Is it necessary for real estate investors to learn how to construct a real estate portfolio?
There are many ways to invest in real estate, with options to suit everyone. The first rule for those looking to accumulate long-term wealth by growing one investment property into several 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 in order 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. Your real estate portfolio will likely depend on your investment goals, how long you plan to invest and how much risk you are willing to take on. When deciding how to start a real estate investment portfolio, investors should consider how long they plan to invest and what kind of risk they are willing to take to reach their goals. The amount of risk an investor is willing to take on in order to make a profit is directly related to how much they are willing to lose.
A real estate investment portfolio is a collection of investments in property. A real estate portfolio is simply a collection of property investments owned by an individual or group. An investment portfolio is a collection of investments that an investor holds. It represents the investor’s career-long achievements. Think of a portfolio as a resume on steroids. Not only will it list your accomplishments, but it will also give a more in-depth look at what you’re capable of.
If you’re thinking about starting a real estate portfolio, there are a few things you should know. Here are some of the key components of building a successful real estate investment portfolio:
How To Start A Real Estate Portfolio
As a real estate investor, it is important to understand how to start a real estate portfolio, as well as why it is important to do so. Having a real estate portfolio can help you diversify your investments and improve your chances of success. A real estate portfolio can help you acquire funding for future deals by showing your past work experience.
If you want to secure private funding for your real estate deals, you need to have compelling marketing materials that show potential lenders the opportunity to earn a high rate of return.
Your portfolio should show your investment goals and strategies, the deals you have completed and own, and your success/fail rate. Your portfolio for seeking financing can also include your buying philosophy and testimonials from other lenders you’ve worked with, similar to a private money credibility packet. When building a real estate portfolio from scratch, investors need to pay special attention to the following aspects:
Your Objective
What do you want your investment assets to achieve? Investors need to know their goals before choosing what to invest in. One investment cannot make an entire portfolio decline, but a combination of investments, including risk factors, will affect your bottom line. While the types of real estate investments in your portfolio are important, rental properties and multifamily properties are more likely to provide passive income, while assets such as wholesaling and rehabs are more likely to provide short-term gains.
Asset Allocation
Asset allocation is a critical part of starting a real estate portfolio. Determining the right asset allocation for your investment goals is important for investors. Real estate investors need to select a combination of assets that are most likely to help them achieve their goals, while also staying at the level of risk they are comfortable with.
The amount of money you invest in each type of asset will depend on your overall strategy, as well as how much risk you’re willing to take on. Looking for greater returns? People who want to make a lot of money will need to take risks with their investments, while people who just want to make a steady income will play it safe. The more risk you’re willing to take on, the more aggressive your real estate portfolio will be, and the less risk you’re willing to take on, the less aggressive your real estate portfolio will be.
Management
The last thing to consider when learning how to start a real estate portfolio is management. Whether to hire a property management firm or become the landlord themselves is a decision investors will need to make when holding onto properties. This is something that lenders will want answers to in order to determine if it will impact your bottom line. It is important to have a clear understanding of how your real estate investments are being managed, as well as the additional costs associated with this management.
Benefits Of Building A Real Estate Investment Portfolio
Building a real estate portfolio can be a great way to grow your wealth, even if you have different financial goals. There are many types of real estate investments that can provide a steady passive income. Rental properties can generate passive income that can be used to pay off the mortgage debt used to finance the property. Over time, properties that you add to your portfolio can become more valuable and help to offset inflation. Building up a portfolio that contains a variety of assets can help spread out the risk, while still giving you a feeling of control. Several tax benefits are associated with building a real estate investment portfolio.
Tax Benefits Of A Real Estate Investment Portfolio
There are many tax benefits that come with owning and building a rental property portfolio. You can deduct many rental home expenses on your taxes, and if you keep your receipts or documentation of your transactions, you can reduce the amount of taxes you have to pay.
In general, you can claim the deductions for the year in which you paid for these common – but not limited to – rental property expenses:
- Advertising
- Cleaning and maintenance
- Commissions paid to rental agents
- Homeowner association (HOA fees)/condo dues
- Insurance premiums
- Legal fees
- Mortgage interest
- Taxes
- Utilities
While a buy-and-hold property can be a great investment, it can also require a lot of work. To keep your property running smoothly, you need to constantly occupy it and free it of complications. You need to have extra resources available to deal with repairs, upkeep, and periodic improvements quickly. In order to find the right tenants at the right price, you need to put in the time. If you have great tenants for five years, the next set could have a problem if they stop paying. There are certain types of tenants you should avoid renting to. Evicting a tenant can be a stressful and difficult experience.
