For real estate investors, understanding how to build a real estate portfolio is vital to their success. A real estate investment portfolio is exactly what you'd expect: a collection of different investment assets that are held and managed to achieve a financial goal. You can say that portfolios are like resumes that identify a real estate investor's accomplishments, but if you dig deeper, they'll tell you a lot more. For beginner investors interested in getting into real estate investing, the following highlights the 7 steps to building a real estate portfolio from scratch!
If you want to become a truly successful real estate investor, you need to learn everything you can about every aspect of the industry. So, the first step is to study the different aspects of investing in real estate. This includes knowing how to do your due diligence, the steps of buying a rental property, the drivers of property price growth, and the housing market trends that affect your investment.
Furthermore, every real estate investor needs to know how to find and analyze investment opportunities. After all, you should only buy the best investment properties that will yield profits and allow you to keep growing your real estate portfolio. If you don't know what cap rate, cash on cash return, or rate of return mean, it's time to start learning! Head over to our real estate investment blog to immerse yourself in real estate and understand every aspect of the game.
Real estate investing is about making money and, therefore, you should treat it like a business. Building a real estate investment portfolio requires planning your 4th and 5th purchase while you're still on your 1st. Therefore, you need to establish a business plan to show you the way and keep you on track to succeed. Moreover, having a business plan enables you to factor in unforeseen scenarios you may experience as a real estate investor. This plan should include:
What are your goals and objectives in building your real estate portfolio? Are you looking to make passive income or to be an active investor? Are you focused on generating cash flow or long-term appreciation? How many investment properties do you plan to buy until you reach financial freedom? You need to have clear answers to these questions and have SMART goals (Specific, Measurable, Achievable, Realistic, and Timely). Goals guide real estate investors in their decision-making and help them to monitor their achievements.
As a real estate investor, you need to know how you will finance your purchases. Do you have enough money saved for a down payment to get a mortgage loan? Did you consider other investment property financing methods like hard money or private money lenders? Your real estate portfolio also needs to include improvement costs as well as monthly operating expenses. Finally, you should include your overall financial goals in your financial plan to make sure your property investments will deliver those.
The next section of a real estate business plan includes a strategy to reach your financial goals. In other words: How will you turn an investment property into profits? There are plenty of ways to make money in real estate and knowing which investment strategy is best for you will help in maintaining your focus and moving forward. For example, there's the buy-and-hold strategy, fix-and-flip strategy, buying rental properties, and wholesaling among others. Understanding these different investment strategies helps you design your path and move past your first investment property to grow your real estate portfolio relatively smoothly.
For more details, read: Developing a Real Estate Investing Business Plan for Beginner Investors
After you've armed yourself with real estate education and a business plan, you can now move on and buy your first investment property. In this step, you need to remember that your first property's performance is vital to the success of your real estate portfolio from the very beginning and a key to unlocking more opportunity later. Choosing wisely and buying the right rental property makes buying a second property sooner possible.
Once you've decided on your investment strategy, you can start looking at what properties are available on the market for sale and where you want to invest. You can find the best investment properties in your city/cities of choice through our Property Finder. This investment tool uses filters to set your criteria and makes it much easier to find a profitable property quickly.
Do you have a free Mashvisor account? Use our Property Finder to find lucrative investment properties that match your criteria in a matter of minutes!
But first, here are a few tips for beginner real estate investors before buying a rental property:
1.Make sure you're buying in the right location by conducting a real estate market analysis
2.Start small - maybe a single family house or a small multifamily apartment
3.Budget for all the costs that come with owning an investment property like mortgage payments, management fees, home insurance, and vacancies
4.Don't make emotional decisions! Focus on building a real estate investment portfolio of positive cash flowing properties
To buy the first property for your real estate portfolio with confidence, read our 6-Step Guide: How to Buy Your First Investment Property in 2019.
The success of building a real estate investment portfolio from scratch depends on one simple aspect: the calculations. Rental income, cash flow, cap rate, cash on cash return, and more are all real estate data and metrics that, as mentioned, you should be familiar with and know how to calculate. These calculations are the foundation of any real estate investment as they'll reveal whether or not it's a good or bad one. If you don't know how to do the math, however, you'll need a real estate investment calculator to do that for you. In fact, this investment tool is a must for any investor looking to build a real estate portfolio!
Cash is the fuel that keeps your real estate investment running. The more accessibility you have to cash, the greater your ability to act quickly when new investment opportunities surface. There are a few ways to get cash from your first property to start acquiring more.
This method has worked for many investors for building a real estate portfolio from scratch and steadily over time. Here's how this works: you take the cash flow that your rental property generates and use it to accumulate more rental properties and increase your wealth. For example, say that your rental property generates $500 in monthly cash flow. This gives you $6,000 of additional income annually. Now, say you want to buy a new property for a $25,000 down payment. If you keep saving cash flow, it'll take you four years to buy the new property for real estate investing. Now you'll have $1,000 in monthly cash flow ($500 from each property). With that, you can buy your third property in two years, rather than four, and so on.
When real estate investors sell properties, they pay some hefty capital gains taxes. This takes a portion of your profits that could go into buying another property. However, you can avoid paying this tax if you do a 1031 exchange. Following this strategy, you'll have to reinvest all of the proceeds in a new investment property or a portfolio of properties of equal or higher value. So basically, the 1031 exchange allows you to build a real estate investment portfolio by trading one property for another without paying real estate taxes!
BRRRR stands for Buy, Rehab, Rent, Refinance, and Repeat. Basically, you purchase your first investment property below market value and rehab it. The property is then rented out to generate rental income that enables you to pay the mortgage, earn profits, and build up equity over time. Then, you refinance the rental property to get your original capital back and buy a second property. As the last R suggests, you can repeat the process to buy multiple properties and build a real estate portfolio from scratch!
For more details, read: BRRRR Strategy: The Ultimate Guide for Real Estate Investors
As you start accumulating more investment properties, management becomes an important factor to account for. To succeed in real estate investing, you need to ensure that your investment portfolio is being cared for. You need to build a team of professionals in order to not make management an issue that may affect your profits. This allows you to manage your real estate portfolio while continuing to grow.
So, start outsourcing tasks where it makes sense. For example, hire a property management company to take over day-to-day operational tasks. Find a great CPA to help you when it comes to real estate taxes. Use Mashvisor to quickly find and analyze new investment opportunities. Have a home inspector who'll examine investment properties for any defects or issues that may cause problems. Farming out tasks and utilizing new technology will keep your income more passive than if you were trying to do everything yourself.
As with any investment, putting all of your eggs in one basket comes with a risk. The housing market fluctuates, and if all of your investment properties are of one type, you'll get a hard hit if the market drops. On the other hand, if you diversify your portfolio, your high-performing investments will cover you if the market drops. Real estate investors can diversify by:
1.Investing in Different Locations: Let's say you live in Orlando, FL and you know that the housing market is hot, so you buy a single-family home rental and start making money. To diversify your real estate portfolio, plan for your next purchase to be in Tampa, for example, as it's another profitable housing market.
2.Investing in Different Asset Class: The real estate market doesn't always move as a whole. Sometimes, the entire market goes up or down, but other times, only a single asset class is impacted by a change. This is why it's important to diversify by asset class. For example, instead of investing in just single-family home rentals, diversify by buying a multifamily apartment or investing in retail real estate, for example.
3.Investing in REITs: REITs are companies that pool money from investors to buy and finance large real estate investments. Investing in REITs gives you access to types of real estate that you may not have access to individually. This is also a great way to invest for passive income with minimal risks and responsibilities.