In recent blog posts, we have discussed in detail some ways that you can create a real estate portfolio that is growing. The methods we went over in those posts are well proven and withstand the test of time and fluctuations in the market. They 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 click back on these posts to get additional details about these methods. In addition, please remember that PMI MSP is a great resource for local investors. In this blog post, we will discuss a couple of things that an investor can do in order to determine how well a real estate portfolio is performing. Some simple calculations and analysis will provide a clear picture of exactly where a portfolio stands. These figures can also help an investor plan an investment strategy for the future. They can also provide details that can help determine which of the various methods previously discussed would be most helpful in growing a portfolio.
Calculate your net cash flow
Net cash flow is a basic principle of accounting. The bigger your portfolio grows, the more complex (and important) cash flow becomes. Net cash flow is figured by taking your income and then subtracting out any and all expenses. Items like utility costs, HOA dues, property management fees and payroll (if you have staff) need to be included in expenses. It is best to figure out cash flow on both a portfolio basis and per property basis as well. Some income and expenses will apply to the entire portfolio but can easily be divided among the different assets for calculation purposes. The goal is for all properties in a real estate portfolio to generate a positive cash flow. However, this isn’t always achievable. That said, sometimes even an asset with a negative cash flow can be a profitable one in the long run. Appreciation and improvements that can be made to the asset often increase the value of a property that cash flows negatively. Once you calculate your per property cash flows, you should formulate a plan for how to improve the situation for any assets that aren’t currently profitable. If it is proving difficult to come up with a viable plan, it might be time to seriously consider finding the most profitable way to remove the troublesome assets from your portfolio.
Analyze your cash on cash return
Next you can use your net cash flow numbers to calculate the ROI for your assets. Simply divide the net cash flow by the initial investment. Once again, it is typically most helpful to calculate this for both your entire portfolio and on a per property basis. This way you can see how your assets are performing over time. In addition, it is very useful to compare and contrast your rate of return with other properties in the local area. This helps to determine whether or not certain improvements to specific properties would help to improve the return on your portfolio as a whole. Your return on investment helps to identify any assets that consistently fall short. Sometimes the best course of action ends up being to sell these assets, and these figures can help you determine which ones should be sold first.
Appreciation analysis
In most cases, real estate is a great investment because property will usually become more valuable as time goes on. Comparing the increase in value for your assets with other properties in the area can provide clarity on how your portfolio is performing. If your properties are appreciating at a similar rate to other local assets, then things are good. If they are appreciating more quickly than average, then things are excellent.
Another helpful strategy is to associate with like-minded and successful individuals as often as possible. Forming mutually beneficial relationships with these types of people can enhance your propensity for success. Real estate agents, lenders, appraisers and Twin Cities property management companies are all great options to help improve your ability to find profitable opportunities. Please don’t hesitate to contact PMI MSP with any questions and especially for assistance with any Golden Valley property management needs.