call now (424) 231-5933

The Importance of a Well Designed Real Estate portfolio

A Properly Balanced Real Estate Portfolio

True, returns from owning multi-family rental properties can be high, but the highest overall returns can be obtained only after a careful assessment of risk and with a well- designed portfolio of properties. The stability of the return from each property is key to the performance of the package. The best approach is to add properties only after considering how they balance others in the portfolio, in order to spread the long-term risk and increase returns.

Avoiding Vacancies – and Turnover

The biggest risks of all: vacancy and turnover. An unoccupied unit brings no return, whatever its assessed valuation. Potential causes of vacancies should always be kept in mind, and a mix of property types in one’s holdings can mitigate the consequences inherent in the instability of the real estate market.

Class “A” Characteristics

For residents of Class “A” luxury complexes, prime location, and amenities are essential. “A” Tenants tend to be unaffected by the ups and downs of the markets, and  to be reliable in payment of rent. However, stable, high rents do not necessarily translate into high returns; actual returns can be low because of the substantial maintenance and renovation costs the investments requires. Other factors to consider:  new or newly-renovated complexes nearby, or conversely, the potential decline of the neighborhood might lead high-paying tenants to flee, leading to a re-evaluation of the worth of one’s holding. All this means that even a somewhat lower return can be viable as long as the units are continuously occupied

Class “B” Characteristics

Class “B” developments constitute the bulk of rental housing. A “B” tenant may be credit- worthy and looking for a lower price unit in a desired neighborhood, or could be  a less-credit-worthy tenant desiring a better complex. The property may be in an “A” location, but with much deferred maintenance and a dated design.  Upgrading and refurbishment of the property implemented over time should be part of the business plan, in the end can yield excellent returns to the portfolio. However, current tenants are likely than not to generally changing neighborhoods; however turnover may be a challenge during up and down cycles. Credit-worthy tenants usually continue to rent or buy while the less credit-worthy may downgrade to low rental units.

Class “C” Characteristics

Class “C” complexes tend to be in less desirable locations, and lacking amenities such as trendy cafes and retail shops nearby, and with much deferred maintenance. Although tenants may face difficulties in keeping up with their rent, subsidized units – that is, those backed with government support – can offer quite stable income. Near universities, students make dependable tenants, to a large degree offsetting the relatively high maintenance required by temporary occupancy. The low purchase price of Class “C” properties can result in substantially high returns when occupied, compared to that of other property classes, balancing the innate volatility of lower-rent areas. However, overall employment and proposed changes in government or institutional support might alert one to review the investment potential of the location, so it is wise to keep abreast of any planning issues. Moreover, if there is an improvement in the surrounding area, the property might shift from the “C” to the “B” Class.

A Balanced Portfolio Is an Active Portfolio

It’s not just the properties themselves; the surrounding neighborhoods must always be part of the equation when making investment decisions. So the key is to maintain a mix of good properties: the right buildings in the right locations. Real estate is a dynamic business and the real estate investor must respond.

Leave a Reply

Your email address will not be published. Required fields are marked *