It’s every investor’s dream: to have a large and profitable real estate portfolio. But while many people are able to find a way to get started with real estate investing, for many it can be difficult to take that next step. Many real estate investors today own just one property. In fact, everyday investors are by far the biggest segment of investors, with institutional investors owning just 2% of the available residential market.
Getting started with real estate is one thing, but growing your portfolio is a whole different ball game. It often requires a great deal of capital and a good understanding of leverage. With hard work, diligence, and a solid plan though, you can grow your portfolio, even if you don’t have an extra $1M at your disposal.
Ready to dive in? Here are some tips to help you grow your portfolio.
Set Clear Goals
Before you get started investing or growing your portfolio, it is important to have a plan or a long-term goal in mind. If you don’t have an end goal, then you won’t have anything to aim for. What often happens in this case, is that people invest in a property that “seems right.” But to grow your portfolio, you’ll want to set the bar higher than that. You’ll want to ensure that the first property you buy is a “cash flow monster” one that will produce the type of returns that you’re looking for. Otherwise, you risk tying up your funds into a property that just won’t generate the returns that you need.
Buy Your First Property
Once you have your plan in place, you’ll be able to take that first step. Now is the time to do your research and find a great neighborhood and a property to invest in. Once you have found a potential property, you should be sure to run the numbers to ensure that you’ll be making a profit on it.
Ready to get started? Read: First-Time Income Property Investors, How to Begin for tips on getting started with real estate investing.
Look for Cash Flow-Positive Properties
One great way to grow your real estate portfolio is to invest in cash flow-positive properties. Generating cash flow will help to open up access to funds that will help enable you to buy more, or help to serve as a source of income which can help you to qualify for an additional loan. Instead of your properties costing you money, they are paying for themselves and giving you a profit. Profit that you can put towards a new investment. After all, one property may not give you complete financial freedom, but many properties certainly will.
Look for Value-Add Property
Properties that need some updates or upgrades are often sold at a discounted price, which means that if you know what you are looking for you can find yourself a good deal, add some value, and sell or rent at an elevated price. An increase in value can also help boost your equity, which, if used right, can help you grow your portfolio by allowing you to purchase more properties.
Looking to increase your property value? Read about how far to go here: Renovations: Setting a Budget, and How Far Should You Go
- Diversify
When building your real estate investment portfolio, it’s a good idea not to keep all of your eggs in one basket. Instead, look to diversify. If you own property in multiple housing markets, you’ll be less affected should one of the local markets experience a sudden downturn. If you have everything in one area, you’ll be far more at risk.
Consider Different Methods
You aren’t the first investor to want to grow your real estate portfolio and, as a result, there are a number of different options available to help you grow and expand quickly. Here are a few of the more popular methods available to help you expedite the growing process.
- Snowball Method
If you’ve ever made a snowball then you’ll know how this method works. In real estate terms, you start with one investment, save the income from it, and roll it into another investment. The more you do this, the bigger your snowball (your portfolio) will become.
- BRRRR
The BRRRR method is another great way to get your real estate portfolio growing. BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. It is a great way to start growing your portfolio, especially if you don’t have a lot of cash upfront. Over time, you will build up equity in your home and be able to refinance. This will then give you the money you need to purchase another investment property.
- Fix and Flip
The fix and flip method is one that most investors are already aware of. You buy a property, fix it up, sell it for a profit, and start over again. The general idea is that you will turn a profit when you sell and can use that profit to purchase more properties to either fix and flip or rent. This will then allow you to grow your portfolio. Of course, this method isn’t without risks. It’s wise to try to leave a 30% margin between what you pay for the property and repairs, and what you expect the property’s after repair value (ARV) to be. That way, if anything happens; a sudden downturn in the market, or repairs ending up being more expensive than planned, you’ll be protected.
Use Leverage
Understand and use leverage. This is a vitally important aspect of investing in real estate. Leverage is essentially borrowing funds to use towards purchasing property. By using other people’s money, you have a chance to increase your returns on the property. There are usually two reasons people use leverage for their real estate purchase: they don’t have the cash available to purchase the property themselves, or they wish to put less money into the property to maximize returns. There are a few ways you can go about using leverage. You can secure a conventional or an investment loan. Or, look to use your home’s equity.
Use Home Equity
One way to use leverage is by tapping into existing equity that you have in your home. The equity in your home is the difference between what you owe on your mortgage and how much your home is currently worth. You can take advantage of this in one of two ways:
- Home Equity Loan
A home equity loan is pretty much like it sounds, a loan. It is essentially a second mortgage that allows you to borrow against the value of your home. Most home equity loans come in a one lump sum payment for a specific amount.
- Home Equity Line of Credit (HELOC)
A home equity line of credit, or HELOC, is a line of credit that you can tap into. It works similar to the home equity loan, in that you borrow against the value of your home. Unlike the loan, however, you receive a line of credit much like a credit card that allows you to borrow up to a certain amount.
Your home equity can be a good way to get the ball rolling on investing in multiple properties without having to wait to save up. However, it is important that you understand the fineprint that’s involved with home equity loans, so that you can ensure that you don’t end up overleveraging yourself. The main risk of overleveraging would be if your home were to suddenly dip in value. To help prevent an underwater mortgage it’s a good idea to keep around 20-25% equity as a cushion; something that lenders will usually require you to do anyway.
Looking for more information on leveraging in real estate investments? See: Leveraging Your Home to Buy Rentals
Create a Team
While you might be able to manage one or two properties on your own, the more your portfolio grows, the more outsourcing will start to make sense. If you hope to spend your time seeking out other investment properties and growing your real estate portfolio, then it will be a good idea to start building a team that can help you manage the day-to-day tasks of owning multiple properties.
Here are a few people you should consider adding to your team as your portfolio grows:
- Property Manager – A good property manager can handle all the day-to-day tasks of owning and operating rental properties, as well as help keep you up to date on all the rules of being a landlord.
- Attorney – Having an attorney that you know and trust can help you as you grow your portfolio as well. Not only can they help you write contracts, but they can also help you with all the local laws and regulations as well.
- General Contractor and Tradespeople – A general contractor is an especially important person to have on your team. From minor fixes and repairs to extensive remodels and upgrades, a general contractor that you trust will make your job easier. You’ll also want to have a couple of electricians, HVAC experts, and plumbers on call as well.
- Accountant – An accountant can help keep you on track financially, as well as ensure that you are handling taxes properly. A good accountant is worth their weight in gold, especially if you’re investing out of state. A local accountant can help to alert you to tax laws in the local area that you may be unfamiliar with.
Building a real estate portfolio isn’t something that happens overnight. So don’t get discouraged if it feels like it’s a long way off. You can take steps now to make it happen. By taking the time to ensure that your first property is a cash flowing machine, and then looking to roll the profits into a downpayment for your next property, you’ll be able to get yourself off to a good start, even if you don’t have a spare pile of cash just sitting around.
Wondering how to get the ball rolling for your first property? Consider house hacking; purchasing a duplex with an FHA loan (low down payment), and residing in one side of it while renting the other out.
It isn’t always easy, but with hard work and diligence, you’ll be able to start growing your portfolio too. So do your research ahead of time, set your goals carefully, and then work to put a plan for financing into place.
You don’t need $1M to grow your real estate portfolio. Have a look at our article to see how you can Invest With Limited Funds.
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