How to Track Your Real Estate Portfolio | PREI 015
In this episode we talk to Joel Grasmeyer, a real estate investor, engineer, and entrepreneur who started PropertyTracker.com in 2004 to create user-friendly, yet powerful tools for real estate analysis.
Some of the topics we discuss include:
- The importance of tracking your rental properties.
- What metrics do most investors like to track?
- What tools do real estate investors use?
- What is PropertyTracker.com?
- Mobile phone Apps that can also help investors.
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How to Track Your Real Estate Portfolio
Today’s show is about tracking your real estate portfolio. It’s one thing to look at and analyze properties before you purchase them. What happens after you’ve purchased them and you’ve added them to our portfolio? As your portfolio grows, you’ll want to keep track of the income and the expenses, and more importantly, the performance of those properties. It might make sense to sell some of them or do a tax deferred 1031 exchange into other markets or maybe refinance them to increase your rate of return or pull equity out and move that over into other markets.
There are many things that you can do, but it’s important that you keep track of your real estate portfolio. This actually all came about, when I had a client of ours, a guy name Kevin contact me about two weeks ago. He asked me how to keep track of his new portfolio. He’s just starting out, he’s just building that portfolio but he’s already creating these elaborate Excel spreadsheets and I thought, “There are online tools that can help you and there’s even mobile apps.”
I wanted to bring on my guest here today, a guy named Joel, and talk about what he looks at as far as metrics for analyzing his properties, as well as what tools he uses. Obviously, he likes his own tools, but we can learn a little bit more about that. This is just one option. It’s not something that is absolute necessity. However, it does make your life a lot easier. Especially, at tax time, when you can just click a button and produce a report and give it to your CPA or your accountant and have your taxes put together for you very quickly and easily.
I’d like to welcome, Joel Grasmeyer to the show. Joel is a real estate investor. He’s an engineer and it seems he’s a serial entrepreneur. He started PropertyTracker.com back in 2004 to create a user-friendly but powerful tool for real estate analysis. Then, in 2008 he created Property Evaluator for the iPhone. Later in 2010, he launched RealEstateTools.com, which is a variety of real estate investment tools, so it’s a market place for that. Lastly, in 2012, he launched the Construction Cost Estimator out to help contractors quickly estimate construction cost using the iPhone, iPad and a Mac. Welcome to the show, Joel.
Thanks for having me on.
It’s great to have you here. Let’s give our listeners a sense of geography, where are you located?
I’m in Ogden, Utah which is about an hour north of Salt Lake City and right next to world class skiing.
I love Salt Lake City, the views there are amazing. You were a native Californian, if I remember correctly?
Yeah, I lived in Southern California from about 1998 to 2006. Then we decided to escape the rat race to Utah and get out of California while the getting was good.
Tell us a little bit about your background. I know you are heavily involved in application development and website tools and you’re an engineer. Tell us about your background.
I spent eight years while I was in Southern California designing unmanned airplanes. After the stock market crashed in 2001, with the dot-com crash, my wife and I decided, “We really need to diversify out of just stocks and mutual funds.” We got into real estate investing and cashing some of the equity out of our California property and buying rental properties, just buying the whole, very passive.
Being an engineer, I wanted to do some analysis on these properties before I bought them. I started by creating my own spreadsheets and sharing them with friends and some of the investment networks in southern California at that time. They were giving me a bunch of feedback on the analysis saying, “Wow, you should sell this.” I started a little side business to help other people evaluate properties and keep track of what they own.
I think a lot of businesses start that way, whether it’s in a garage or you identify a need and you start working on something and people start asking you for a copy or a version of whatever you’re making. Maybe they’d ask you, “Let’s mass produce this.”
Then a year later, I quit my engineering job and I’ve been working full-time as a software developer ever since and just following different technology trends. I did web development for a long time back in the early 2000s and then moved to iPhone, iPad, Mac development in the last few years, as those has become more popular.
Real estate investors measure and gauge their investments based on cash flow and rates of return and all kinds of other metrics. They do this at two stages of the game. One is before they purchase, before they complete that transaction. Then they monitor and measure the performance of their real estate portfolio after the close of escrow. Let’s begin by talking about the different kinds of metrics that real estate investor like to track, whether it’s on the analysis side and/or post-purchase.
