In our most recent blog posts, we have gone over in a good amount of detail a few methods that can be utilized in order to create a real estate portfolio that is trending in a positive direction. The strategies that we discussed are well proven not only to lead to the success of a portfolio but also to one that will be able to withstand most fluctuations in the marketplace. The methods we discussed are as follows:
- 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
If you haven’t had an opportunity to read about these concepts, please feel free to click back on these posts in order to get additional details about these methods. Don’t forget that PMI Rocky Mountains is an excellent resource for investors in the area. In this post, we are going to cover some things that you can do for the purpose of figuring out how well a portfolio is performing. These calculations and subsequent analysis of the figures provide a good picture of exactly where your assets currently stand. These numbers are also useful in order to help an investor plan their continued investment strategy. The numbers can clue an investor in on which of the various strategies previously discussed might yield the best results for their specific circumstances.
Calculate your net cash flow
Net cash flow is an accounting principle that is very useful in the realm of real estate. The more assets an investor acquires, the more complex (and important) their net cash flow becomes. You calculate it by taking your income and then subtracting out applicable expenses. Things such as utility costs, HOA dues, property management fees and payroll (if you have staff) should be included in the calculation. It is most helpful to figure out cash flow on both an entire portfolio basis and on a per asset basis as well. Certain expenses and income can be applicable to the entire portfolio. These can also be easily divided across the different properties. A common target for investors is for all of the assets in a portfolio to be currently generating positive cash flow. However, this isn’t always a target that is hit. Often times, even a property with a negative cash flow today can turn out to be a profitable one down the road. Things like appreciation and positive market fluctuations play into the hand of the long term investor. Additionally, improvements can be made to the asset, which will often increase the value of a property. This can help turn a negative cash flowing asset into a positive one. When the cash flows for the property have been determined, a plan should be formulated for how to improve the performance of subpar properties. If coming up with a viable plan proves to be challenging, perhaps it might be time to look for the most profitable way to unload these troublesome assets.
Analyze your cash on cash return
After you have figured out your cash flow figures, you can use your results to calculate the return. Divide the net cash flow by the initial investment. Like before, it is most helpful to figure out your return both per property and for the whole portfolio. In addition, it is very helpful to compare your return with the return that other investors are getting on their properties locally. Knowing your rates of return will help identify any assets that consistently fall short. Then you can set a plan in motion to improve the rates of return.
Appreciation analysis
Real estate is almost universally considered a wise place to invest. The main reason is that property will usually appreciate over time. Comparing the increase in value for your assets with other local properties can provide another benchmark on the performance of your investments. If your assets are appreciating at a similar rate to other local properties, then you are keeping up with the market. If they are appreciating more quickly than the local average, then you are beating the market and have found some excellent opportunities.
Investors should associate themselves with successful and like-minded individuals as often as possible. Mutually beneficial relationships with these types of individuals will enhance your propensity to be successful. Real estate agents, lenders, appraisers and property management companies Colorado Springs are all possible avenues you can utilize to help find potentially profitable properties. Please don’t hesitate to contact PMI Colorado Springs with any questions. We can be a great resource and sounding board for any Colorado Springs property management needs.