Should real estate investors learn how to build a real estate portfolio? With something for everyone, there are numerous ways to invest in real estate. However, for those looking to accumulate long-term wealth by growing one investment property into several, the first rule is learning how to build a real estate portfolio.
A real estate portfolio is a collection of different investment assets that are held and managed to achieve a financial goal. It's a strategic catalog of current and past real estate deals, whether rental properties, rehabs, or REITs (Real Estate Investment Trusts), to earn monetary returns. Although not every real estate portfolio will look the same, the items considered part of your portfolio generally depend on a combination of factors such as your objective, time horizon, and risk tolerance.
How To Start A Real Estate Portfolio
For real estate investors, understanding how to start a real estate portfolio and why it's important is vital to your success. A real estate portfolio will not only serve as your resume of work but also your marketing arsenal to find and acquire funding for future deals.
During your daily interactions, you will meet many people who could potentially be private lenders for your deals. That's why you must have marketing materials that show people the opportunity to potentially earn a high rate of return as a private lender. A well-maintained portfolio will essentially showcase your personal investment goals and strategies, the inner workings of deals you've completed and currently own, as well as your success/fail rate.
When building a real estate portfolio from scratch, investors need to pay special attention to the following aspects:
Your Objective
Simply put, what do you want to achieve from your investment assets? Because different investments perform differently at any point in time, investors need to understand their end goal before choosing assets. The types of real estate investments in your portfolio will play a significant role in achieving your goal. Rental properties and multifamily properties aim to achieve passive income, while assets such as wholesaling and rehabs look to accrue short-term gains.
The Numbers
Building a real estate portfolio hinges on one simple aspect: the numbers. These numbers provide transparency to your deals, revealing whether or not they're good or bad. Your real estate investment portfolio should comprise each of your investment assets broken down by various numbers, such as purchase price, transaction/holding cost, profit, repair cost, and sale price.
The next aspect of building a real estate portfolio is financing. How did you find and structure the financing of your deals? How did you find a buyer for the property? Your real estate portfolio will need to answer similar questions when seeking financing through traditional institutes like banks or private money lenders.
Finally, your real estate portfolio will need to include the improvement costs, as well as monthly operating costs. This will provide lenders with a snapshot of the associated costs of each project and how you leverage that money to earn a profit.
Asset Allocation
Another critical part of learning how to start a real estate portfolio is asset allocation. For investors, this includes determining the appropriate asset allocation model for your goal. The appropriate asset allocation for you will take into account your overall strategy, as well as risk tolerance. Looking for greater returns? Investors will need to partake in riskier investments to achieve those results, while others seek safer bets, bypassing bigger gains for consistency.
Management
The last component to consider when learning how to start a real estate portfolio is management. When holding onto properties, investors will need to decide whether to hire a property management firm to oversee the investment or become the landlord and do it themselves. This is something lenders will not only want answers to but also a role for your bottom line. Whether you have a dedicated property manager or not, your real estate portfolio should include how your investments are being cared for, as well as the added cost associated with their management.
Benefits Of Building A Real Estate Investment Portfolio
There are various benefits associated with building a real estate portfolio that prove attractive to anyone who wishes to build their wealth, even with varying financial goals. Many types of real estate investments provide a steady cash flow in the form of passive income. By adding a rental property to your portfolio, this passive income can also be utilized to pay down the mortgage debt that was used to purchase the property in the first place. Over time, properties added to your property portfolios can appreciate in value and help hedge against inflation. Expanding your portfolio can help diversify risk while allowing you to have a sense of control while doing so. Finally, building a real estate investment portfolio offers many tax benefits.
Tax Benefits Of A Real Estate Investment Portfolio
Many tax benefits come with owning and building a rental property portfolio. Most rental home expenses are tax-deductible, and if you save your receipts or document your transactions, you can discount several charges.
As great as a long-term buy and hold property is, it also takes a great amount of work. You need to constantly keep your property occupied, running smoothly, and free of complications. To do this, you need reserves to handle repairs, maintenance, and seasonal upgrades quickly. You also need to put the time in to find the right tenants at the right price. You can have great tenants for five years, but if the next set stops paying, you could have a problem. There are definitely rental property tenants you will want to completely avoid as well. As great as rental properties are when things run smoothly, an eviction can make you forget all of the good.
The bottom line is that even if you don't pay off the mortgage, holding a property for the long term is still a good investment. Nobody knows where the market will be in 10 years, but you can assume you will have built some equity over the past 120 months - all the while receiving tax benefits and cash flow.
Continue To Grow Your Real Estate Portfolio
Now that we have addressed the question of "what is a real estate portfolio," how to launch one, and its various benefits, you may be wondering how to grow your real estate portfolio effectively in the long run. If you have taken away anything from this discussion, it is that a portfolio cannot be acquired overnight. Rather, it is something that is built up strategically over time.