The two main ones that I like to look at are cash flow and internal rate of return. Cash flow is the most obvious one that people look at. It’s probably one of the most important ones especially if you are going to be highly leveraged. You definitely have to keep an eye on that, so you can make sure you’re taking in enough money each month to stay above water and not get upside down with a bunch of negative cash flow.
Internal rate of return is really nice because it compares a real estate investment to like a savings account or a CD. Something with a fixed rate of return every single year. Real estate is difficult to normalize that way because it has all these positive and negative cash flows. Some years, you put repairs into the property but the internal rate of return, basically, boils all that down to say, this real estate investment is equivalent to having a savings account with this fixed interest rate compounding annually. It lets you do a true to apples to apples comparison between lots of different types of property, regardless of how much money you’ve put down, how leveraged you are, the purchased price around all that stuff.
Internal rate of return is a term that a lot of real estate investors don’t use or hear about, and when they try to understand it, they scratch their head because it has to take future cash flows and reduce them down to the current value or what is called, net present value. That’s a very difficult concept for most real estate investors to understand.
In fact there isn’t even a close form solution for it. You couldn’t just write out a formula on a piece of paper and calculate it directly. It actually takes an iterative algorithm to find it. It’s called the root-finding algorithm. It tries a bunch of different interest rates, rates of return and sees which one matches all those future numbers to make the net present value equal to the amount you actually put down.
What you’re saying is the IRR, the internal rate of return, is the best way to compare one investment to another or one property to another because it’s boiling it down to, “the lowest common denominator”.
It’ll let you compare a property with negative cash flow but high appreciation with a very different type of property with lots of positive cash flow, not leveraged, but maybe with low appreciation. It’ll say, you can look at the internal rate of return five years down the road or ten years down the road.
The other nice thing about it is it helps you decide what the optimum holding period is for a property. Because a lot of times what happens is when you first buy a property, you’re highly leveraged and you don’t have very much dead equity in that property, money that’s just sitting there in that property. But then overtime as you pay down the mortgage balance, you build up some of that equity and you’re not as leveraged anymore, your return on equity goes down and your internal rate of return goes down. That’s a signal to say maybe you should do cash-out refi or take out a second mortgage on this property. Take that money and then invest it to another property and leverage that money out and get it working for you again.
That happens too after 27 and a half years on residential real estate because your depreciation cycle ends at that point, so you no longer have this wonderful tax benefit of writing off the depreciation of that property because it’s gone. Now, you have to either step up your basis, refinance or 1031 exchange it into other properties. There’s different creative solutions there.
One of my favorite sayings about 1031 exchange is, “Swap until you drop.”
It sounds like we’ve gone from one extreme to another in my mind, because when I look at properties, one of the first things I look at are the cash flow in dollar terms. On the other end of that spectrum, again in my mind, you have this more advanced calculation of the internal rate of return, the IRR. But in between, you have the two metrics that I believe most investors use and look at and that would be cap rate, the capitalization rate. You also have the cash-on-cash return, which to me gives you a much better representation of your rate of return than the cap rate.
There’s actually one more metric. This is something that we track on our website as well, and that’s your total ROI. That factors in equity gain, appreciation, tax benefits, etc. That is the bottom line for me. You take that one step further and then you have this fourth level, which is the internal rate of return.
There are so many metrics out there. I’ve looked at so many different ways to calculate all these things. I’ve tried very hard to boil it down to maybe half a dozen of them that really matter. In my own analysis, I try not to create like a huge table of 30 different metrics to look at because that just creates a paralysis of analysis and a lot of confusion. I just try to pick maybe half a dozen of the most important ones and just focus on those.
Because really what it comes down to is if you’re doing that apples to apples comparison between different types of properties, most of those metrics are going to have similar relative values to each other. If the IRR looks good for a property, chances are that the total return on investment also looks good on that property. The key is to do the apples to apples comparison and just pick a few of the most important metrics.
What are investors using to track information like this? I would assume that most investors use Excel, that’s probably the most common tool. Tracking the accounting is probably just done in Quickbooks or maybe TurboTax or they just do it on a piece of paper.
