The New Year is the perfect opportunity to reflect; both backwards and forwards. As you look at your real estate investment(s) and how they performed during 2011 are you pleased? Granted, no one ever has sufficient cash flow, but many issues that might lead to disappointment are well within your control.
First of all, it is critical to understand why you invested in real estate in the first place. In addition to the pure joy of ownership and portfolio growth, were your goals and objectives reasonable?
Quantifying Expectations Through Budget
The expectations for a real estate investment are best quantified through a thorough budget. The budget takes into account all items of expenses including account historical expenses, known expenses and projected expenses. This then provides an educated projection as to what a property will cost. Of course, expenses need to include taxes, insurance and mortgage costs.
Income, A Less Than Predicable Equation
The other side of this equation is the income side. This tends to be a bit less predictable than the expense side. An owner needs to take each space or unit and make assumptions relative to each space. For example, if a suite is under a lease contract through 2014, than the income will be simple to project. If an apartment is leased on an annual or monthly basis, the overall vacancy and market rents must be taken into account. In any market the income assumptions are critical and need to be realistic, not wishful thinking. If you are getting $2,000 per month for an apartment rented in 2011, if there any market reason to expect this unit to increase or decrease when available? What are the market concessions for the unit, how much down time will there be, etc? Therefore, quantifying each individual suite and/or unit is critical to obtaining an accurate budget. Combining the expenses with the income should then provide an accurate cash flow projection, i.e. that which we all care about.
Assessing Assets Performance
Now as to the reflections; if you had a budget last year was your asset’s performance in line with this. If so, than the expectations were met and there should be some serenity in your life. If not, what items were missed and why? Those can then be used to adjust the budget for 2012 and provide a basis of reasonable future expectations, but also better understanding of your asset.