Why Manage Your Real Estate Portfolio?
Maneuvering the waters of an investment property deal is just half the game: as a commercial real estate investor, you need to be able to manage all of your properties successfully as a whole.
That’s because while a property may have its’ own strengths and weaknesses, each individual property is a piece of a greater whole – your portfolio. And if one piece isn’t holding its own, it will bring down the rest of the ship with it.
Managing your real estate portfolio successfully is both an art and a science, and it is the key to minimizing your risk while maximizing your returns.
Real Estate Portfolio Management Has Two Critical Functions
Whether you own one property or a hundred, managing your real estate portfolio involves two tasks: matching properties to your investment goals, and balancing risk against the performance of the investment.
As an investor, you’ll need to analyze your properties’ strengths, weaknesses, and determine how those will be affected by any opportunities or threats in the market. You’ll have to weigh debt against equity, examine the various markets, balance the need for growth against your desire for safety…alongside numerous other factors that will help you make the right decisions to balance your desire for a return against the inherent risks.
This may be more difficult than it seems, since there are numerous categories of commercial income properties, and each one is vastly different from another, subject to different market pressures and different expectations. Despite this fact, you can still compare investment properties if you focus on carefully choosing and assessing the proportions of various assets.
How To Compare Income Properties In A Real Estate Portfolio
It’s common for investors to compare an income property to other properties in the area based on cash on cash return or the gross rent multiplier. While these figures are useful when doing a quick property comparison, they don’t take into account the drastic changes in cash flow that can occur while the property is held.
Therefore, it’s critical you use the discounted cash flow method (DCF) as well. The DCF is a valuation method that discounts back to the valuation date all future expected cash flows expected from the income property. Because it accounts for all the cash flows that occur during the holding period, it can give a more accurate picture of a property’s well-being.
In order to calculate the DCF, you’ll need to know how much money is expected to go into the investment property, as well as how much is projected to go out, due to expenses, etc. You’ll also need to know when cash flow withdrawals (property taxes or capital expenditures, for example) or additions (rental income, for example) are expected to take place.
Usually, cash flow predictions cover a five to a fifteen-year range.
Choose the period that fits your investment property based on lease expiration and renewal dates, and break clauses. The accuracy of your numbers is strongly tied to how frequently you update your cash flows, so make sure to set a regular time- quarterly at a minimum- to update your information.
It’s also important to evaluate how the property compares to other properties in that asset class. For example, if you have own several condominiums, you should compare their performance to multi-family apartments, or mixed-use buildings.
You might compare your condos to other properties in the area and find they are performing at or above the industry standard. However if you then compare them to a straight multi-family building and find they are performing poorly, then it might be time to re-evaluate your exit strategy for that property.
Also, make sure you compare ALL aspects of owning the property – not just the net returns or the DCF. You can compare the investment structure, financial setup, property life cycle, operational management, and more, as long as you make sure to benchmark your numbers against industry measures.
All of these factors combined will help give you a clearer picture of the risks of each investment in your portfolio.