Rental Property Portfolio ABCs

ABC of Rental Property PortfoliosEver sit down and look at what you own in your rental property portfolio today? Even if you only have two properties and one of them is your own home. Do you ever sit down and think about what you’ve got and whether those assets are moving you closer or further from your goals?

Dave does this on a regular basis. I call it ‘dances with spreadsheets’ as he reviews the cash flow and the values on each of the properties we own. I do it in a less formal way but I still look at what we own and think about whether each asset is properly performing it’s role in our greater plan.

It was during one of my informal reviews that I realized one the properties we’ve held for five years is not doing it’s job. It’s not generating positive cash flow and it’s not part of a greater plan to redevelop. It’s just making us money through the mortgage pay down and it’s slightly increased value.

We bought it by refinancing another property so we have been more forgiving of it. I mean, it didn’t cost us any money out of our own pocket and it’s still building our wealth at a steady pace so it hasn’t been a bad purchase.

BUT this particular property hovers around neutral cash flow on a monthly basis which really means it is costing us money each year because any additional repairs (like the painting we will have to do when the tenants move out or the fence we have to repair because it’s falling apart) come out of our pocket.

Spending a bit of money here and there on this place didn’t bother me in the past because I had a great paying job. The repairs were a tax write off, and the tenants were paying down my mortgage so I was still ahead. This property hadn’t cost us a single penny to buy and we’ve probably only put $5,000 into the property over the five years we’ve owned it, so we’re still making a great profit on this property. And, it’s in a great area that makes it easy to rent out. I was holding it for the long term so I didn’t really worry about it too much as long as it was rented. But, times have changed and we live off the money we make from our rental properties so cash flow is far more important to me today.
Julie at MOMAR thinking About rental property portfoliosAnd refining our portfolio to squeeze out the maximum amount of cash flow and wealth creation possible is my full time job … so I want to do better with every property. This was my focus when I was doing the informal portfolio review. (By the way … I call it an informal review because I usually think hard about things like this while running or walking the dog. When I am done thinking about it I discuss it with Dave who can back up or counter my thoughts with the real numbers and together we’ll make the final decision).

My latest informal review of our portfolio made me think of the advice my friend John Marsh shared with me recently. He said:

Take a look at your portfolio and label each property as either A, B or C. Figure out a way to turn your B’s to A’s and then sell your C’s.”

And when I thought about it in this way, it was clear to me that this property is a solid B.

The home is conveniently located to shopping and good schools. It’s very central to everything in this city. There are always tenants that want to live in the property and the area is stable economically. House prices went down a bit in late 2008 and early 2009, but they’ve recovered and are on their way up again. It creates more wealth for us than it costs us money but overall it’s not putting any cash in our pocket today. It’s not a money pit but it’s also not a cash cow which is why I would call it a solid B property.

John is a real estate investor and businessman in Alabama. He has a restoration company called Historic Possibilities where he specializes in moving and restoring historic buildings to the beautiful state they once were in. He’s really revitalizing his town one house at a time, and he loves what he’s doing! I hear it in his voice every time we speak. And with years and years of real estate investing experience under his belt and some fabulous mentors helping along the way, John has some fabulous stories and wisdom to share.

So John’s advice was running through my mind as I was thinking about our portfolio. I realized that we only have a couple of C’s but we’re keeping those for now as we plan to redevelop the land they are on at some point in the future. Beyond that I would classify all our other properties as A’s except this one.

Turning The B Property into an A+

As of Tuesday that all changed. We have turned our solid B into an A+.

Smiling Rental Property PortfolioOn Tuesday Dave deposited a bank draft for $10,000 and starting in July we’ll begin collecting so much rent from this property that we’ll be banking $700 in cash flow profit each and every month.

So what did we do? Well, basically we decided to turn this property into a rent to own! And we were totally overwhelmed with the response. Like I said, this property is in a great location. It’s a very high demand area. We actually had a wait list of qualified applicants without even showing the property to a single person! We were blown away.

What we uncovered by simply trying to find a way to turn our B property into an A was a crowd of starving people desperate to get into a rent to own program for a home in this specific area. Many of the folks we’ve talked to already rent nearby, work close by and have kids in the schools that are walking distance from this home. They want to live in this area but can’t get financing from a bank to buy. Some of the folks anxiously waiting for a home in this area include:

  • A young couple with a 4 year old son with good jobs but one person in the couple has horrible credit because they cosigned for a loan for a family member and the family member defaulted on the loan;
  • A family from Nigeria that has only been in Canada 9 months and hasn’t established their credit yet;
  • A couple going through divorces with assets tangled up in the divorce and very little cash for a down payment;
  • A single mom with credit issues coming from her divorce.

Now with our B property safely positioned as an A, we can focus on buying more properties in this area! And, while we’re doing that we’ll be carefully reviewing our portfolio every couple of months to make sure the A’s are still A’s.

If you have rental properties today … take a look at your portfolio and figure out where you can improve your holdings. If you’re holding B’s figure out a way to turn them into A’s. If you can’t turn them into A’s you should consider selling them. And if you’re holding C’s consider selling them so you can buy A’s instead.

It’s as simple as ABC … :)

ABC Image Credit: ©Limbi007 |Dreamstime.com

Smiling Face Image Credit: ©Kuzmichevdmitry |Dreamstime.com

Published May 27, 2010

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