and hold investors? Or is it?

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