It's a new year, and there are a great many rental property investors out there doing well and celebrating last year's financial results. But, are you sure just how well you did last year? Do you know that this year will do as well, better or worse? Sure, you know about your taxes, or at least you're working on them with your accountant. But, taxes aren't the same as actual cash flow and ROI is another matter.
If you're a successful rental property investor, you're likely doing a good job of evaluating your market, doing home value calculations and managing your rental properties. The question is, are you re-evaluating your properties regularly to see if they're still performing to your original investment model? I think we should do this every six months or so, but definitely when we have all of the numbers together at tax time.
Home Value CMA
Doing a Comparative Market Analysis like the real estate agents do it is what you should do each year to get the market value of your homes. Not only check to see if the value has risen, see how it compares to the local market as a whole. You may have considered this when you bought it, wanting a home in an area with a better appreciation history than others. It's great to validate your awesome purchase decision too!
Income Analysis
Did you get the rents you wanted? Did they hold all year, or did you have to reduce rents or give monetary incentives to get or keep tenants? At the first of this new year how are rents doing and what's the competition like? Are there a lot of rent "deals" out there that could make it more challenging for you to continue your current rents?
Expense Analysis
How did your actual expenses compare to your budget at the beginning of the year? Particularly, how did your estimates of vacancy and credit loss expense compare? Did your taxes go up? How about insurance? If any of this is substantially different than your budget, it's time to make adjustments that could influence your rents or other decisions.
Portfolio Adjustment Time?
This one is going to depend on how long you've held some of your properties related to how well they're doing compared to their recent history. If you're seeing some softening on the cash flow side but good appreciation, perhaps it's time to look at selling and rolling the profits into another rental property using a 1031 Exchange. Interest rates are still low and prices are pretty good right now, so selling may produce a nice overall ROI. However, if you need to buy another property, you're buying into the same market, so it's important to check out the replacement possibilities first.
We all celebrate the New Year, but it's a time for serious re-evaluation of our investments and make adjustments to make this year even better than last.