Leverage Your Real Estate Portfolio
An important aspect of learning how to grow your portfolio is learning how to leverage it to pursue new prospects. In short, leverage means using an asset or a resource to your advantage. For example, your portfolio, a collection of assets, can be leveraged to establish your credibility when trying to close new deals or gain additional funding.
Reduce Risk By Diversifying Your Portfolio
Another motivator for growing your portfolio is risk mitigation through diversification. By investing in different types of assets, you avoid "putting all of your eggs in one basket" if any external factors influence your portfolio for the worse. Here are a few alternative investments to help bolster your real estate portfolio:
- Commercial Real Estate: Commercial properties are often thought of as the "next step" after investors complete a few residential deals. The reason for this is because not only do commercial properties lead to higher profit margins, but they are also a great way to diversify.
- Multifamily Properties: Investing in multifamily properties is a great way to bulk up your real estate portfolio. By exploring different markets and larger residential spaces, investors can protect themselves from market factors that may affect the profitability of single-family homes.
- Real Estate Investment Trusts (REITs): REITs are a way for investors to reap the benefits of real estate investing without adding any properties to their portfolios. These trusts refer to companies that purchase income-generating real estate and pay dividends to investors in the company.
- Raw Land: Undeveloped land is an emerging strategy among today's best real estate investors. Investors who purchase raw land can divide the plot for resale, lease it to renters, develop new construction, and even hold on to it while it appreciates.
Costly Mistakes To Avoid
Part of effectively growing your real estate portfolio is knowing what mistakes to avoid. Some of these mistakes include neglecting to diversify your portfolio, ignoring your due diligence, underestimating costs, or failing to recognize when to work with a professional.
Compile Your Assets Using A Real Estate Portfolio
Creating a successful real estate business is often contingent upon an entrepreneur's ability to design and execute efficient systems to achieve economies of scale. In addition, learning how to create the perfect real estate portfolio template can be a great way to showcase your work on your behalf, which can help attract new opportunities, even while you sleep. Diversify your real estate portfolio with several different types of investments. It is common for the market to fluctuate, which can be dangerous if you invest in only one type of real estate.
Utilize Real Estate Analytics
Real estate analytics refers to calculations that analyze the performance of different investment opportunities. Analytics is an important component of any real estate portfolio because they are a measurable tool that can monitor the success of various investments. Real estate analytics are helpful for a variety of reasons. Not only will prospective lenders request these numbers from time to time, but they can also be used to quickly evaluate whether a new property is worth pursuing.
Build A Team
As you build your real estate portfolio, there may come a time when the workload is too much to manage alone. This is a great opportunity to start building a real estate team you can trust. Many investors choose to start by hiring a virtual assistant. Another opportunity to build your team is by hiring an accountant. They will be able to manage your taxes and finances as your business grows. Consider the tasks you struggle with the most in your real estate investing business, and start there when it comes to building a real estate team.
BRRRR Method Vs. Conventional
The BRRRR method stands for: buy, rehab, rent, refinance, repeat. Essentially, you buy an undervalued property, renovate it, and then get an appraisal. With the new, higher property value, you have just increased your equity in the home and can secure a cash-out refinance. During this process, you are also renting out the newly renovated property and earning rental income. You can then use the cash-out refinance to buy the next property and the monthly rental income to cover any remaining costs. The purpose of the BRRRR method is to build up your portfolio and consistently increase your equity.
A conventional mortgage refers to the traditional real estate transaction process. You apply for a mortgage from a lender, agree to the terms of the loan, and then purchase the property. With conventional financing, you would then need to identify another source of funding for your next deal to keep building your portfolio. Overall, there are benefits to both in terms of building a solid real estate portfolio.
Financing Options For Your Real Estate Portfolio
The financing options for your real estate portfolio are seemingly limitless. Ranging from traditional lenders to more creative financial solutions, there is a lot to choose from when searching for new investment opportunities. Traditional financing, hard money lenders, business partnerships, seller financing, home equity, self-directed IRA accounts, SBA loans, and government financing are just a few of the options available.
Measuring The Success Of A Real Estate Portfolio
There are two main ways to measure the success of a real estate portfolio: with an asset manager or through your own calculations. After compiling your portfolio, you can approach an investment management group to begin working with a financial advisor. Many investors will instead opt to manage their portfolios. The key to this approach is adding the right performance metrics and comparing numbers over time. Net cash flow, cash-on-cash returns, economic vacancy rate, and property appreciation are a few key indicators to help you measure and improve your portfolio.
Summary
Understanding the importance of a real estate portfolio is necessary to not only manage and grow long-term wealth but also obtain financing for other future projects. Ultimately, how to start a real estate portfolio comes down to an investor's overall end goal, as the types of assets they obtain will dictate their path to achieving it. Investing in real estate may be the perfect way to achieve your financial goals, and building a rental property portfolio is a great way to start.