If you take out a 30-year mortgage, it will take a while to own your house outright. Many investors are not okay with waiting a long time or having their money inaccessible for a while. There are things you can do to reduce the amount of time it takes to pay off your mortgage, but even those will only save you 5 to 7 years. The bottom line is that even if you do not pay off your mortgage, holding a property for a long time is still a good investment. Assuming you have built some equity over the past 120 months, you can receive tax benefits and cash flow; however, it is unknown where the market will be in 10 years.
Continue To Grow Your Real Estate Portfolio
Now that we have discussed what a real estate portfolio is and how to launch one, you may be wondering how to effectively grow your portfolio in the long run. The most important thing to take away from this discussion is that a portfolio cannot be acquired overnight. It takes time to develop something.
Leverage Your Real Estate Portfolio
An important aspect of learning how to grow your portfolio is learning how to use it to pursue new prospects. Using an asset or resource to your advantage. For example, your portfolio of assets can help you establish credibility when trying to close new deals or gain additional funding.
Reduce Risk By Diversifying Your Portfolio
Another reason to grow your investment portfolio is to reduce risk through diversification. There is always some level of risk present in any type of investment activity. For instance, if you invest in the stock market and it tanks, you can lose money. Real estate may be seen as a stable investment, but it is not immune to risk exposure. You can minimize the risk to your investment portfolio by investing in a variety of assets. This way, if any external factors cause the value of one type of asset to go down, the other types of assets you own may not be affected. Here are a few alternative investments to help bolster your real estate portfolio:
- After a few residential deals, commercial properties are often thought of as the “next step” for investors. The reason for this is that commercial properties lead to higher profit margins and are a great way to diversify. Commercial properties are buildings that are used for business purposes, such as office buildings, retail space, and industrial buildings.
- If you’re looking to add more real estate to your portfolio, multifamily properties are a great option. They can provide a steadier income than other types of properties, and are a good way to diversify your portfolio. By investing in different markets and larger residential spaces, investors can reduce their risk from market factors that may lower the profitability of single-family homes.
- REITs are a way for investors to make money from real estate without actually owning or managing any property. The trusts are companies that buy income-producing real estate and pay dividends to investors who have ownership in the company. An excellent chance for investors seeking to enlarge their foothold while continuing to stay within the realm of real estate.
- Investors are increasingly interested in undeveloped land as a real estate strategy. Investors who purchase raw land can resell it in smaller plots, lease it out, or build on it themselves. They may also choose to keep it as an investment, letting it appreciate in value over time. Investing in raw land can be a way to diversify because it can offer investors a new exit strategy and, in many cases, a new market.
Costly Mistakes To Avoid
To effectively grow your real estate portfolio, avoid making costly mistakes that can diminish it. If you want to avoid making investment mistakes, you should diversify your portfolio, do your due diligence, estimate costs accurately, and recognize when it’s time to work with a professional. Get the full discussion here.
Compile Your Assets Using A Real Estate Portfolio
An entrepreneur’s success in the real estate business is often dependent on their ability to create and carry out efficient systems that allow for economic growth. This concept can be applied to real estate portfolios so that they start working for you once you have launched and cultivated them. If you want to be successful in the real estate industry, it’s important to learn how to create an impressive portfolio. Having a well-designed portfolio can help you attract new business opportunities, even when you’re not actively looking for them.
It is important to have a variety of different types of investments in your real estate portfolio in order to minimize risk. The market is constantly changing, which can pose a risk if you only invest in one type of real estate. A diversified portfolio of real estate investments can provide greater security than relying on a single property. If the market falls, you can still count on income from your other investments. There are many different options when it comes to investing. You can invest in different locations, different asset classes, or REITs.
Utilize Real Estate Analytics
Real estate analytics is a process by which data is gathered and analyzed in order to improve investment decision-making.
Real estate analytics are calculations that are used to analyze the performance of different investment opportunities. Any real estate portfolio should include analytics in order to have a measurable tool to monitor the success of various investments. There are several different types of analytics that can be used to evaluate investment properties. Some of the more common ones are cap rate, cash flow, rate of return, after repair value, and even loan repayment schedules. A real estate calculator can be a helpful tool for investors who are trying to quickly determine important numbers associated with an investment property. You should keep track of your real estate investment calculations along with your real estate portfolio.
Analytics pertaining to real estate can be useful for a multitude of reasons. Prospective lenders request these numbers from time to time can quickly evaluate whether a new property is worth pursuing. Creating a spreadsheet to track your numbers is a good system. You can also include specific metrics for investments that you didn’t land. These might help when analyzing comparable properties. The most important thing is to find a system that you can easily use.
Build A Team
There may come a time when your real estate portfolio is too much to manage alone and you will need to hire someone to help you. Now is an excellent time to begin forming a reliable real estate team. Many investors are hesitant to bring new people into the business, but adding new team members can help you in the long run. It is important to find people who share your goals and work hard to achieve them. Start by delegating tasks slowly so that people can get used to their new responsibilities.
