In this snippet from our Portfolio Analysis Mastermind, we discuss how investors Richard and Ilona can optimize their portfolio.  The Mastermind allows investors to see exactly how their portfolios are performing and discuss all of their options with our panel of experts. 

Last week, we discussed Ben’s portfolio, which is typical of a local House Hacker.  Richard and Ilona’s portfolio, meanwhile, is representative of traditional landlords. We talked with them about how well their properties are performing and what moves they can make to get them closer to their long-term goals.

Analyzing Richard and Ilona’s Portfolio

Richard and Ilona’s current portfolio consists of three properties.  They started investing in Colorado real estate about 1.5 years ago while they were living in Hong Kong.  They purchased their first property with the intention of moving into it when they moved back to the US.  Once they saw the massive appreciation on their home, they realized investing in real estate was a great move. 

Their current portfolio is valued at $1.2M with nearly $700K in equity.  The Loan to Value (LTV) is 43%, below our rule of thumb of 50%, and the average cap rate is 3.6%, below our recommended cutoff of 4%.  While the portfolio as a whole isn’t performing as well as they want, the silver lining for Richard and Ilona is that the reason for this is because the properties appreciated a considerable amount over a short period of time. 

Property #1: Single-Family Home in Highlands Ranch

The first property is a single-family home in Highlands Ranch, just outside of Denver.  They intended on moving into this house when returned to the US. In the meantime, they wanted to rent it out to cover the mortgage.  Instead, the property appreciated so much that moving into it has been put on the back burner. 

We don’t usually recommend investors mix personal and investment properties because it’s hard to find a number that makes sense both as a current investment and as a future dream home.  Investors rarely follow through on their plan to eventually move into a home they’ve been renting out. 

Property #2: Townhome in Colorado Springs

This home is a townhouse in Colorado Springs that’s a more traditional investment property.  It has a 4.7% cap rate and more than 50% LTV, so it meets our metric for holding onto.  Because Richard and Ilona are self-managing this property, it keeps their cap rate above 4%.  Remember to adjust the cap rate down 0.5-0.8% if adding a property management fee. 

The home has $100K in equity, which is a good amount, but not huge enough to warrant making a move.  It’s better to hold tight and let it continue to appreciate, especially since it’s located by a major industrial revitalization area.

Property #3: Identical Townhome in the Same Complex

The third property is an identical townhome located in the same complex as the first.  It was selling for the same price he’d paid for the first property, so Richard was excited to buy it.  They paid for it in cash and have the option to do delayed financing or refinance. 

Delayed financing allows investors to buy a property in cash and then set up financing within six months of purchasing the property.  If Richard and Ilona were to make improvements to the property, they could get it appraised at the higher value and take out up to 75% of the new appraised value, not to exceed what they paid. 

After six months, they could do a regular refinance.  By taking this option, they have the potential to take out more cash than they could with delayed financing.    

Either option gives them incredible leverage over the course of just months.  It gives them the ability to recycle the same money over and over, which is how to build equity in an appreciating market.  Anyone interested in delayed financing or a refinance should talk to their lender ahead of time and make sure they take all of the necessary steps to qualify. 

Option: Combine a 1031 Exchange and Refinance to Trade Up

When we look at the portfolio as a whole, the major move that stands out is to do a 1031 exchange on the Highlands Ranch single-family home into a bigger property.  They should also refinance their second Colorado Springs property but hold onto both townhomes.  Between the money they’d get from the 1031 exchange and the refinance, they could use that as a down payment on a multi family property worth $2M. 

Potential Outcome: Getting Halfway to a Long-Term Goal

If they were to make this move, they would be taking a huge step closer to their long-term goals.  With a multi family property, their portfolio cap rate would go from 3.6% to just under 5%, and their LTV would increase from 45% to 74%.  The biggest difference, though, would be their Net Operating Income (NOI) going from $45K to $125K, essentially tripling.  The valuation would move from $1.2M to $2.5, basically doubling their portfolio’s value in one move.

Richard says their long-term goals are to have a portfolio valuation of $4M, equity of $1.25M, and an NOI of $250K.  They want to be able to cashflow and retire thanks to their real estate investments.  In just one move, they would be halfway to their goals. 

Analyze Your Own Portfolio

This portfolio analysis shows the power of adapting to the market rather than just complaining about it.  The market is gifting Richard and Ilona with appreciation, so they have the opportunity to take it and do something with it. 

The market will continue to appreciate regardless of your participation in it, so why not get involved?  To get your own portfolio analysis and find out the best move for you, reach out to us. 

Chelsea and are happy to look at your properties and figure out how you can optimize their performance to get you closer to your investing goals.

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Portfolio Analysis Mastermind: Optimizing Richard and Ilona’s Rental Portfolio

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