Scaling your commercial real estate portfolio is important if you want to achieve your investment goals.
The first step to scaling your commercial real estate portfolio is to evaluate your holdings. Ideally this should be done on a quarterly basis, with a deep-dive done at least once a year.
Here are some questions you can ask yourself when it’s time to evaluate your portfolio’s performance.
How are Your Properties Performing?
The first key to understanding how your properties are doing is to take a look at the cap rate.
Newer properties may take more time to show a good cap rate. That’s because between repairs, closing costs, getting to know the property, and optimizing management, you’re bound to get lower cap rates.
Thus the first year is often a wash in terms of profits, but each year after that the cap rate should improve. That means that newer properties will need to be checked more frequently to see whether the property reaches the cap rate you’ve decided as your goal.
Don’t just evaluate each property individually, however. You should also compare properties to see which ones are closer to your desired cap rate. Based on what you find, you may decide to sell the property, or perhaps you need to re-evaluate the property manager to see how you can optimize the building’s performance.
Evaluate the Value of Your Portfolio
A comparable market analysis (CMA) compares your property to similar ones, and is considered one way to get an accurate representation of what the property’s value is.
Start by ranking the properties according to which one has gained the most equity; this will also affect how you decide to handle each property.
Sometimes when you do a CMA you’ll notice that the market value of the income property is less than it should be, but the equity has increased. In that case, you might want to sell the property. Or you might choose to increase rent, upgrade a property, or make other changes that can increase a specific property’s equity.
Again, it all depends on what your overall investment goals are.
How Do Your Finances Look?
Many investors forget you don’t need to sell a property in order to realize a gain. If you can lower your interest rates on any financing you have, then that could be a good opportunity to take equity on a property and re-invest that into another property, or refinance it in order to improve your cap rate.
For example, if your original LTV was 80%, but now the LTV is 60%; refinancing could lower your interest, improve your cash flow, and give you money that can be invested in another property.
Talk to your lender, who can help you decide whether a cash-out could be helpful in your case: putting the equity to work and diversifying your portfolio with another property could be one of the smartest decisions you make.
And of course, if you do decide to buy another property, the smart thing to do is use a 1031 exchange. This will enable you to save tens of thousands of dollars in taxes while upgrading to a better-performing property.
Make Sure Your Insurance Is On Par With Your Needs
There have been several natural disasters lately, and checking that your insurance has you fully covered could save you hundreds of thousands of dollars.
This could be especially important if the value of your property has increased in the last year, since if something does happen, you might be under-insured by a significant amount.
If you’ve done any major repairs or renovations, then be ware that they can also increase the value of your property, and decrease the deductible, which is one of the biggest factors in increasing or decreasing a premium. That’s because the likelihood of a major expense is much lower if you’ve completed major repairs like roof, plumbing, electrical or HVAC systems.
If you’ve completed a major repair or renovation, it is definitely worth your time to speak to your insurance agent to see if this might apply to you.
Re-Evaluate Your Investment Goals
It’s not uncommon for investors to create an investment plan when they first begin investing, yet years later, fail to revisit their investment plan to see if it still fits in with their goals.
An investment plan created in your 30’s is unlikely to fit you when you’re in your 40’s or 50’s.
Your revamped goals will also help you determine exactly how many properties you still need to acquire, and what type. If you’re close to retirement age, for example, you might decide to sell off some of your riskier properties and exchange them for triple nets.
Triple or double nets offer a steady stream of income at low risk – a definite benefit if you’re already retired. In truth, triple nets are a great diversification tool in any portfolio, since they balance out riskier properties.
If you’re well under retirement age, careful calculation of your living expenses might reveal that between taxes, food and rising healthcare costs, you might need to set aside more money than you thought for retirement.
Or, you might decide that you’d really prefer to work fewer hours at your day job, which you could do if you were able to add an additional income stream to your portfolio.
Create and Implement Clear Systems and Procedures
Using systems and procedures to streamline the amount of time you spend on investing details is essential. Not only will you save time, but they’ll help you become more successful since you’ll be using proven methods.
Do you have a system for doing thorough due diligence? For handling upcoming tenant vacancies? For finding and evaluating property managers?
Keep in mind that it’s not a system or procedure unless all the steps needed to accomplish your goal are written down. Having it in your head isn’t enough, especially if you decide to delegate a task to a team member or employee.
Pick a Property Type You Love – and Stick With It
There are always plenty of opportunities for profit in commercial real estate, but choosing a specific property type makes it easier to recognize a great deal when it comes along. This doesn’t mean you’re failing to diversify, however. Even within a property type there is always room to branch out.
If you’ve decided you like retail properties, for example, there is still plenty of room to experiment. You can choose anything from quick service restaurants to shopping malls to triple net franchises, and all of these offer plenty of diversity.
In short, scaling your portfolio can be done, but it won’t happen by accident. Plan for it, and make sure you have a good team on your side, and before you know it, you’ll be ready to hit the next level.