Building Your Real Estate Portfolio
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 the 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), for the purpose of earning monetary returns. Although not every real estate portfolio will look the same, the items that are considered part of your portfolio will generally be dependent on a combination of factors such as your objective, time horizon and risk tolerance. When learning how to start a real estate investment portfolio, investors should first consider the expected number of months or years they intend to be investing in order to achieve their desired goal, as well as the risk versus reward approach they aim to take to obtain it. Risk and reward are inherently intertwined with real estate investment, so the risk tolerance will ultimately be decided by an investor’s willingness to lose some–or all–of their original investment in pursuit of their financial goals.
A real estate investment portfolio is exactly what you’d expect: a compilation of assets. Simply put, however, a real estate portfolio is nothing more than a collection of property investments owned by an individual or group. Appropriately dubbed a real estate investment portfolio, these collections represent an investor’s career-long achievements. Metaphorically speaking, portfolios are like a resume that that identify one’s accomplishments, but if you dig deeper they’ll tell you a lot more.
How To Start A Real Estate Portfolio
For real estate investors, understanding how to start a real estate portfolio, as well as why it’s important, is vital to your success. A real estate portfolio will not only serve as your resume of work, but your marketing arsenal to finding and acquiring funding for future deals. 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. Your portfolio can also include your buying philosophy and testimonials from other lenders you’ve worked with — similar to a private money credibility packet — when seeking financing, When building a real estate portfolio from scratch, investors need to pay special attention to the following aspects:
Simply put, what do you want to achieve from your investment assets? Because different investments perform different at any point in time, it’s vital for investors to understand their end goal before choosing assets. Although an entire portfolio does not decline because of one investment, the combination, including risk factors, will ultimately impact your bottom line. That said, the types of real estate investments you have in your portfolio will play a significant role in achieving your goal, as rental properties and multifamily properties aim to achieve passive income, while assets such as wholesaling and rehabs look to accrue short-term gains.
Your real estate portfolio hinges on one simple aspect: the numbers. These numbers are the foundation to any real estate investment, as well as the elements of truth. What I mean is, these numbers provide transparency to your deals–revealing whether or not they’re good or bad. Your portfolio should be comprised of each of your investment asset broken down by the various numbers, such as purchase price, transaction/holding cost, profit, repair cost, and sale price. The next aspect 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, whether 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 not only provide lenders with a snapshot of the associated costs of each project, but how you leverage that money to earn a profit. As an investor, make sure to provide a summary of the repairs and improvements you made to the property, including the After Repair Value for future projects. Your real estate portfolio needs to be accurate, up to date, and comprised of all financial figures pertaining to your real estate investment.
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. Although a complicated task, real estate investors will need to select a combination of assets that not only have the highest probability of meet their goals, but also doing so at the level of risk they desire. As mentioned earlier, 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. That said, the more risk you’re willing to take on, the more aggressive your real estate portfolio will be, and vice versa.
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 its 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 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 as well as 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 a myriad of tax benefits, discussed in the section below.
Tax Benefits Of A Real Estate Investment Portfolio
There are many tax benefits that 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 a number of charges.
In general, you can claim the deductions for the year in which you paid for these common – but not limited to – rental property expenses:
Cleaning and maintenance
Commissions paid to rental agents
Home owner association (HOA fees)/condo dues
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 quickly handle repairs, maintenance and seasonal upgrades. 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.
If you take a traditional 30 year mortgage out, it will take some time to own the house free and clear. Most investors are not willing to wait that long or have their money tied up for that period of time. There are things you can do to accelerate principal reduction and own the property quicker, but even those will only wipe off 5-7 years. 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. Your portfolio, a collection of assets, can be leveraged to establish your credibility when you are 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. No matter what type of investing activity you choose, there is always some level of risk present. For example, if you invest into the stock market and the market crashes, you can lose on that investment. Although real estate is seen as one of the more stable investment activities available, no one is immune to risk exposure. By investing in different types of assets you avoid “putting all of your eggs in one basket” in case 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. Commercial properties include office buildings, retail space, and even industrial buildings.
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 who purchase income-generating real estate, and pay dividends to investors in the company. This is a great opportunity for investors looking to expand their reach, while still sticking to real estate.
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. The reason raw land can be used to diversify is because it offers investing a chance to switch gears into a new exit strategy (and in many cases, a new market).
Costly Mistakes To Avoid
Part of effectively growing your real estate portfolio is knowing what mistakes to avoid – mistakes so costly that they can diminish your portfolio. 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. Get the full discussion here.
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, so that they can achieve economies of scale. This concept can and should also be applied when growing a real estate portfolio, so that once you launch and cultivate it, it starts working for you. 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.
Understanding the importance of a real estate portfolio is necessary to not only manage and grow long-term wealth, including your personal budget, but 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.
You won’t hear talk about long-term investing on reality TV shows, but it is still a great way to generate wealth. Think about where you want to be financially 10 years from now. What you may find is that investing in real estate may be the perfect way to get there. And building a rental property portfolio is a great way to start.
Have you had any success building a real estate portfolio? Have you always wanted to build one, but didn’t know where to start? Feel free to share your questions and concerns in the comments below.