Real Estate Investing Goals: Evaluating & Updating Strategies

You need to review and update strategies to reach your real estate goals.

The real estate industry is dynamic and ever-evolving. Market conditions are constantly influenced by factors like supply and demand, interest rates, and economic cycles, to name a few. Any of these factors can cause your property values, rental income, and investment opportunities to fluctuate.

Before real estate investment trusts (REITs) were established in 1960, only ultra-wealthy investors could invest in high-income-producing properties like commercial real estate and apartment buildings. Now thanks to the internet, everyday investors can join real estate investment groups (REIGs), invest in real estate debt, and easily access different strategies for house hacking, house flipping, and real estate wholesaling. In addition, with sites like Airbnb growing in popularity, many investors have made whole careers out of investing and managing short-term rental properties.

The possibilities for your real estate investing journey are endless! However, to reach your desired destinations, it’s crucial to regularly assess and adjust your real estate investing strategy to help you stay on track and surpass your investment goals.

In this post, we’ll discuss how to measure your real estate investing strategy’s success, set new goals, and update your real estate investing strategy to achieve your desired outcomes.

How to Determine the Success of Your Real Estate Investing Goals

If you ask 10 different real estate investors how they measure success, you will get 10 different answers because these measures are both quantifiable and qualifiable. You have to consider your real estate assets’ physical return on investment (ROI) and the degree of personal satisfaction you’re getting as a real estate investor. You should also be looking at how your real estate investment strategies will serve you down the road. Is what you’re doing scalable? How and where can you grow your investment portfolio and increase your bottom line?

Let’s break down each of these markers of success:

Cash flow

Cash flow is the amount of money you have left after deducting all expenses associated with your rental property from the rental income. It’s a straightforward measure of your monthly profit:

Cash flow = total income – total expenses

It’s very similar to how you balance your budget and is thus used by many new investors.

Your total income includes the following:

Monthly rental income
Additional income for things like parking and pet fees

Your totals expenses include the following:

Monthly rent payment
Property taxes
Homeowners Insurance
Property management fees
Repair reserves budget
Vacancy reserves budget
Additional expenses (e.g., supplies, gas/mileage, other insurance, etc.)

If you’re not focusing on long-term investments or plan on retiring soon, cash flow is an easy way to determine whether your rental property is netting you a decent return. It’s not an ideal measurement of your real estate investing ROI simply because it doesn’t tell you enough. It could be good or bad if your monthly net cash flow is $200. If you invested $10,000 in the rental property, that’s a 2% monthly ROI, double the 1% rule! If you invested $100,000 and earned $200 a month back, that’s not as ideal.

Cash-on-cash return

Cash-on-cash return helps you determine how much money you’re making from your investment compared to the amount you put in. It tells you if your $200 monthly net cash flow is a good return on your investment.

Here’s the formula:

Cash-on-cash return = annual net cash flow / invested equity

Your annual net cash flow is how much you profited in 12 months ($200 x 12 = $2,400). Your invested equity includes your down payment, closing costs and related fees, and rehab costs.

If your invested equity is $10,000, your cash-on-cash return is 24% ($2,400/$10,000). For $100,000, it’s 2.4% ($2,400/$100,000).

Generally, a good cash-on-cash return for real estate investments is between 10-12%, which typically outpaces most mutual funds.

Cash-on-cash return is a popular metric for most investors because it’s easy to calculate. It’s still not a precise reflection of your ROI because it doesn’t account for appreciation, opportunity costs, risks, and the entire holding period. However, it’s quick to determine whether an investment is worthwhile.

IRR

Unlike cash-on-cash return, which focuses on the profitability of your initial investment, IRR calculates your investment property’s potential profitability for the duration of your entire holding period. This method is ideal for experienced investors who are thinking long-term.

