Have You Performed Your Real Estate ‘Check Up' Lately?

Have You Performed Your Real Estate ‘Check Up' Lately?

If you invest in real estate, it's worth your time to perform a periodic portfolio performance evaluation.  NAR and OFHEO both released updated statistics supporting a current cooling of the housing markets across many cities nationwide.  This national cooling could be significantly impacting the performance of your real estate portfolio.

 The questions you must ask are (1) whether, (2) how significantly and (3) what can be done if your current real estate holdings are being affected by these localized pockets of cooling.

Portfolio Compression Strategies

Real estate investor, David Robertson is the perfect example of this situation.  David has owned an investment condo for the past 12 years.  The loan on the property is paid off, and David has a $100,000 line of credit open against the $400,000 condo.  During David's years of ownership, there have been certain times that the condo has increased significantly in value.  At other times, David has owned the condo through local economic periods that have caused higher vacancy, lower cash flow and more money out of his pocket.

During both experiences, David held true to his original buy and hold philosophy.  It has paid off and today, David has nearly $350,000 available from this single investment.  But, has David's investment paid off to its full potential?  To answer this question you need to explore Portfolio Compression techniques within a real estate portfolio.

Portfolio Compression within a real estate portfolio is a blend of property and market selection strategies which over time subscribe to the traditional buy and hold approach with a slight twist.  The twist: Don't buy and hold the same properties in the same cities over the entire life of your real estate portfolio.  In other words, don't subject your real estate holdings to the good and the bad of local market economics.  When local economic conditions are good; buy and hold.  Before or as local economic conditions change; sell and reposition your real estate holdings into other cities.

The 5 Steps to Portfolio Compression

An underperforming real estate portfolio can be improved.  Here are the five steps to evaluating and getting your portfolio back on track:

•1.        Evaluate the performance of your current real estate holdings

•2.        Create a comprehensive personalized or corporate real estate plan

•3.        Research local market conditions where you currently own investment property

•4.        Choose cities across the country in which performance data is beating the average

•5.        Establish your advisory team to successfully implement Portfolio Compression

Financial modeling of the traditional buy and hold real estate strategy versus modeling using Portfolio Compression techniques will clearly show you the potential for significant portfolio improvements. 

Remember David?  Modeling his portfolio conservatively and assuming he had used Portfolio Compression techniques over the past 12 years, David's portfolio could be valued well over $3,500,000 today with cash flow potential in commercial real estate in excess of $75,000 per year.  His current situation is not bad; however a little planning and ongoing guidance to implement a Portfolio Compression strategy plan, his results today could be significantly better than the $400,000 value and $14,000 per year cash flow he currently has.  He is now implementing that plan for the next 12 years. 

Portfolio Compression techniques create (1) greater real estate portfolio diversification, (2) increased internal equity and (3) significantly greater cash flow potential for investors investing in residential housing, land and commercial real estate.

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