Understanding The Real Estate Portfolio: Learn How To Build Your Real Estate Resume
Melissa Brock6-minute read
April 19, 2021
Have you ever thought of putting together a real estate portfolio? The concept might seem foreign to you, even if you've invested in real estate for a long time. Think of your portfolio as a way to track your real estate investing resume once you put together an extensive list of investments.
Let's go over some pointers and how to display your full real estate portfolio. Building a strong portfolio lays the foundation for understanding your unique overall approach to real estate investment and portfolios of property.
What Is A Real Estate Portfolio?
Put simply, a real estate portfolio is a collection of real estate investment assets and/or a comprehensive document that details your past and present real estate investment assets. You can think of it as very similar to a resume. Your portfolio can include rental properties, flipped homes and Real Estate Investment Trusts (REITs). “Portfolio” is not a legal term, so you can use the word flexibly with your contacts, clients and business partners.
Building Your Real Estate Portfolio: Tips And Hints
Ready to start building? Take a look at the following tips and hints to build your real estate portfolio.
You don't want to try for anything too ambitious when you first get started building your real estate portfolio. When you just start out, you have a lot to learn, including how to increase a property’s value, how to manage tenants and more.
Make sure you know the ins and outs of what to know before buying an investment property.
Consider Exponential Rather Than Linear Increases To Your Portfolio
What is exponential growth? Exponential growth refers to a pattern of data that shows greater increases over time. For example, let's say you invest in coastal markets such as in California, New York, New Jersey and Florida. Housing price gains may help you realize high rates of appreciation in those areas – but housing busts can occur more often in these areas as well.
In contrast, linear markets see flatter growth over time. These markets show smooth, steady growth and do not see major spikes or declines. Booms and busts virtually never occur.
Many experts encourage exponential increases because they can help increase profits dramatically. Devise your investment strategy around what works best for your particular situation.
Learn Your Local Market
Knowing your local market gives you a real estate edge. Unlike investing in an area you don't know well, you’re probably aware of what's going on in your community – both good and bad. For example, you know when a new highway will route behind a particular neighborhood. You know where a new, undesirable building (like a prison) will go. You also know the good schools in your area or whether a particular neighborhood has started to pick up in popularity.
Choosing to get to know your local market gives you more hands-on opportunities to manage a property.
When you live far away, you don't always know what's going on in a rental home and neighborhood. For example, if you live in Seattle and decide to buy a rental property in New York, you don't have intimate knowledge of that area. Stick to your local market (the one you know like the back of your hand!) for opportunities.
Finally, keeping tabs on your local market helps you find deals and helps you understand the true nature of a given offer.
Take Detailed Notes
Taking detailed notes helps you create your resume and also helps you learn from your successes and mistakes. You may want to approach this process like a scientist. Once you accumulate a particular real estate investment, evaluate how it works (or doesn't work). In that way, you can home in on your best real estate opportunities and only make sound decisions moving forward.
Research Your Financing Options
Financing multiple investment properties presents many challenges, and you need to know what types of financing options exist as you work to carve your own real estate niche. Take a look at these options. Will one of them (or a combination) work best for you?
- Hard money loans: A hard money loan, a type of short-term loan, comes from a hard money lender instead of a traditional lender. Hard money loans involve individuals or private companies that accept the property itself or another asset as collateral. You may consider getting a hard money loan if you prefer less traditional means of getting a loan or a lender denies your loan or mortgage application. One example of a hard money lender includes fix-and-flip loans, in which you get your profits back in a lump sum after you sell a home. Some real estate crowdfunding platforms offer fix-and-flip loans.
- Conventional bank loans: A conventional mortgage conforms to guidelines set by Fannie Mae or Freddie Mac. The federal government does not back these types of loans.
Live And Breathe Numbers, And Understand The 1% Rule
You must know your numbers. Track every expense and identify which numbers rise to the top – and know the numbers you need to work on. Know the 1% rule, a rule of thumb for measuring the price of the investment property against the gross income it generates. You can use it to quickly determine how the property should generate cash to make you money or help you determine what you should charge in monthly rent.
Also, make sure you know the financials of the following items:
- Economic occupancy: Economic occupancy refers to the percentage of potential gross income that a property achieves during a given period. For example, let's say the total potential rental revenue for a collection of properties in January costs $100,000 but you only earn $43,000. In that case, the economic occupancy for that month equals 43%.
- Return on investment: You want to measure all returns on your investments in real estate. Define your investment priorities and goals. Will you invest for cash flow or for appreciation? What return on investment will you feel comfortable with? Many investors aim to beat stock market returns, which have hovered around 10% over the last century.
- Improvement costs: What improvements do you need to make to the property? Improvements should add to the value of the property or improve its usefulness for tenants and should adhere to the 1% rule.
- Monthly operating costs How much does it cost to maintain the property? Calculate your expenses versus your income. Let's say you collect $1,200 per month in rent and your expenses amount to $200 per month. You can use these amounts to help you measure your results against the 1% rule.
Know The Difference Between The BRRRR Method And The Conventional Path
You may already understand how a conventional path to purchasing a home works – but you may want to consider the Buy, Rehab, Rent, Refinance, Repeat (BRRRR) method instead. With the conventional path, you get a traditional mortgage or pay cash and rent out the investment property in exchange for rental income. The rental income then pays your mortgage and for any extra income.
On the other hand, the BRRRR method involves flipping distressed property, renting it out and then refinancing through a cash-out refinance to fund more rental property investments. It involves a constant stream of turning out more rental properties.
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Using A Real Estate Portfolio As A Resume
Think of your real estate portfolio as a way to sell yourself, like you would in a job interview. View it as would use your resume in a job interview. You can present your real estate portfolio to a potential lender, a potential seller or a potential investment partner. It neatly summarizes your accomplishments and property investments so you can showcase them whenever the right opportunities come your way.
Should You Diversify A Real Estate Portfolio?
Experts always suggest diversifying your financial investments or asset classes. For example, a financial advisor may encourage you to invest more investments than just stocks – a financial advisor might encourage you to invest in stocks, bonds and mutual funds so you don't put all your eggs in one (risky) basket.
You might think you can't diversify your real estate portfolio, but you actually can. In fact, it might work in your favor, just like it might with a standard financial portfolio.
How would you diversify with real estate? You might consider investing in multiple types of real estate, such as vacation rental properties, fix-and-flip properties, raw land, multifamily properties, commercial properties and REITs.
Consider all your options before you choose – you don't want to pigeonhole yourself into one investment when multiple options might boost your portfolio even more.
The Bottom Line
When you put together your collection of real estate investment assets or a comprehensive document that details your past and present real estate investment assets, you essentially put together a real estate resume.
Building a portfolio requires careful planning and research at every stage of the process and also requires constant reflection and analysis.
Take a look at all topics related to real estate investors in the Rocket Mortgage® Learning Center.
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