The downside of IRR is that it’s not a simple equation. It looks like this:

IRR = (future value / present value)^{1 / number of periods} – 1

Luckily, some calculators do all the heavy lifting for you. You can also calculate your IRR using Google Sheets. Again, IRR isn’t going to tell you exactly what your returns will be because it can’t predict the future. However, it does account for the time value of money, which can help you prepare for the adverse impacts of market shifts, the cost of repairs, and more.

Appreciation

Appreciation is the term used to describe the increase in value of your property over time. It’s like watching your investment grow and become more valuable as time goes on.

Appreciation = final value – initial value

If your rental property’s value was $200,000 when you bought it, and now it’s $300,000, you’ve gained $100,000 in appreciation.

You can also calculate your appreciation rate:

Appreciation rate = (change in value / initial value) x 100

Your rental property’s long-term appreciation rate is 50% in this scenario. To find the average yearly appreciation, you simply divide that percentage. For example, if you’ve owned the property for 10 years, it’s appreciated at 5% per year (50 / 10).

If you’re primarily equity-driven, you should calculate your property’s appreciation.

Personal satisfaction

In addition to measuring your physical ROI, you have to consider your quality of life, which brings us back to your why. Why are you investing in real estate in the first place? Are you planning for retirement? Are you looking to start a new career? Achievement financial independence? Build a legacy?

Calculating your personal satisfaction is tricky because it’s both quantifiable and qualifiable. As a beginner real estate investor, you likely created SMART goals.

Are you on track to meet those goals? If not, it’s time to reassess and determine how you can. If you are, what can you do to exceed these goals?
Are you enjoying want you’re doing? You may be able to house hack with the best of them, but if sharing your home with others makes you miserable, then house hacking isn’t your real estate investment strategy.
Are you making the most of your time? If you’re your property manager, it may be time to outsource this work to a property management company, especially if you’re in the multifamily space or own a rental property on the other side of town.

Another reason we recommend making SMART goals is that they require you to think about the path to achieving them. One way to get started is to think about your desired outcome, then work backward to figure out how to achieve it. These goals must be as transparent and easy to communicate as possible because, when hiring others, they must clearly understand what’s expected of them.

Know Your Processes

Write down all of your processes and be as detailed as possible. To scale your business effectively, analyze each of your processes. Look for redundancies and think about ways they can be done more efficiently. If your 10-step process can be done in five, update it!

Develop a standard operating procedure for every aspect of your business, such as rent collection and contract evaluation. The more clear and detailed these processes are, the easier it will be for others involved, such as your property management company, real estate agent, administrative staff, and contractors, to follow and execute them efficiently.

Automate Your Processes

Simplify your processes even further by using software to do them for you. Here are three types to consider:

Pricing software: Hotels and Airbnbs constantly change their rate to optimize for availability, special events, and time of year. Pricing software examines these daily changes to determine what you should charge.
Auto-messaging software: Setting up auto-responders with guest experience messaging software like Hospitable. With it, you can set up key messages that guide your guests or tenants through their leasing experience.
Leasing software: Online platforms like BiggerPockets can provide state-specific lease agreement templates that comply with local ordinances and include all the necessary disclosures and attachments. You can even include your clauses and additional attachments and disclosures.

Setting New Real Estate Investment Goals

Now that you’ve measured your success regarding physical ROI, personal satisfaction, and scalability, it’s time to revisit your SMART goals and risk tolerance.

Updating your goals

No matter how detailed you were at the start of your real estate investing career, you’ve undoubtedly learned a ton from hands-on experiences. What you consider a good investment and how to measure it may have changed. Your passive investment strategy might need a few tweaks. Your new leasing software may make your residential real estate business far more efficient than it was before. Consider all of this as you’re updating your goals, and if you haven’t already, create both short-term and long-term goals.

Short-term goals: You can accomplish these in under a year, typically in 3-6 months. They can include things like finding more properties to invest in, hiring a new property manager, or taking a single distressed property and flipping it.
Long-term goals: Long-term goals are your ultimate objectives or your why. These might not change much, but your journey to accomplishing them may. For example, if your goal is to retire in 10 years and you think you can do it in eight, adjust your numbers accordingly.

