Kentucky Real Estate

Are Your Real Estate Holdings Maximizing Your Investment Portfolio?
By Rob Swanson

In 2001, real estate investor Mary Cummins of Denver, Colorado made a critical mistake. She began building a real estate portfolio purchasing residential real estate as her means of establishing long term, passive cash flow. There are several reasons why her plan ultimately failed.

Mary, a community leader, volunteer and mother, decided that she wanted to do something to add to her family’s long term financial security. Mary’s husband was employed by a large pharmaceutical company and while there was no immediate need for cash or cash flow, Mary had a plan. Her plan was well thought out; discussed with her husband and received the blessing of their family’s trusted advisors, their CPA, attorney and financial planner.

The plan was to use some of their existing investment capital, along with leverage to purchase single family and small multi-family residential properties. Mary determined that at the current area rents, if she put between 10% and 20% down on each property, each one would cash flow approximately $100 to $150 per month. Over time, she expected the loans on each property would be paid down and her cash flow would rise.

What Happened Next
Over the next three years, Mary bought 14 properties with an average purchase price of about $185,000. She put approximately $450,000 down and calculated that she would be receiving between $1,500 and $2,000 per month in passive income.

Unfortunately, vacancy was consistently higher than expected, local market conditions remained flat and she discovered that even one extra vacancy completely wiped out every penny of her anticipated monthly cash flow. Paying down the loans did not happen and market conditions prevented values from rising. What Mary ended up with, was the reality that she had traded cash for a rather significant negative cash flow.

Mary made the common mistake of using residential housing in her attempt to create cash flow. While she had the right goal, cash flow, in mind, she failed to calculate the external impacts of local market conditions on reaching her goal. In essence, Mary used the wrong property type in an attempt to reach her cash flow goal.

The 4-Phase Portfolio
Real estate investors can mitigate the problems Mary has experienced by simply using the right property types for their intended purposes and by building the 4-Phase Portfolio as follows:

1. Develop a comprehensive short and long term real estate plan
2. Build equity using market selection strategies, residential real estate and land
3. Compound growth using Portfolio Compression techniques and a re-leverage plan
4. Convert your portfolio’s internal equity to cash flow using commercial real estate

Residential real estate, subdivision lots and development land are property types that should be used to build equity within the 4-Phase Portfolio. Commercial real estate, such as larger multi-family housing, industrial warehouse, medical office and retail strip malls to name a few, are property types that should be used to maximize cash flow potential.

Real estate investors need not start with $450,000 of investment capital as Mary did. They simply need to recognize that (1) using the right property types, (2) for their intended purposes and (3) in the right order, anyone’s real estate portfolio will significantly outperform the traditional buy and hold plan.

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