In our recent blog posts, we discussed ways individuals can create a real estate portfolio that is thriving. The proven methods that we covered in detail in those posts 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
Please feel free to go and click back on these posts to learn more about these strategies, and please don’t forget that PMI Albany is a resource for you as it relates to all aspects of real estate investing. In this blog post, we will discuss a few things that can be done in order to determine how well a portfolio is performing. This analysis will help an investor discover exactly where their portfolio stands. In addition, it will give them an idea regarding which of the various methods listed above might be helpful.
Calculate your net cash flow
When it comes to this fundamental accounting principle, the bigger your portfolio grows, the more complex (and important) cash flow becomes. Net cash flow is derived by taking the total income and then subtracting out any and all expenses. You need to include such items as utility costs, HOA dues, property management fees and payroll (if you have staff) in the deduction. Cash flow should be calculated on both a per property basis and for the entire portfolio as a whole. Certain expenses and income might apply to the entire portfolio but should also be equally divided among the different properties for cash flow purposes. Ideally, all assets in a portfolio will be generating a positive cash flow. However, many times even a property with a negative cash flow can be of value. This is due to the fact that things like appreciation and improvements that can be made to the asset will change the value in a positive manner. When the cash flow has been figured out, the next step is to create a plan focusing on how to improve the situation for any assets that have a negative cash flow. If you can’t come up with a good plan for improvement, it might be time to think about finding the most profitable way to sell any negative cash flowing properties.and replace them with better alternatives.
Analyze your cash on cash return
When you have determined the net cash flow, that figure will be used to calculate the return on investment. Simply divide the net cash flow by the initial investment. Always calculate this for both your entire portfolio and on a per property basis. This will shed some light on how your properties are performing over time. You should also compare and contrast your rate of return with other properties nearby. This provides insight on whether or not certain improvements would help with how your portfolio is performing return wise. You can also determine if your properties are keeping up with the local average rates of return. When you know your return on investment, it helps identify any assets that consistently perform in a subpar manner. Often times, these properties need to be sold quickly, and these figures can help you determine which ones should take precedent.
Appreciation analysis
Real estate is a smart investment because most properties will become more valuable as time passes. Comparing the appreciation rates for your portfolio with other properties in the local area will help you know how your portfolio is doing. If your properties are appreciating at a similar rate to others in the area, then you are doing well. If they are appreciating more 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 Albany property managers should increase your ability to find profitable opportunities. Please don’t hesitate to contact PMI Albany with any questions or for assistance with any property management Albany NY needs.