A real estate portfolio is a collection of diverse real estate investments. It is often a part of your overall collection of assets and investments: stocks, bonds, mutual funds, crypto, cash, etc. A diversified investment portfolio helps you minimize risk while maximizing returns.
A real estate portfolio will usually include assets from different asset classes. That can be a combination of residential and commercial real estate. For instance, you may build a portfolio of single-family rentals, small multifamily buildings, and commercial properties.
Blanket Homes, real-estate expertise, explains the primary objective for building a real estate portfolio is to make it easier to reach your financial goals by creating a collection of cash-flowing properties. A diverse property portfolio also shields you from stock market volatility and acts as a hedge against inflation.
How do you build a portfolio of property investments? This seven-step plan is what you need to do it.
7 Simple Steps to Build a Real Estate Portfolio
1. Educate yourself
Unless you are already investing in properties, the first thing is to educate yourself on the basics of real estate investing. Familiarize yourself with the various investment property types, including their pros and cons. You want to understand different real estate investing strategies. You should sign up for a real estate investment course or get a mentor to fast-track this process.
2. Define your goals
Clarity around your goals makes it easy to find a strategy consistent with your objectives: short-term profits, long-term appreciation, or both. With clearly defined goals, it is easier to measure progress. A written real estate investment plan is the best way to stay on top of your goals because it captures every aspect of your investment plan in one easy-to-read document.
3. Create your investment budget
To invest in real estate, you must have enough money to pay a property down. But there are also real estate investing options that only require you to have a little money. How much money do you need to get started? How much money can you save in the next two years?
4. Choose your investment strategy
The right real estate investment strategy depends on your goals, time, level of expertise, budget, risk tolerance, and how involved you want to be in your investments. Common real estate investment strategies include house flipping, buy-and-hold, and investing in REITs. You may also have to choose between single-family and multifamily homes or commercial buildings.
5. Know what makes a good investment location
Location is the most essential factor in the success of an investment property. You are better off with an average property in a great location than the best property in a wrong location. Understand the parameters for measuring the viability of a location: jobs, school districts, crime rate, population, taxes, transportation, etc.
6. Buy your property
On average, you must have around 25% of the purchase price of a property as your down payment before you can buy it. When investing in properties, look for a home below its market value in a location with a substantial population and job growth. You also want to look at the cash flow potential of that property.
7. Gradually scale up your portfolio
The easiest way to scale your real estate investment portfolio is to use the snowball method. The snowball method lets you build momentum slowly; you gain the ability to add new properties within ever shorter timeframes. With this method, you use the cash flow from one property to finance the down payment for the next one.
To use the snowball method, your first investment property must be cash flow positive from the outset. If the home generates an annual cash flow of $7,000, for instance, in five years, you can save $35,000 to use as a down payment for the next property. You may also add money earned from your day job.
Furthermore, you can refinance that first property when its value grows above a predetermined threshold. You can then use the money from the loan to make the down payment on an even bigger property. Repeat this entire process several times until you have built a substantial portfolio.
Conclusion
There is an additional step you need to make these seven steps work. Real estate investing is a team sport, and the quality of the people you surround yourself with determines the speed to reach your goals. Who should be on your real estate investment team?
At the minimum, you need a competent tax accountant, an attorney with experience in real estate, a trusted handyman, and an honest estate agent. Most importantly, you need a property manager to oversee the day-to-day operations of your rentals.
Lastly, you want to find a community of real estate investors who can provide inspiration and education on your journey.
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