Real Estate Portfolio Guide: Starting and Growing the Right Way
Renters Warehouse Blog
When it comes to long-term investing, the benefits of rental property really can’t be beaten.
Rental property offers cash flow, appreciation, diversification, equity growth –and leverage. Not to mention it serves as a hedge against inflation; all benefits that compound with multiple investments.
However, when it comes to the actual nuts and bolts of investing –many people aren’t sure where to begin. Additionally, 61% of landlords own just one rental property –taking that next step on towards scaling and adding to your portfolio can be a real challenge.
Successful real estate investing, in many ways, requires a business-minded approach. Much like starting your own business, when it comes to real estate investing, it’s important to take the time to create a plan before you start, outlining your goals and objectives before you dive in. It’s also a good idea to establish investment criteria, and implement systems that you can follow that’ll help to keep you on the right track, and moving forward. This approach will also help to keep you from making many common mistakes that landlords often fall victim too, and will give you a way to gauge your progress as well.
With this in mind, let’s take a look at some tips for getting started, and see how you can start investing, and growing your portfolio –the right way.
So how do you start building your real estate portfolio?
Here are some things that you can do ahead of time to ensure that you’re making smart investing decisions.
- Set Goals and Establish Your Investment Criteria
First up, you’ll want to ensure that you start out with clear objectives. Knowing what you’re hoping to accomplish long-term and having a plan for doing so will help you tremendously when it comes to your investment strategy. Start out by determining what your big-picture goals are –early retirement? Financial security? Maybe you’d like to replace what you’re earning at your day job? Many people find it helpful to assign life goals to each of their properties, to help keep them on track. So say you’d like to pay for your child’s education, having a rental that you can use for that purpose is a great way to stay clear on your purpose. This approach will also enable you to ensure that you have enough properties to reach your objectives. You’ll also want to ensure that you establish investment criteria for each of your properties as well. So determine for yourself what type of returns you’d like to generate; 10%? 12%? And then establish how many properties you’ll need to purchase in order to reach your goals.
- Get Yourself Financially Ready
You’ll also want to ensure that you’re in a good place to invest financially. You’ll want to check your credit score. A score of at least 740 is considered very good and will help you to qualify for a better interest rate. You’ll also want to see what your debt-to-income ratio is, the bank will consider this as well before giving you a loan. Keep in mind too, that there are a number of different ways that you can finance investment properties, so make sure you’ve done your research to find the best option for you –before you commit.
- Start Networking
Starting and building your portfolio is a lot easier if you have help, and you’ll want to surround yourself with other professionals who have experience with real estate investing. Networking with property managers, real estate agents, and other investors means that you’ll have people that you can turn to for advice. As a bonus, some of your connections may even be able to alert you to potential real estate deals as they hit the market, giving you the chance to move quickly to secure a bargain.
Growing your portfolio isn’t something that happens overnight. But with the right approach, you can start securing investment properties that meet your criteria and benefiting from higher cash flow and long-term appreciation.
If you’re looking to take that next step here’s a look at a few tips for growing your portfolio now.
One of the best things you can do when growing your portfolio is to diversify your investments to help lower your risk exposure. Instead of investing in one type of real estate, consider diversifying your options by looking to invest in different housing markets. Look for areas that are up and coming, with excellent growth prospects. You’ll want to pay close attention to secondary markets, here’s a look at some that are warming up. Once you’ve found a promising area, be sure to take a look at the Renters Warehouse Research Center to gather key insight on the area, like employment trends and housing data.
- Choose a Strategy
When growing your portfolio, there are a number of different routes you can take. Here’s a look at some of the different methods that investors use when investing.
- Fix and Flip – The fix and flip method is one that has gained popularity over the years thanks to HGTV. The idea is to find a property that’s listed below market value and is in need of repairs or upgrades. Once the repairs have been made, you then sell the property to turn a profit. While this can be a rewarding strategy, it isn’t without its risks. Profit with fixer-uppers is heavily contingent on timing the market very carefully, so you’ll want to ensure that it’s a good time to buy before you dive in.
- The Snowball Method – The snowball method is one that many investors have used –with great success. As the name suggests, it is a slow and steady climb to success. While not without risk, the snowball method is fairly straightforward and predictable. The idea is that you take the profit from one property and roll it into another. You keep rolling, and much like a snowball, your portfolio will grow as well, gathering steam as you go along. Learn more about the snowball strategy.
- The BRRRR Strategy – Buy, Rehab, Rent, Refinance, and Repeat; the BRRRR strategy focuses on securing a property that’s below market value. You then fix it up and rent it out. The income from the rental allows you to pay down the mortgage. From there you refinance your property, take the capital and roll it into your next property. Keep in mind though, that while this approach can be a great way to find properties that are below market value; you’ll want to make sure you don’t make the mistake of underestimating the cost of repairs. Often, repairs can end up costing more than anticipated. If you’re new to rehabbing properties, it may be a better idea to start smaller –with a property that’s in need of fewer repairs. You’ll also want to make sure you add at least 10% to your estimated repairs costs. It’s also a good idea to secure an inspection contingency; meaning that any offer you make is contingent on an inspection. That way you’ll be aware of everything that needs to be done and able to budget for your expenses accurately.
- Crunch the Numbers
Finally, once you have a property in your sights you’ll want to gauge its performance as an investment.
Here’s a look at some numbers you can run:
- The 1% Rule: The 1% rule is a fast way to quickly assess whether a property’s even worth considering in the first place. For this rule, take the initial cost of the property, along with any repairs costs, and calculate 1%. If you’re unable to rent the property for this price, then there’s a good chance that the property wouldn’t be a good investment.
- Cash Flow: Cash flow is the amount that you’ll generate from rental income, after factoring in expenses. This is one of the key components in any investor’s strategy and will show you what type of returns you can expect.
- Cap Rate: The cap rate is the returns that you’d generate if you paid for the property in cash. To calculate your cap rate, find your net income –your income after expenses, and divide it by the property’s cost –the resulting percentage is your cap rate.
Annual net operating income / purchase price = Cap Rate
- Cash-on-Cash Returns: Cash-on-cash returns are your annual (before-tax) cash flow as compared to the total cash invested in the property. If you’re paying all-cash for a property, this would be the same as your cap rate. If you’re financing, use the amount that you invested yourself instead of the total purchase price of the property.
Annual Income / Money Invested = Cash-on-Cash Returns
What does a good cap rate or cash-on-cash returns look like? The answer is –it depends. Take a look at this helpful guide to learn more about what type of returns you’ll want to look for when assessing a property’s profitability.
- Avoid Costly Mistakes
While investing includes a learning curve, it’s important to keep in mind that there are many mistakes that you can avoid by learning from others who have been there before. Some of the bigger mistakes you should look out for include failing to diversify your portfolio, not creating a plan for management, and underestimating the costs of repairs or maintenance costs when running the numbers. See common mistakes that first-time (and even experienced) landlords make.
When it comes to growing your portfolio and creating long-term wealth, slow and steady is often the way to go. With the right approach, you can invest in rentals that meet your criteria –ones that’ll help you to reach your long-term goals, and will be able to start reaping the rewards that come from owning multiple investment properties.
Are you ready to scale your portfolio? Be sure to take a look at our FREE guide: So, You Want to Grow Your Investment Portfolio? Your goal of financial freedom is within your reach!
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