This Portfolio Analysis looks at a client who currently has four properties but wants to scale up to eight doors. While this number is a personal goal for him, I think it’s a great idea to 2x first, walk that path for a while, and then decide whether to triple or quadruple your properties. I created a scenario that would enable him to double his properties while preserving the equity he already has.
- Listen to the podcast “#308 DDD: Competing Against Institutional Investors and Doubling the Size of Your Portfolio” on the Denver Real Estate Investing Podcast.”
- Watch the YouTube video (at the bottom).
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
Current Property Overview
My client started investing in 2012 and has a current valuation in property of $2.16M, equity of $1.236M, and $40K in cashflow a year. His current holdings consist of a condo, a townhome, and halves of two duplexes. A couple of the properties are paid off, and a couple still have balances. Using recently sold properties, I created a pro forma scenario to build a roadmap for him.
He has two properties in particular on which he wants to do a cash out refinance and a 1031 exchange. The cash out refinance would be done on the property that is already paid off, cash flows really well, and is located downtown in an area that’s on the upswing. One of the properties he just doesn’t want anymore because it’s a headache due to property management issues and a high HOA. It can be sold using a 1031 exchange to get a property that won’t be such a hassle for him.
One of the factors leading my client to want to go from four to eight doors is that he found a property management company that will charge him a flat fee per property instead of a percentage. Knowing exactly how much he’s paying for management gives him the confidence to double his holdings. I think this is a good next step for him.
How to Get Cash to Purchase New Properties
He’s going to pull out $340K from the paid off property using a cash out refinance. In our return of equity analysis, we refer to this as a “safe cash out refi” because he’ll have $1.25 in income for every $1 of debt. After transaction costs and closing fees, I’m estimating he’ll walk away with $455K from selling the property he no longer wants. Combined, this gives him nearly $800K in cash that I’ve used to model out scenarios. He may change his mind about how much he wants to invest after he looks at these scenarios, but this is a good starting point.
Acquiring New Properties
Because he’s planning on selling a property, I ran the scenario using 5 properties.
One of the things my client has mentioned to me is that he’d like to acquire the other half of the duplexes he owns. These are side by side duplexes that share a wall and have separate owners. I think this is a great strategy for multiple reasons: he’s already familiar with the property, knows how they cashflow, and if he has a relationship with the owners can potentially get the property before it goes to market. I modeled out the duplexes based on the ones he already owns. They are very standard, 800-900sqft, 2 bedroom, 1 bathroom units. I am assuming a 35% down payment with a conventional loan because that has the best cashflow of $4K a year.
The next three properties are ones that were purchased in 2021 by actual clients. I changed the identifying details, but they’re relevant numbers in today’s marketplace. They are all single family homes in Aurora, Denver, and Arvada. The Arvada property has two separate entrances and is currently used for house hacking, so I used conservative numbers to estimate renting out the whole house.
The cumulative down payment for all of these properties comes to $777K, leaving him an extra $20K for reserves, improvements, or turnover. I don’t want to use all of his money, and I spread it out in a way that seems most efficient. While this isn’t the only way he could proceed, it gives him an idea of all of his options. He could take out more money and buy even more properties, but the risk isn’t worth the reward ratio.
Outcomes of Doubling Properties
Putting everything together, we can see what he currently has, what his portfolio could look like, and the difference between them.
The equity doesn’t change a lot in the properties because the debt has been upped a lot. However, the equity he currently has is not only preserved but slightly increased. Essentially, he’s in the same spot with equity as when he started, even though he’s gone from four to eight properties and almost doubled his cashflow. His NOI has gone up almost three times, well above the $10K per month rule.
This portfolio screams acceleration, and I like this scenario a lot. Even though this isn’t exactly how it will go, it shows my client his best first options and he can digest this information before moving forward. The benefit of doing a Portfolio Analysis is that you can take this spreadsheet to your broker or underwriter and give them a starting point to aim for.
Connect with Us
We’ve got lots of stuff in the pipeline to improve the Portfolio Analysis process, including new software and features. Over the next few months, our clients will start to see these developments, and we’re excited to show and share them on the podcast soon. If you’d like your portfolio analyzed, reach out to us and we can show you all of your options.
