I have seen this a lot lately: people who hold on to underperforming properties because they add to their door count or self-worth as real estate investors. If you don’t like buying hoarders’ houses, don’t be a property hoarder. A property hoarder keeps properties just to keep them. See the old mom-and-pop investors in their 60s from whom you are trying to buy off-market properties.
This is like people who buy for cash flow but fail to realize that the best cash flow comes with capital expenditures and tenant issues. You can’t have your cake and eat it, too. Appreciation is great, but not when all of that appreciation is eaten by the repairs you fail to make.
It’s OK to sell properties. It’s OK to sell properties at a loss (you get the down payment back to repurpose into something better). Real estate is generally a very liquid asset. It’s tradable (see 1031 exchange). You don’t need to hold everything.
Owning properties requires constant evaluation and stabilization. Here are five metrics I would rank to create an overall scorecard of my properties:
1. Rank Them From Best to Worst in Cash Flow
This is pretty simple if you have your income and expenses documented. Take your actual net income from each property and rank them against each other. The best one gets one point, the second best gets two points, and so on. This is like golf: the lower the number, the better the score.
Remember, this is only one of five metrics to help you determine which of your assets are the best.
2. Rank Them From Best to Worst in How Much You Like Them
This is purely based on your gut. It can include the location, the tenants, the aesthetics—anything you want. Don’t overthink this.
All property owners have properties they like better than others. You should be able to rank them quickly. We all have a redheaded stepchild property (I can say this because I was a redheaded stepchild). That one will be last.
You can start to see the metrics go to work now. Score to see the lowest (best) and the highest (worst).
3. Rank Them From Best to Worst in Management Cost
This is your total management cost: utilities, property management, and average monthly maintenance and repairs. A great rent-to-sales price ratio can offset your management costs, which is why this helps segment your total costs for this analysis.
Your property picture should be getting clearer. You may start seeing an asset best repurposed for something else.
4. Rank Them From Closest to Farthest in Proximity
This is your distance tax. You may have good property management, but the farther away from an asset you are, the more detached you will remain. You don’t have to own everything in your backyard, but the ability to put eyes on your assets becomes a long-term hedge for better cash flow.
You’re almost there, but you have to think about the future, too.
5. Rank Them From Worst to Best in Capital Expenditures Expected
This is so important for cash flow focused investors. Many high-cash flow properties have high expected capital expenditures over time. These are your boiler and roof replacement, new windows, new plumbing line, upgraded electric, and more. You can ballpark these but don’t pretend you don’t know what’s coming due.
Adding It All Up
You made it through all five ranking metrics. Your final tally should give you an overview of your best to worst properties. You can change the categories to your taste, but these should give you a strong view of the overall strength of your assets. But the rankings don’t tell you everything.
Now, add those numbers together for each property. The lowest is your best property, and the highest is your worst property, in theory.
In a vacuum, I would tell you to sell your worst property first. Then, take that money and repurpose it into something better. But you can’t analyze everything on a spreadsheet. You need to reengage your gut and add in population, employment, and migration trends to your decision-making.
Final Thoughts
The perils of becoming a property hoarder or door counter are vast. Anyone well-versed in off-market acquisition has talked to hundreds of tired landlords.
Do you know why they are tired? Because they didn’t analyze the strengths and weaknesses of their properties annually. They took the cash flow but didn’t spend it on repairs. That’s why you can buy all of their properties at a discount from market value, with tenants paying below-market rent.
Door culture is crazy. If you own 10 doors and six aren’t cash flowing, why do you want to hold on to them if there isn’t overwhelming appreciation coming? Don’t be a property hoarder. And don’t be a door counter.
The only doors are good doors. And if you own 25% of an eight-unit building, you don’t have eight doors. Do the math. You own two doors. If you say you own eight, you are door-counting.
Financial asset managers are always balancing and rebalancing your portfolio of stocks, bonds, and funds, so why aren’t you doing the same with your real estate assets? This is a reminder that passive income can be a hallucinogen. You get so used to it that you fail to realize it’s not having the same effect as it once did—you aren’t making the same amount of cash flow.
You may believe all of your properties are perfect or be emotionally attached to some of them. Even so, this exercise will not hurt you. It can only help you. And why wouldn’t you do something that can only help you?
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