I’ve used a lot of those tools myself. Things like Quicken and QuickBooks are very good at tracking your income and your expenses, which are the raw data for your real estate investments. But they don’t do a really good job of doing an analysis of those numbers or what I call the instrument panel to say, “Here’s the raw data, now, how do I make smart management decisions based on that data?”
Just by looking at income and expenses, by categories and the cash flow, the difference between those two, that doesn’t necessarily tell me whether I should hold on to this property for another year or do a cash-out refi or do a 1031 exchange. That’s where you need the higher level analysis based on your actual income expenses to help you make those smart management decisions.
That’s just the deeper level of analysis and then after you’ve bought the property, that’s just an ongoing analysis of tracking the performance of your property because that might improve or it may get worse.
Two weeks ago, I had an investor reach out to me and asked me, “How do you keep track of your properties?” This is the whole reason why I reached out to you, to bring you on to the show is because I realized, “There’s got to be a lot of real estate investors out there that are using Excel spreadsheets or some other method to keep track of what they own, what the income expenses are and hopefully they’re keeping track of what their rates of return are, however they want to measure that.”
I met you back in 2006, I think it was, and at that point you had just launched Property Tracker. Correct me if I’m wrong, but I remember looking at the software and thinking this is a great solution. It’s online so it’s in the cloud. It helps investors keep track of what they own, where it is and run the numbers or crunch numbers. What is PropertyTracker.com? Tell me more about it and how it would benefit real estate investors?
PropertyTracker.com is a web-based tool to help you do two things. It evaluates potential properties before you buy and then it also keeps track of the performance of the properties you already own. It’s pretty rare to find one integrated solution that does both of those things. Usually, you have to buy two separate tools to do those two different things. But Property Tracker integrates it all into one.
From the day you’re first looking at the property, it shows you those metrics like cash flow and return on investment. Once you own it, you put in your monthly income and expenses each month. It’ll show you the same type of metrics based on your actuals and then it produces things like a scheduled lease, a scheduled depreciation for loan applications. You can do a health check schedule of real estate owned. It even has online documents storage and a bunch of calendars, like a lease calendar. It keeps track of your insurance policies, management contracts, things like that.
I built it to scratch my own itch, because like I mentioned before, I was using Quicken and QuickBooks before. They were fine for the raw data but I wanted a higher level analysis to make the smart business decisions.
How simple or complicated is it to use? Because I know there are a lot of tools out there that offer so much more than a typical real estate investor needs or even wants. They might feel overwhelmed, there’s got to be a cut off at some point where you’re tracking enough to know what your portfolio is doing for you without getting overwhelmed or getting that glazed look in your eyes.
When I built it, I specifically tried not to make it a general ledger accounting program, like Quicken and QuickBooks and a lot of other property management software that’s built for property managers that are managing a huge portfolio of properties for their investor clients. I tried to make it very simple in that, all you do is put in your monthly income and expenses by category each month and then it calculates all those metrics and schedule of depreciation based on those inputs.
I tried to say, “What’s the bare minimum information we could put into this to produce some good analysis?” A lot of people use it in conjunction with tools like QuickBooks and Quicken where they use those tools to track their stocks and mutual funds and the real estate and make their loan payments online and print checks and things like that. But then, you can create a memorized report in QuickBooks or Quicken that just gives you a monthly summary of your income and expenses by category. If you just type those numbers into Property Tracker, then you can do the more detailed analysis that Quicken and QuickBooks don’t give you.
Let me dumb the question down. In terms of how much time an investor would be on PropertyTracker.com per month, what would you say that is?
I would say it’s about five minutes per month.
It’s very little?
Yeah, literally it’s just like half a dozen numbers, your income and your expenses by category.
I talk about passive real estate investing, which include turnkey real estate investments. Although, it’s a passive investment, it doesn’t mean it’s completely hands off. We tell investors that you’re going to spend about one hour per month on your property. That’s being conservative, it’s not going to be an hour a month, it could five minutes a month, it could be fifteen minutes a month.
