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Expert advice: How to measure the success of a property investment portfolio

by Bianca Dabu | November 15, 2019
research
1 minute read

Expert advice: How to measure the success of a property investment portfolio

November 15, 2019

While there are a lot of different measures to evaluate the performance of a property portfolio, for some experts, the three most important metrics are equity, gross yield and cash flow.

As a buyer’s agent, Cohen Handler’s Simon Cohen has helped investors understand the ins and outs of the property market as well as their own portfolios.

These three metrics, according to Mr Cohen, allow investors to reassess their portfolio and ultimately determine the next steps to take based on the current status of their assets, their capacity to expand to the potential of the portfolio, as well as the potential for downsizing, upsizing, or selling off assets.

How do equity, gross yield and cash flow help investors understand their property portfolios?

Equity

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According to Mr Cohen, equity is the first variable he looks at when assessing his clients’ portfolios.

For him, it’s absolutely vital that a portfolio maintains a good amount of equity as it basically defines how healthy the portfolio is.

“We’ve seen and heard a lot of horror stories where people leverage themselves to the absolute max, and then just the slightest change in interest rates or the market could literally flip them on their heads,” the buyer’s agent explained.

“How much liquid cash do they have to tip in if they're going to grow the portfolio – for me, thats the main thing.” 

Gross yield and cash flow

There are different types of yield that contributes to the growth of a portfolio, but the gross yield – how much rent you’re getting over the purchase price – is the one most often used to evaluate a portfolio’s performance.

“[Gross yield is] how much out of pocket you are between the mortgage and the rent,” Mr Cohen said.

On the other hand, cash flow, like equity growth, stands as one of the most important tools that help property investors grow their portfolio, according to the buyer’s agent.

Yield vs cash flow

Ideally, investors would seek to strike a good balance between having good yield and good cash flow.

However, most of them often find themselves prioritising one over the other depending on their goals, capabilities, and limitations as property investors.

According to Mr Cohen, as in all aspects of property investment, there is no one formula to determine whether you should chase yield or focus on gaining and maintaining cash flow.

He explained: “Some are nearing retirement and some are starting out,” he said.

“I think the people who are starting out or have a few properties... for them, they don’t mind being out of pocket $1, $200, $300 a month to own a property.

“On the other hand, the people nearing retirement... they want their money in their pocket – everyone is different.”

As a property professional, he helps his clients find a “happy medium” by looking for properties that are always going to experience growth even if the market becomes a bit stagnant.

These properties are often found in areas where there’s new infrastructure going into it, whether it be trains, schools, hospitals, shopping centres, according to him.

“At least, you’re always going to have people who are going to want to rent it, and it’s always going to have a good reason for growth… Then, you’re going to get that happy medium,” Mr Cohen said.

Apart from the “happy medium” strategy, the buyer’s agent also encourages investors to try out other strategies, provided that it’s backed up with good education and thorough research.

After all, there’s no one path towards success in the field of property investment.

Determine your goals, capabilities, and limitations as a property investor and seek out the advice of property professionals in order to make good decisions and ultimately succeed in the business of creating wealth through property.

Mr Cohen’s final advice for budding investors: “ You don’t want to overextend yourself. Being conservative in buying property, I would say, is the best thing you can ever do.”

Expert advice: How to measure the success of a property investment portfolio
Simon Cohen
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