Assessing your risk

The greater the risk, the greater the reward. A single-family home doesn’t require as much capital as a hundred-unit apartment complex, but it also generates far less income. Scaling your business requires you to take on more risk.

Investment properties are typically ranked on a scale from Class A to Class C (or D, E, F, etc.):

Class “A” Properties: These are “top-notch” properties that are newly built with all the bells and whistles. They’re mostly owner-occupied, and while your cash flow may be lower, there offer high-growth potential.
Class “B” Properties: These are ideal for passive investors. These homes are a little older but still well-maintained and are typically half owner-occupied and half tenant-occupied. They offer an attractive cash flow, growth potential, and reliable exit strategies.
Class “C” Properties: These properties are high-risk but can be highly profitable with the right investment strategy and processes. They’re primarily investor-owned and occupied by lower-income tenants. While they offer the highest cash flow of the three property classes, they also require constant monitoring and management.

When determining your risk tolerance level, keep your satisfaction and lifestyle in mind. Typically, the further you stray from Class “A” Properties, the more will be required of you.

5 Steps for Updating Your Real Estate Strategies

Much of this post has been about measuring your growth and evaluating where you want to go. Here are a few real estate strategies to expand your investment portfolio and help you get there:

1. Explore new investment types

As we mentioned, you have many more investment opportunities than we did 100, 50, or even 20 years ago. If you’re an active investor, BiggerPockets offers beginner’s guides to many of the most common types of real estates investments, including:

Thanks to the digital age, plenty more passive investment opportunities are available to everyday investors as well! You can:

Join real estate investment groups and REITs
Partake in crowdfunding opportunities that invest in high-yielding properties
Buy real estate notes
Join sites like Groundfloor and collect real estate-secured debt
Scale your residential or commercial real estate investments to earn more rental income

2. Explore new market opportunities

Fledgling real estate investors are drawn to local markets because that’s what they know. However, many other markets are out there, and the odds are many of them have higher-yield potential. When scoping out new markets, here are a few things to look for:

Population swells
Job growth swells
Shorter listing periods
Increased number of real estate transactions
Declining crime rates
An increased presence of artists and creatives
Home prices are rising faster than local incomes
More conversions from apartment buildings to condominiums
Neighborhoods adjacent to areas experiencing most or all of the above

3. Don’t be afraid of risk

As with any business, you’ll often learn and grow through trial and error. You will make mistakes, but when you do, learn from them. Figure out what you like, what you don’t like, and what you’re good at. Make the jump from residential to commercial, or play with different software to see what works best. Always look for new things to try and opportunities to explore.

4. Evaluate Your Success

This step is worth repeating. Track your progress regularly based on your preferred metrics: cash flow, cash-on-cash return, IRR, appreciation, personal satisfaction, etc.

Take some time each month to review your account statements. These statements give you a clear picture of how well your real estate investments are performing and the total value of your portfolio. If you have an admin or a property manager, ensure you receive monthly reports that track important financial metrics such as profit and loss, rent collection, and accounts payable.

Also, identify why your accounts are performing the way they are. If your profits are lower this month than last, determine what happened and create a plan to address it. If you’re making more month-over-month, figure out what’s making your investments successful and draft a plan to capitalize on that success.

If you have any questions about optimizing your real estate business, don’t hesitate to ask your BiggerPockets community. It consists of over two million real estate investors just like you, and experts are always happy to help.

5. Work SMARTER

You knew this was coming, didn’t you?
The best way to evaluate and update your strategies for success is to constantly find ways to work SMARTER. The SMARTER method provides you with an action plan for every step of your journey, from creating your strategy to mastering and repeating it. We’ll help you scale your investment portfolio by providing the tools you need to identify what’s working and learn from what’s not.

Mastering Your Real Estate Investing Goals: Updating Strategies for Success