Back to the Learning Center

End-of-Year Real Estate Portfolio Review

End-of-Year Real Estate Portfolio Review

The beginning of a new year is a good time to review the performance of your existing real estate investments to see how they’re doing and to help your future investment planning. 

You can evaluate your investments at several levels, which we’ll discuss in turn:

  • Property Review:
How are your individual properties performing?
  • Portfolio Review:
How is your portfolio performing as a whole
  • Strategy Review:
Big picture: Are you on track to meet your goals?

You may want to get your CPA to help you in this evaluation, just to get another set of eyes on it.

Property Review

At the most basic level, you want to evaluate the performance of each investment property you own.

Financial Review

Examples of cash flow performance and price appreciation performance are shown in the tables below.
End-of-Year Real Estate Portfolio Review

Notes:


  • The last column shows the cash flow performance for the most recent year
  • After your first full-year of ownership, you can compare this cash flow statement with the pro forma statement you were given when you bought it, and see if the numbers are close
  • If you’ve been tracking these metrics since you first acquired the property as shown in this example, you can notice trends over time. In this example, the rents and cash flow are steadily increasing.
  • One red flag to watch out for is if total expenses are growing faster than rents (usually due to maintenance expenses). If that happens year after year, your cash flow will be squeezed and it may be time to sell the property.

You should also look at any price appreciation, or equity growth:

End-of-Year Real Estate Portfolio Review

Notes:

  • A ballpark estimate of Fair Market Value (FMV) can be determined by simply going to Zillow and searching for similar properties (# beds, # baths, square footage, etc.,) in the same zip code and seeing what properties similar to yours are selling for.
  • It’s not necessary to hire a licensed appraiser or even get a Broker Price Opinion (BPO) unless you’re thinking of selling the property.
  • If you record your findings every year, you can see trends. In the above example, the property is appreciating over 5.0% per year which, on a 25% down payment, represents a 20% return-on-investment just on the equity growth alone.

What if a Property Has Under-Performed?

If the property was purchased primarily for appreciation and it hasn’t appreciated much, your best bet is to wait and let time solve that problem for you, provided it’s at least breaking even on the cash flow.

If the property was purchased primarily for cash flow and that’s negative, the main question is: Is the situation salvageable? 

Maybe you had a bad tenant who trashed the place, and the next tenant will be better. Maybe you had a major repair like a new HVAC system but now that it’s fixed, the property should perform. In these examples, you’d hold onto the property and monitor its performance closely in subsequent years.

If the situation is not salvageable, such as a property in a rough area of town that will never attract quality tenants, or a money-pit that nickels-and-dimes your cash flow with endless repairs, then you should consider selling it on MLS to an owner-occupant. 

An owner who lives in the property won’t be paying for property management and can do many repairs himself vs. using a licensed handyman every time something goes wrong, so a property that doesn’t work as an investment can still work well as someone’s primary residence.

If you’re on the fence and aren’t sure if you should sell it, ask yourself: “If I didn’t already own this property, would I buy it today?” That question usually clarifies your path forward.

What if a Property Has Over-Performed?

The flip side occurs when a property has a run-up in price and you’re sitting on a lot of equity. In that case, you have several options:

  • Hold the property and hope for more future appreciation
  • Do a cash-out refi to liberate some capital for more investments (not ideal when interest rates are high)
  • Sell the property in a 1031 exchange and buy multiple properties elsewhere.

The main question is: Has the price appreciation peaked or is there more appreciation to come? To find out, discuss current market conditions with your property manager and the broker who first sold you the property. Find out what the trends are with Days on Market (DOM), multiple offers and inventory levels and make your best call.

Portfolio Review

Next, to get a view of how your portfolio is doing overall, just aggregate the results of the individual properties.

In this example, the investor owns four investment properties, two in Baltimore for cash flow and two in Charlotte for appreciation. His portfolio review for the year might look like this:

End-of-Year Real Estate Portfolio Review

As you can see, the portfolio looks healthy with both cash flow and equity growth in the past year. Over time, as rents go up and property values go up, the owner will be well-served by this portfolio.

Strategy Review

Finally, at the highest level, you’ll want to see if your long-term investment strategy is working.

The quickest way to evaluate this is to compare your performance vs. your ultimate goal. Let’s say your goal is to get t $10K per month in passive income so you can retire someday. After you get your taxes filed each year, look at how much of your income came from investment properties and how that compares to your goal.

If your cash flow from investments is $2,000 in the most recent year, then you’re 20% towards reaching your goal. Over time, you want to see that percentage increase.

Another way to think of it conceptually, is to compare how much of your income comes from active sources (like a W-2 job) vs. passive sources (like investments) as depicted in the graph below.

End-of-Year Real Estate Portfolio Review

When you’re starting your career, 100% of your income will come from your day job and none from investments. Over time, if things are moving in the right direction, you should see more and more of your income coming from passive investments until the passive income completely replaces your active income.

Every year when you do your taxes, ask your CPA how much of your income comes from you at work, vs. how much of your income comes from your money at work. The percentages don’t change much year-to-year, so you may want to track it every few years (such as every Presidential election year).

The scenario you want to avoid is waking up on the day of your 65th birthday and realizing that your passive income is not where it needs to be. By tracking what percent of your income is coming from active vs. passive sources every few years, you can see if your strategy is working and ensure you’re on track – or give yourself time to make course corrections.

What’s Next?

When you’ve completed your end-of-year review, you should have answers to these questions:

  • Did your properties cash flow and/or appreciate as expected?
  • Do any of your current properties need to be sold?
    (either due to poor performance or to free up capital for better opportunities)
  • Are you on track to meet your goals?

Armed with that information, you can plan how to move forward in the new year. Feel free to discuss your findings with your Investment Counselor to get a sanity check. 

Don’t have an investment counselor yet? Sign up for your free RealWealth membership to be assigned one!

Join 75,555 members and counting who are creating real wealth with real estate.

Join for FREE to:

Scroll to Top