A Portfolio of Properties?

When I talk with new clients I typically will try to understand what their goals are with regards to their investments. Some aren’t concerned with current income and are focused more on long-term appreciation. Others aren’t worried too much about long-term appreciation and are focused more on maximizing current income.

Depending on the client’s goals, I’ll suggest different investment strategies to maximize either long-term appreciation, or current income. Different properties are targeted depending on the goal we are working towards.

Maximizing Income:
For example, let’s assume an investor is focused exclusively on maximizing current income so they can quit working full time. To accomplish this goal, we’ll focus exclusively on the highest cashflow properties available. This means we’ll look for lower priced homes in areas with minimal appreciation.

Here is an example of this type of property:

euclid cashflow property(click on picture to enlarge)

This is a 3-bedroom home for sale in Euclid, Ohio for $29,000. It offers a garage, deck and central air conditioning. The home would rent in the $950 range. The property taxes and insurance are $250 per month. We’ll add in another $100 a month for maintenance and repairs. After subtracting these various expenses, the investor would enjoy $600 a month of income from their $29,000 investment. This is a 24.8% return on investment.

Even though this property offers excellent income, it more than likely will not appreciate significantly over time based on market conditions for the area.

Another opportunity for an investor looking to maximize income might be a mobile home investment. An example of a mobile home investment might be this home in Madison, Ohio:

38 pupulie exterior 2
This is a 2-bedroom mobile home that was purchased by an investor for $9,000. This home was sold to a buyer with financing. The buyer is paying $295 per month for 5 years. In addition the buyer is responsible for utilities, maintenance, taxes, and insurance. In the first year, this investor will collect $3,540 on this investment which is a return of 29.5%. If the buyer of this home makes all payments as scheduled, the income stream to the investor will disappear at the end of the 5th year, which means there is no appreciation on the investment.

With these two properties, an investor would invest $38,000 to acquire both homes. They would collect $895 a month, or $10,740 a year, after expenses. This is a combined annual return of 28% without any future appreciation.

Maximizing Appreciation:
If an investor is looking for long-term appreciation, we’ll focus on completely different properties. These properties will be higher in price because they’ll in different areas where values will appreciate with time. An example of a home purchased for appreciation is this home in Willowick, Ohio:

Willowick Cashflow Property (Click on picture to enlarge)

This is a 3 bedroom, 2 bath brick ranch listed for $74,900. Its on a corner lot and offers an attached two-car garage. This home would rent for $1,095 a month. After paying taxes, insurance and maintenance and repairs, the investor would enjoy a $700 a month cashflow. This is an 11.2% return on investment.

You’ll probably notice this return on investment is lower than the two income properties. This is because we’re paying more for the property based on the location. This home will appreciate in value over time increasing the overall return on investment.

These different properties provide different results and can be structured around specific goals. However, there is an interesting third option…

Maximize Both Income & Appreciation

This third option is to accumulate a portfolio of both types of properties.

For example, we can create a portfolio of 5 properties that have different rates of returns. These returns combined together can help us maximize both long-term appreciation and current income at the same time.

#1 РHigh Cashflow Euclid Home Р$29,000 investment   Р$600 monthly income Рreturn 24.8%
#2 – High Cashflow Mobile Home – $9,000 investment – $295 monthly income – return 29.5%
#3 – High Cashflow Euclid Home – $29,000 investment – $600 monthly income – return 24.8%
#4 – High Appreciation Willowick Home – $74,900 investment – $700 monthly income – return 11.2%
#5 – High Appreciation Willowick Home – $74,900 investment – $700 monthly income – return 11.2%

This portfolio of homes includes 3 high cashflow properties and 2 long-term appreciation properties. An investor could build this portfolio of homes with an investment of $216,800 for all 5 properties. This portfolio of homes would generate $2,895 per month after taxes, insurance and maintenance expenses. This is $34,740 annually for a combined return on investment of 16% PLUS the long-term appreciation on homes 4 and 5.

This third approach accomplishes both goals at the same time and may be the best strategy for most investors as it provides diversification across both opportunities. An investor can enjoy attractive current income and long-term appreciation at the same time.

 

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