How to improve your real estate investment results by tracking key pieces of information like an asset manager does
Financial reviews
Often investors lose sight of their goals regarding real estate investments because they may not know how to track the successes and failures of their investments. Many investors just don't take the time to review their financials. This is step one, to control your properties, much like you would do in any business.
You need to review your monthly financial results, this will give you solid insights into the operations of your property.
For example, you can check and see if all the rents have been paid, has the mortgage been paid, have all the expenses been paid. Regarding other bills that haven't been paid, is there an aged payables analysis attached, have all the rents been received? Check your aged receivables report. Looking through your general ledger and your budgets can tell you if a property is operating in line with budgeted expectations.
Many investors think that budgeting isn't a critical part of managing or operating a property. But in fact, you can't run a property without a budget. Investors need a baseline to compare to and ensure that their expenses are lined up with budgeted expenses and income in line with budgeted income. If they're not, you must look deeper and see what the problem is.
For example, I review all my utility bills regularly and recently noticed that my water bills increased by about $400.00 a month at one property, over the last six months. The property manager and I reviewed every single bill, and we realized that in fact, there might be a water leak because the amount of water being used per door on one of the bills was significantly greater than at other apartments. This is an example of the financial management you and your property manager need to be doing.
Once a year summary
Once a year you should consolidate all your financial information into an asset management summary and try to analyze if you have potential trapped equity, that has developed as the value of your property keeps growing and debt keeps reducing. It might look like this, though this is a very limited analysis.
Simplified Asset Management Summary
This will help you plan how to manage your investments. Actively managing your properties can help you accelerate value and cash flow growth and at some point in time, take out the equity (by refinancing) and buy another property and grow your net worth. In addition, your annual analysis can track your debt, your due dates, your tenant lease expirations, and the condition of your property.
This annual review will help you decide if you are going to:
Hold the property.
Sell the property.
Refinance the property.
Make a blend of decisions to leverage your real estate assets.
Remember your goal is to increase your net worth as much and as fast as possible while the economic environment is in stasis.
In other words, if interest rates are stable and demand characteristics are stable, rent is edging slightly upward, and expenses are somewhat balanced you've got a chance to increase your net worth significantly. If interest rates go down, you may have a chance to aggressively increase your net worth as well. As interest rates go up this becomes much more challenging and clearly puts you into a stuck market where it's difficult to hit the yield numbers that have worked for you in the past.
As you continue to review these financial numbers you also need to review your annual cash flow and your annual taxation requirements for cities, counties, states, and the federal government. Understanding your actual return and comparing it to other returns such as bonds, stocks, and compared to properties in other states, can help you better direct your investments.
Making money is your goal.
Most importantly, are you making money? Many investors only do one thing, they look at the check they receive in the mail from their property manager to check if that the amount seems reasonable.
Clearly that is not enough. You need to take the time to analyze not just how well your property is doing but compare it to other properties in the marketplace to ensure that you're receiving a competitive return. If not, then you need to start thinking about the difficult decisions you may need to make. Either you:
a. Pay more attention.
b. Plan better
c. Find someone who can help you analyze your properties.
d. Hire a smart accountant to help you track your numbers.
e. Get a better asset and or property manager.
The state of the economy can make a difference. It's difficult for anyone to manage all the nuances of an economy, but that brings us to your ability to track not only your properties but also what's could happen in the future, such as keeping an eye on national debt. As the national debt keeps increasing, it makes it harder for governments to raise money with lower interest rates, this may mean that interest rates might not adjust back to the former 3.5% range.
As an investor it's your job to track what's happening in the economy and stay on top of it. You need to know if interest rates could go up or down. You need to decide if the economic activity is enough to generate more cash where your properties are located, what's the population like, growing or shrinking? Are jobs being created? What does the economy look like in the next six months, year or two years and how does that fit in with your growth plans for your real estate investments?
Summary
It's in your hands to improve the results of your investment. Don't take your eye off the ball, review your financials every six months, and create summary reports regularly to compare year-over-year successes and failures. This may include inspecting your property at least once a year, so when you review your budget with your property manager you are better prepared and have a good idea how much capital you need to invest to maintain or improve your cash flow results.
This is a lot of work work you may not like doing, but if you don't do it, your properties will not perform, and you will have trouble increasing your net worth at a scale that you have in mind. If you'd like some more help thinking this through, reach out to the author of this article.
Clifford A. Hockley, CPM, CCIM, MBA
Cliff is a Certified Property Manager® (CPM) and a Certified Commercial Investment Member (CCIM). Cliff joined Bluestone and Hockley Real Estate Services 1986 and successfully merged that company with Criteria Properties in 2021.
He has extensive experience representing property owners in the sale and purchase of warehouse, office, and retail properties, as well as mobile home parks and residential properties. Cliff’s clients include financial institutions, government agencies, private investors and nonprofit organizations. He is a Senior Advisor for SVN | Bluestone.
Cliff holds an MBA from Willamette University and a BS in Political Science from Claremont McKenna College. He is a frequent contributor to industry newsletters and served as adjunct professor at Portland State University, where he taught real estate-related topics. Cliff is the author of two books, 21 Fables and Successful Real Estate Investing; Invest Wisely Avoid Costly Mistakes and Make Money, books that helps investors navigate the rough shoals of real estate ownership. He is the managing member of a real estate consulting practice, Cliff Hockley Consulting, LLC., designed to help investors and commercial brokerage owners successfully navigate their businesses. He can be reached at 503-267-1909 , Cliffhockley@gmail.com or Cliff.Hockley@SVN.com.
