In our recent blog posts, we have gone over some ways an investor can create a real estate portfolio that is growing. The methods that we discussed 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 back to these posts to get some additional details about these strategies. In addition, please don’t forget that the perimeter property services offered through PMI Perimeter are a resource for you as it relates to all aspects of real estate. In this blog post, we will discuss a couple of calculations that can be done in order to determine how well your real estate portfolio is performing. This analysis will help you know exactly where your portfolio stands today. It can also be useful in helping you determine your investment strategy going forward. In addition, it can show you in more detail which of the various strategies above might provide the most benefit for you and your portfolio.
Calculate your net cash flow
Net cash flow is a fundamental accounting principle. As such, the bigger your portfolio grows, the more complex (and important) cash flow becomes. Net cash flow is figured by taking the total income and then subtracting out expenses. Items such as utility costs, HOA dues, property management fees and payroll (if you have staff) need to be included in the expenses deduction. It is wise to calculate cash flow on both a per property basis and for the entire portfolio too. Some individual expenses and income might actually apply to the entire portfolio but can easily be divided among the different properties for cash flow purposes. In a perfect world, all assets in a portfolio will be generating a positive cash flow. However, this is not always the case. Just remember, that sometimes even a property with a negative cash flow can be of great future value. Things like appreciation and improvements that can be made to the asset can add significant value to a property that has a negative cash flow. Once you figure out your per property cash flows, the next step is to create a plan focusing on how to improve the situation for any assets that aren’t in the black. If you are having difficulty coming up with a sound plan for improvement, it might be time to think about finding the most profitable way to sell any underperforming assets.
Analyze your cash on cash return
Next you can use your net cash flow numbers to calculate the return on investment for your properties. Simply divide the net cash flow by the initial investment. Once again, it is prudent to calculate this for both your entire portfolio and on a per asset basis. This helps you see how your properties are performing over time. You can also compare and contrast your rate of return with other properties in the area. This way, you can start to realize whether or not certain improvements to certain properties would help to improve your return. You can also deduce if your properties are keeping up with the average rates of return in your locale. Your return on investment helps to identify any assets that consistently perform poorly. Often times, these properties need to be sold, and these figures can help you decide which ones you should focus on moving first.
Real estate is widely considered a sound investment because usually property will become more valuable as time goes by. Comparing the appreciation rates for your assets with other properties nearby can show you how your portfolio is performing. If your properties are gaining value at a similar rate to other local properties then you are doing well. If your assets are appreciating faster than the local average, then you are doing excellent.
It can be very beneficial to associate with like-minded and successful individuals. Fostering mutually beneficial relationships with these types of people can have a positive impact on your ability to meet your targets. Real estate agents, lenders, appraisers and property management companies in Atlanta are all viable options to help improve your ability to find opportunities. Please don’t hesitate to contact PMI Perimeter with any questions or for assistance with any Perimeter properties, or any properties in the Atlanta metropolitan area.