As you grow your portfolio, you have more and more properties, it’s not one hour per month per property. That’s scales down very quickly. But you do need to have some time where you’re either communicating with your property manager or you’re depositing your rent checks and cutting a check to the mortgage company, if it’s not on autopay. There is some maintenance and administrative work involved and it’s not a lot, but Property Tracker is just another tool that allows you to keep track of that information in an organized way and pull reports and then do your year-end taxes.
I know you’re working on some apps. In fact, I actually own two of your apps and they’re very well done. Talk about what you’re doing in the mobile phone space.
Back in 2008, when Apple launched the iPhone, I felt, “Wow, this would be a great tool for people that are driving around, looking at rental properties and they want to run the numbers directly on their phone, on site rather than waiting until they get back to the office.” I made a native iPhone version, just a property evaluator portion of PropertyTracker.com with the thought being that when people are doing their book keeping, tracking the properties they already own. They’re probably at home in their office opening mail and stuff like that. They don’t need to do it on their phone necessarily. That’s why I only built it for the analysis part.
A couple years later, a lot of people were asking me for an app to do more of a fix and flip analysis. I launched a companion app, called the Property Fixer. People that do fix and flip analysis, do the calculations in a reversed order. They start with the after repair value of the property and then figure out what purchase price they want to pay to get a certain profit. The holding period ranges from zero to twelve months in Property Fixer, rather one to thirty years in Property Evaluator.
Once those people started using the apps, I got a lot of request for an app to help people do a fifteen-minute walk through on a property and quickly estimate the rehab cost. In 2012, I launched another app called Construction Cost Estimator, and that’s actually used by more than just real estate, fix and flip type people. It’s also used by all kinds of contractors from plumbers, to landscapers, to electricians, to general contractors, to create onsite estimates for projects that they’re working on. Then you can email a PDF directly from your iPhone, iPad or Mac.
We’re working on a new app right now called Contractor Tools that goes beyond just estimating and it adds the ability to also create invoices and take credit card payments against those invoices, sync that data between multiple users and sync it to QuickBooks. Basically, a contractor could get rid of all their paperwork and do everything on their iPhone, iPad or Mac.
Those are great ideas for apps. Do you think there’s a move away from browser-based applications and more towards mobile phone apps?
Definitely. That’s certainly the trend I’ve seen with my own apps over the last few years. Especially on smaller devices like iPhones and iPads, it’s just so much easier to create a great user experience on a native application than it is on a web app. A lot of web apps don’t work very well on the small screen of a phone. Websites can look pretty good that are just presenting content, but a deeply functional web app really needs the native characteristics of a development environment like something like Apple provides.
How many apps do you have out today?
It’s three apps but they’re on three different devices iPhone, iPad, Mac. It’s technically nine different apps. It’s all in a family and they all share some code between each other too.
Joel, I appreciate you being on the show. Can you tell our audience how they can find you and more information about your products?
If you go to RealEstateTools.com, you can get links to all of the different sites for all of the different apps. That’s the umbrella site that links to all the other ones. Also, if you go to PropertyTracker.com/Norada, you can get a discounted rate on the Property Tracker. Normally, it’s $24.95 a month or $249 a year, but Norada clients get a discounted rate of $19.95 a month or $199 a year and you get a 30-day free trial.
I appreciate the discount. Our audience would certainly appreciate that. I appreciate your time today, Joel. Your tools are fantastic. I’ve played with many of them and they’re very, very well done. I congratulate you.
Thanks. I appreciate your feedback.
Thanks for your time, Joel. We will talk to you again soon.
Thanks for having me on the show.
Well there you have it, a very simple online tool to help you keep track of your real estate portfolio. This allows you to measure what is going on with your properties. You can see what your real returns are, year after year. As well as whether you need to keep, sell, or move those properties to other markets through a tax deferred 1031 exchange.
Take a look at it, they have 30-day free trial, which is well-worth checking out. It doesn’t cost you anything. There’s no obligation but at least you can get a feel for the product. This is just one of several tools that are out there.
If you haven’t subscribed to the show, I encourage you to do so. Be sure to download our free report, The Ultimate Guide to Passive Real Estate Investing. You can find that at PassiveRealEstateInvesting.com.
We appreciate you being here. See you on the next episode.
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