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How to measure the success level of your real estate portfolio

PMI Richmond - Thursday, May 20, 2021
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In recent blog posts, we have gone over some ways to make sure your real estate portfolio is headed in the right direction. The methods we went over in depth 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 previous posts if you want to learn more about those methods, and remember that property managers Richmond VA can be a fantastic resource to help you employ these strategies. In this blog post, we are going to discuss some ways that you can measure how well the methods you are applying to your portfolio are paying off. With proper analysis, you can determine where your portfolio currently stands and even which of the above methods might need more of your attention in order to get the results you are looking for.

Calculate your net cash flow

Although this is a fairly basic accounting principle, the more you grow your portfolio, the more complex (and important) this calculation becomes. Net cash flow is determined by taking your total income and subtracting out your expenses. Don’t forget to include things like utilities, HOA dues, property management fees and payroll (if you have staff). It is a good idea to calculate net cash flow on both a per property basis, and an overall portfolio basis. Certain expenses might apply generally to your entire portfolio but can still be easily divided out among different properties to determine your per property cash flows. It stands to reason that you want all of your properties to be generating a positive cash flow. However, it is important to remember that in certain circumstances even a property that is cash flowing negatively can still be valuable due to things like appreciation and future improvements in both the property and the market in general. It is equally important to come up with a detailed plan to turn assets with negative cash flow to positive. If you can’t come up with a plan to accomplish this, it may be time to give serious consideration to finding the most profitable way to move on from that asset.

Analyze your cash on cash return

Once you have calculated your net cash flow, you can figure out your return on investment. Simply divide your net cash flow by your initial investment. Once again, this should be done on both a per property and complete portfolio basis. This will give you a clear picture on how assets are performing over time. It can also be beneficial to compare with other properties in the market and see where your assets stack up. It can also provide some more clarity on whether or not certain improvements would improve the rate of return. In addition, this calculation can identify properties that consistently under perform over time, which can help you decide whether they should be sold so that you can cut your losses and move forward.

Appreciation analysis

The principal reason real estate is considered such a sound investment is that the vast majority of properties will appreciate over time. You should compare the increase in value in your properties with the appreciation in the local market. If your portfolio is appreciating at a rate on par with the local average, you are definitely on the right track. If you are exceeding the average appreciation rate, then you are setting the pace for continued growth and success.

As is the case with any worthwhile endeavor, the more you surround yourself with like-minded and successful experts in your field, the greater chance you will have to do well. From real estate agents and lenders to appraisers and property managers, the more experts you align yourself with, the better your portfolio will perform. Please don’t hesitate to contact PMI Richmond with any questions or for assistance with property management Richmond VA.