Many investors choose to start their business venture by hiring a virtual assistant. This is the perfect chance to give someone else the responsibility of managing your website or tracking the results of your marketing campaign so that you can free up some of your time. You can build your team by hiring an accountant. As your business grows, they will be able to manage your taxes and finances. Being organized with your bookkeeping can help a lot during tax season by ensuring that nothing is forgotten. You should start building your real estate team by considering the tasks you struggle with the most in your real estate investing business.
The Slow Way Toward Building Wealth
Many beginner real estate investors buy rental properties slowly and methodically. First, they buy one house. First, buy one house. A few years after that, buy another one. They are growing their portfolio by adding assets gradually, one after the other.
Nothing wrong with that. It’s just slow.
If you want to grow quickly, you need to grow a lot.
And that’s where the stack comes in.
How “the stack” grows wealth exponentially
Let’s say you buy one house this year. That’s it. Just one house.
The first transaction is a lot of work, but it doesn’t mean freedom. But it does provide knowledge and experience.
Once you’ve gathered the necessary knowledge and experience, as well as some equity, wait a full year before buying two units. Maybe a duplex, maybe two single-family houses.
Wondering where the money came from? I will explain that in a moment.
The next year, can you double down again? After all, you already own three units. What’s another four? After gaining experience and knowledge from their last deal, the individual buys a fourplex or a pair of duplexes. If you were to double your investment the following year, you would then have a total of 8 units. Then 16… then 32.
You gain experience and knowledge each year and become more efficient in your systems. Additionally, your expanded network will make it easier to finance your properties.
So, here we are in year six. You’ve got 63 rental units with $10,000 in monthly cash flow. Additionally, your mortgage payments have helped you build up equity in your home, which has increased in value an average of two percent per year. If you are needing quick cash or just wanting to slim down your portfolio in a few years, selling may be the best option for you. No problem. You’ve got plenty of options to sell.
What if you double again?
Stacking even faster in rental real estate
If you wanted to increase your purchases, you could double them each year. As you increase the number of rental units you own, you will eventually reach a point at which your rental income is $10,000+ per month.
If you have an exponential growth rate, you can increase your investment portfolio quickly. You can’t get to hundreds or thousands of units by purchasing one unit at a time. They grow exponentially. You keep your risk small by starting small. As one’s knowledge and experience grow, so does their portfolio. You aren’t taking on a 100-unit property as your first investment.
If you’re at the top of your stacking game, you’ll need to take a few more things into consideration. Most notably: How will you manage all these units? This is when you should start thinking about whether you should get a property manager. Although they will require a smaller portion of your monthly earnings, you will be given back a vast amount of time. Some people are not suited for being a full-time landlord. Whoever you are, there is no shame in needing a property manager. That is why they exist!
If you want to succeed in real estate investing, it’s a good idea to associate with other investors. They can help you to learn and grow in the industry faster. The BiggerPockets Forums are a great place to find investors in your area and to get answers to your tough questions.
The importance of diversification
At this point, you have invested a lot of money in real estate. We think that real estate is a good industry for building wealth. But that doesn’t mean it’s not important to diversify. What does that mean? It means protecting yourself from an economic downturn by investing in different types of investments.
Do you have an interest in investing your money in stocks, cryptocurrency, or other forms of investment? That’s okay. You don’t need to get rid of your real estate investments to have a diverse portfolio. An investment portfolio in real estate can be very diverse by making good choices when buying.
Some people might invest in retail, mobile homes, commercial, or even real estate investment trusts (REITs). Or maybe you really love investing in residential—that’s okay! Consider looking at different asset classes. It is beneficial to have your units located in different class neighborhoods as a safety measure for your investments.
How to finance your stack
What about funding?
You may initially consider obtaining a traditional mortgage for your first investment property. However, you will quickly discover that conventional loans are not an ideal method. For one, they’re more cumbersome. And second: They’re slower. If you’re looking to expand your business rapidly, you might want to consider taking out a loan from a hard money or private lender. These types of lenders can help you move and close deals quickly. That speed is essential to the stack.
One investing strategy, which works great with a stack of cash, is called BRRRR investing.
It’s where you:
- Buy a fixer-upper (with short-term money, like a hard money loan, line of credit, or partner)
- Rehab it by making any essential repairs—and making it look oh so cute!
- Rent it out (to great tenants who are thrilled to have a remodeled home—and pay top dollar!), and then
- Refinance it and leverage all the money you put into it (which gives you your cashback, so you can then…)
- Repeat the process again and again. Each time, you add more and more passive income to your net worth.
