Today I want to talk about some very real problems that many real estate investors face:
What do you do if you have begun the real estate journey and yet don’t seem to be getting ahead? How do you know which properties you should keep and which to sell? What should you do with a property that may not be performing as well as it should be, or is in need of serious repairs?
As an investor, you have a choice between renovation, relocation, or detonation. Should you renovate the property, sell it as it is, or just tear the whole thing down and rebuild it from the ground up?
Not always an easy decision to make, that’s for sure. The first thing that I recommend you do is to take a step back and identify where you are today and where you want to be in the future.
A “Peg in the Sand”
The way to do that is to put your “peg in the sand” as to what you want to accomplish financially. By doing this you will simplify your decision-making process with regards to your property portfolio.
What kind of peg in the sand am I talking about? Well, when you really cut to the chase, your ‘peg in the sand’ concerning your portfolio will either be income oriented or growth oriented.
Now, for some it may be a little of both, and truthfully, you should want it to be both. But for right now, while you’re building your real estate portfolio, you will need to focus on one or the other.
In my experience working with thousands of people learning to invest in real estate, the vast majority of those begin as income oriented investors. That is, they are seeking to increase their monthly income, and are usually looking to replace the income they get from their current jobs rather than looking to increase the equity and value of their portfolio. Aiming to grow your income is completely logical and the correct place to put your peg in the sand.
However, to actually grow your income, you have to either increase the current income from the property or acquire more income properties, don’t you? But to do either, you will likely need capital to do it (unless you obtain seller-financing).
And how do you acquire more capital?
Some of you may be able to get the capital from your family, but that’s not the case for most people. You can also build it up slowly with savings from your job. Or, if you already have an income property, you can build it from that as well. But you can also convert any assets that you may have, into capital.
Know your assets!
What is an asset? There are several definitions, but the easiest one is anything that the bank will lend money on or that you can sell for cash. (It’s important to identify just how much of the value of your asset—a property, for example—that a bank will lend you. This will depend upon your personal credit rating and other factors.)
An asset can be anything from a piece of property that you own, stocks and shares, or even a classic car, a coin collection or valuable antiques. Converting these assets into cash by either borrowing against them or selling them can provide you the capital you need to move you closer to your peg in the sand.
But another way to get the capital you need to buy an income producing property is simply by…
Finding the right equity deal!
Equity gets you to income
Funny how that works out, isn’t it? A smart way to grow your income portfolio is to fund your income property purchases with a great equity deal! The equity in the property will provide you the capital to purchase your income property. As I noted above, sometimes it’s better to take a step back, or in this instance, take a step sideways, into an equity deal, in order to make progress in your income property portfolio.
Renovate, relocate, or detonate?
So, back to your problem of moving forward in your real estate journey…
If your equity position is low on your current portfolio, you have to find ways to manufacture equity in your existing portfolio. Can you renovate a property to get more value or income out of it? Can you develop it more? Can you subdivide it?
To know this, you need to know the capacity of your current portfolio. Work through a feasibility study for every option. Avoid the mind chatter of the bigger picture of what you might do one day if it were a perfect world. Rather, focus on what you have today; determine which options actually are the best for you: to renovate, relocate, or detonate.
First, carefully examine each property inside and out, making clear notes for renovation needs, costs, and the future value and income stream. It will take some time, but it’s jolly good worth it to know what the cost benefit ratio really is for each property. This will be your renovation costing list. Add ten percent to this number for unexpected costs.
Then, look at comparative values and rents for the area and determine if any of your properties is worth renovating or not. Renovation calculation should be as follows: If renovation costs are $20,000, the new value should be at least $40,000 higher. That is, the value added should be at least double the renovation costs. If the value isn’t there, you have a second option…
It might be smarter to relocate. For that, you need to know the opportunity costs of holding onto a property or selling it. You have to determine how much money you can get out of your current property without renovations, which would allow you to buy a better property. Could you, for instance, live in a new property and collect rents at the same time? Or buy a property with more equity in it? These are just some of the questions you need to ask. And, don’t forget to add advertising and sales commissions into your calculations.
Finally, does it make more sense to bulldoze the property and rebuild a more profitable one? To know the maximum capacity of your site, you’ll need to talk to town planners to see what you are allowed to build. Look at similar sized blocks in the area and see what’s built there to know what rent and value is possible for the area.
Until then, when it comes to building your portfolio, you don’t need to reinvent the wheel. Simply see what someone else has done successfully in the area, calculate all the costs of doing so, and then compare those costs to the added value and rents afterward. That way, you’ll make an informed decision and move forward in your real estate investment journey.