Improve Your Real Estate Returns by Optimizing Your Existing…

Finding promising equity deals in today’s real estate market can feel like a needle in a haystack. Whether you’re an active or passive real estate investor, facing this challenge means it’s crucial to focus on making the most of your existing investments. By optimizing your current holdings, you can enhance their performance and ensure they align with your long-term goals—and put more money in your pocket along the way. Here’s a straightforward guide on how to do just that.

Understanding the Need for Optimization

When new real estate deals are hard to come by, it becomes crucial to focus on optimizing your existing portfolio. This is your chance to enhance the value and performance of the properties and deals you already own—especially commercial opportunities, where every dollar you can save or create can increase the exit valuation of the project. 

However, the process of optimization doesn’t start with creating income and saving on expenses, but rather evaluating each property to ensure it aligns with your financial goals and adjusting it to fit current market conditions. 

How to Optimize Your Current Holdings

Even if you’re a passive investor who is more hands-off, you can still gain significant value by following steps one and two and staying up to date with your operator on steps three and four. 

1. Define your goals, risk, and timeline

Begin by articulating—or updating—your investment objectives. To make meaningful changes to your investments, ask yourself:

• What are my investment goals? Am I aiming for capital preservation, diversification, consistent cash flow, long-term equity growth, or some combination of these?
• Are my current investments aligned with my long-term objectives? How are my existing investments performing in relation to my long-term goals, and do they fit with my current strategy?
• What do I want my portfolio to achieve in the next five to 10 years, and what level of risk am I willing to take to meet this timeline? Have I clearly defined what success looks like for my portfolio in the long term? Am I comfortable with the level of risk associated with achieving these goals within my desired time frame?
• How am I tracking the performance of my investments? Am I regularly reviewing my investments to ensure they are on track, and am I making adjustments if needed? 

These questions will help you evaluate whether your investments are meeting your goals and guide you in making necessary changes.

2. Reevaluate your portfolio based on your goals

With a clear understanding of your goals, risk tolerance, and timeline, it’s time to reassess your investments to ensure they still fit your strategy. Treat each property in your portfolio as if you were evaluating it for the first time. Here’s how to approach it.

Rate each property on a scale from one to four—four being the best—in these core areas. This will help you identify which investments are meeting your expectations and which might need changes or even replacement:

• Capital Preservation: Is your investment protected from market downturns? The aim is to avoid losses and stay in the game during tough times.
• Cash Flow: How is each property performing in terms of income? Consider ways to boost rental income, such as adjusting rents, upgrading amenities, or changing rental strategies.
• Equity Growth: How does each property contribute to your overall equity growth? Look for properties that appreciate in value and enhance your portfolio’s worth.
• Timeline: Are your investments aligned with your financial goals and plans for the future? Assess whether each property is on track to help you meet your long-term objectives.
• Tax Benefits: Are you taking full advantage of tax deductions and benefits? Effective tax management can significantly improve returns.
• Leverage: How is your use of borrowed funds impacting your investment strategy? Proper leverage can boost returns, but too much borrowing can increase risk.
• Operator Performance: How effective is your property management team or investment partner? Efficient management is crucial for maintaining property value and ensuring tenant satisfaction.

If a property scores low in any key area—such as a one—consider whether it’s worth holding on to. If improvements aren’t feasible, it may be time to sell and reinvest that capital into better-performing opportunities. Or if the deal is a passive syndication, earmark those funds for reallocation—for example, moving that equity position into a debt position when the deal does cycle out.

Reevaluating your portfolio this way ensures that each investment aligns with your updated goals and helps you make informed decisions about keeping, replacing, and investing in new properties.

3. Deciding to sell

When deciding whether to sell a property, it’s crucial to see if it aligns with your investment goals. If it doesn’t, preparing it for sale might be the best move.

Start by making any necessary repairs and improving the property’s appearance. Enhancing curb appeal can make a big difference in attracting buyers. Also, consider updating your marketing strategy to highlight the property’s strengths and reach more potential buyers. Sometimes, raising rents can make the property seem more valuable to buyers.

For instance, I recently sold a short-term rental (STR). To prepare it for sale, I switched property management companies to boost its performance. Although it still didn’t hit my financial targets, the new buyer was drawn to it because it fit their needs for lifestyle and equity growth. They also valued the improvements I made to address the income issues. 

The same approach can apply to single-family homes, multifamily properties, and other types of real estate: Making smart enhancements can help you sell a property more effectively.

4. Deciding to hold

If you choose to hold a deal, the first step is to assess whether your current strategy still aligns with your investment goals, real estate market conditions, and the local real estate market itself. If your existing strategy is no longer effective, it may be time to consider a change. 

Ask yourself if the strategy needs adjustment or if moving to a different market might yield better returns. For example, if you’re using a long-term rental (LTR) strategy but market conditions favor midterm rentals (MTRs), it might be worth switching. Conversely, if STRs are no longer as profitable, transitioning back to LTRs or MTRs could be beneficial.

If your strategy is still effective or once you’ve made the necessary adjustments, focus on maximizing the property’s income using these strategies:

• Adjust Rent Prices: Regularly update rent prices to keep them competitive with local market rates.
• Upgrade Amenities: Invest in property upgrades to justify higher rents and attract better tenants.
• Add Income Streams: Consider additional revenue sources like pet fees or rent, amenity fees, laundry income, storage income, etc.

While optimizing your income, it’s equally important to manage your expenses to maximize profitability:

• Debt Management: Review your mortgage or loan terms to see if refinancing or restructuring could lower your payments and secure better rates.
• Insurance: Assess your insurance coverage to ensure it’s adequate and cost-effective.
• Taxes: Explore tax-saving strategies to reduce your tax liabilities, including possibly contesting your property taxes.
• Property Management Fees: Negotiate management fees, if possible, without sacrificing service quality.
• Other Contracts: Regularly review and negotiate contracts with vendors (lawn care, pest care, snow removal, etc.) and consultants (bookkeeping, tax, legal, etc.) to ensure you get the best value for the services provided.

Once you’ve optimized income and reduced expenses, establish systems to monitor performance and set a timeline for reevaluation:

• Monitoring Systems: Implement regular tracking systems to monitor income, expenses, and overall property performance. These can include financial software or property management tools. A simple checklist reminding you when certain policies renew and contracts expire can be a great planning tool.
• Reevaluation Timeline: Set a timeline for periodic reviews—such as every six months or annually—to assess the effectiveness of the changes and make further adjustments if needed. This may simply mean putting an appointment on your calendar!

By carefully evaluating your strategy, optimizing income, managing expenses, and implementing regular review systems, you can ensure that your property remains a valuable, productive part of your investment portfolio.

Final Thoughts

When finding new real estate deals is difficult, optimizing your existing holdings becomes a vital strategy for both active and passive investors. By understanding your financial goals, reevaluating each deal, and making strategic adjustments, you can enhance the performance of your portfolio and ensure it aligns with your long-term vision. This proactive approach will not only help you get the most out of your current investments but also prepare you for when new opportunities arise.

Reach Your Financial Goals, Faster

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.