In our recent blog posts, we have gone over some ways investors can create a real estate portfolio that is trending in a positive direction. The different strategies that we covered in detail in those posts are:
- Get in the game
- The concept of leverage
- Work smarter instead of harder
- Find properties before they are listed on the local Multiple Listing Service (MLS)
- The tried and true method of cold calling
- Rental properties equal cash flow
- Recognize and protect your most valuable asset
- Know when to walk away and have the courage to do so
Please feel free to go and click back on these previous blog posts to get more information about these methods, and please remember that PMI Twin Cities can be a fantastic resource for you as it relates to all things real estate. In this blog post, we are going to discuss some things that you can do to determine exactly how well a real estate portfolio is performing. By doing this analysis, you can discover exactly where your portfolio stands today and which of the strategies listed above might be helpful and even necessary.
Calculate your net cash flow
As it relates to this fundamental accounting principle, the more your portfolio expands, the more complex (and important) cash flow becomes. Net cash flow is calculated by taking the total income and then subtracting expenses. You need to include items such as utility costs, HOA dues, property management fees and payroll (if you have staff) in your expenses. An investor should calculate net cash flow on both a per property basis and for the entire portfolio. Some of the expenses and income might apply on a broad spectrum to the entire portfolio but can easily be equally divided among the different properties for cash flow purposes. You want all of your properties to be generating a positive cash flow. However, it is important to note that many times a property with a negative cash flow can be of significant value. This is because things like appreciation and future improvements that can be made to the property will impact the value in a positive way. Once the cash flow numbers have been figured out, the next step is to work up a detailed plan on to how improve properties that have a negative cash flow. The sooner you can get them to cash flow positive, the better off your investment portfolio will be. If you can’t come up with a good plan for these types of assets, it might be time to think about finding the most profitable and efficient way to remove the negative cash flowing properties from your portfolio and replace them with better alternatives.
Analyze your cash on cash return
Once you have determined the net cash flow, you can use that figure to calculate the return on investment. Simply divide the net cash flow by the initial investment. Once again, always calculate this for both your entire portfolio as a whole and on a per property basis as well. This will show you how your assets are performing over time. Next, you should compare and contrast your returns with other properties in the local area. This provides further insight on whether or not certain improvements would have a positive effect on how your portfolio is performing from a return standpoint. Additionally, you can determine if your properties are keeping up with average rates of return locally. Finally, when you know your return on investment, you can easily identify any properties that consistently perform poorly. If you need to sell any of them due to their below average returns, these figures can help you determine which ones should be the top priority.
Appreciation analysis
Real estate is considered such a smart investment due to the fact that most properties will become more valuable over time. You can compare the appreciation rates for your assets with other properties in the local area. If your assets are gaining value at a similar rate to other properties locally, then you are doing well. If you are getting more appreciation in your portfolio than the local average, then you are doing phenomenal.
Another smart move is to have numerous like-minded and successful individuals in your corner. Associating with these individuals can have a significant impact on your ability to be successful. Key relationships with real estate agents, lenders, appraisers, and Minneapolis property managers should increase your propensity to find profitable investments. Please don’t hesitate to contact PMI Twin Cities with any questions or for assistance with any St. Paul property management needs.