Real Estate Portfolio: What Is It And How Do You Build One?
Melissa Brock8-minute read
November 30, 2022
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.
How To Build A Real Estate Portfolio: Tips And Hints
Ready to start? Take a look at the following tips and hints to building 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.
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. When you deal with an area that’s far away, you don't always know what's happening to a rental home or the neighborhood it’s in. 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 market and could miss important details about the home and the surrounding environment. Those details could make or break a property.
But in an area you know well, you’re more likely to be involved and aware of your community – and understand where the opportunities and liabilities are. Like finding out which neighborhood a new highway will route behind. Or, like knowing where a new, undesirable building (like a prison) will go. You also know about good schools in your area or whether a particular neighborhood has started to pick up in popularity.
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. Try approachingthis 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 the home sells. 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.
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 is $100,000 but you only earn $43,000. In that case, the economic occupancy for that month equals 43%.
- Return on investment: Measure all returns on your investments (ROI) 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? Renovations 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 Conventional Loans
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.
Real Estate Portfolio Pros And Cons
Creating a real estate portfolio and investing in real estate has its advantages and disadvantages. Let’s go through both so you have a better idea if you should start real estate investing.
Pros Of Investing In Real Estate
Creating a real estate portfolio is beneficial because you will showcase your investments. There are many other reasons why you should start investing in real estate though, such as:
- Passive income: In certain types of real estate investments, you’re able to create a passive income. You essentially watch your cash flow grow while not being part of the whole nitty gritty process.
- Tax benefits: When you invest in real estate, you receive certain tax benefits, which is why investors like to go this route.
- Diversification: By diversifying your real estate portfolio, you’ll showcase that you like to invest in multiple types of properties.
- Builds equity: If you invest in a house, make renovations and boost the value of the home, you’ll see the ROI and your equity will continue to build.
Cons Of Investing In Real Estate
Although you’ll get many benefits through investing in real estate, make sure you understand the downsides. Real estate investing takes time and effort. Let’s take a look at a few disadvantages that comes with investing in real estate:
- Long-term investment: Investing in real estate takes time. You might not see your ROI for a while, so you must be patient when it comes to real estate investing.
- Requires maintenance: If you’re renting out properties or decide to do a fix and flip, you’ll need to know how to do all these things or hire the right professionals to do them.
- Value can decline: The housing market is unpredictable. Just as the value can go up, it can also go down.
- Costs can be high: Real estate investing isn’t cheap. Whether you’re renovating or an appliance breaks in a tenant’s rental property, you’re in charge of those costs.
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 in more 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.
If you’re ready to buy your first investment property, the best thing you can do is get your financing in order before you start looking at properties. Apply for a mortgage today with Rocket Mortgage®.
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