Portfolio analysis sounds daunting, particularly to newer investors who may be unsure what this process entails. Are you doing it right? Looking at all the relevant factors? Making the right decisions?

End-of-year analysis for passive investors involves a mix of financial, operational, and market performance reviews. Because you’re not taking care of day-to-day operations, a careful, thorough look at all the data is necessary not only to minimize risk but to maximize profit.

We’re here to simplify it – breaking down what you need to consider and examine step-by-step!

Your 7-Step SFR Portfolio Analysis Checklist

Step #1 – Review Financial Performance

As we talk about metrics and calculations, remember that there are countless factors and equations investors can look at. We’re not telling you what to prioritize or value. However, these factors are the most commonly reviewed and considered most valuable.

• Net Operating Income (NOI) – Calculate the annual NOI by subtracting total operating expenses from gross rental income. This metric shows the cash flow from rental operations alone. It’s only part of the big picture but key for further calculations.
• Cash Flow – Look at cash flow after all expenses (mortgage payments, repairs, taxes, etc.) Ideally, cash flow should be positive and on target with your goals. If not, mark it down as a red flag for further investigation!
• Return on Investment (ROI) – Calculate your ROI based on net income compared to your initial investment. If you’ve made upgrades or repairs, include these in the total investment to see if they yield returns. You can also look at forced appreciation against investment.
• Cash-on-Cash Return – Compare the cash income against the cash initially invested. This measures your portfolio profitability based on the money you’ve put in.

Step #2 – Evaluate Property Appreciation and Equity Growth

• Market Value – Check property values through appraisals or market comps. Year-over-year appreciation may be marginal, but you want to see increases rather than decreases. This happens naturally over time and through forced appreciation from renovations and property upgrades.
• Loan Balance Reduction – If you’re financing properties, examine how much principal was paid down. This equity growth is part of your net worth increase. Consider refinancing if you can secure a better interest rate.

Step #3 – Analyze Operational Performance

• Occupancy Rates – Track occupancy for each property. A consistently high occupancy rate is a sign of a well-performing rental. It indicates high demand and desirability.
• Turnover and Retention – Review turnover rates, as high turnover slashes profits through vacancy costs and re-leasing expenses. Confer with your property management team to identify causes.
• Maintenance and Repairs – Assess maintenance costs and look for any trends. Identifying frequent repairs could indicate a need for more proactive, aggressive measures. Review the age of things like HVAC, roofing, and other necessary (potentially costly) line items.

Step #4 – Assess Cash Reserves

• Emergency Reserves – Verify you have enough cash for unexpected repairs, vacancies, and contingencies. Review how often and how much you tapped into these reserves and adjust accordingly. 3-6 months’ worth of expenses is typical.
• CapEx Fund – Establish a budget for capital expenditures (CapEx) based on the condition of each property in anticipation of significant repairs or upgrades. This is separate from your emergency fund.

Step #5 – Compare Portfolio Performance Against Market Trends

• Market Rent Growth – Compare your rent increases with market trends. Ideally, your rental income should grow with or above the market average.
• Local Real Estate Trends – Study trends in your properties’ neighborhoods. Economic growth, employment rates, and local development can affect future rental demand and property values.

Step #6 – Tax Strategy Review

• Tax Deductions – Ensure you take advantage of tax deductions, including depreciation, mortgage interest, and property management fees. We recommend retaining a trusted, experienced CPA.
• Plan for Capital Gains and 1031 Exchanges – Review potential capital gains if you plan to sell properties, along with tax implications. Consider strategies like the 1031 exchange to defer capital gains taxes.

Further Reading: Use the 1031 Exchange to Maximize the Money You’ve Already Invested.

Step #7 – Risk Management

• Insurance Coverage – Review insurance policies to ensure adequate coverage. While there may be no new risks, appreciation demands beefing up your policies.
• Debt-to-Equity Ratio – Review the level of leverage across your portfolio. Keeping this modest and balanced makes acquiring further financing easier and reduces overall portfolio risk.

As you work through your portfolio analysis, confer with property management and advisors to ensure you have the complete picture and interpret the data correctly. You can develop an action plan to refine and improve your portfolio from there.

Start investing with REI Nation, where you invest and we handle the rest!