Real estate portfolio: What is it and how do you build one?

A real estate portfolio can generate passive income and long-term wealth. However, it’s not something you build overnight. Before investing, it's important to learn more about real estate portfolios, including how to build one, their pros and cons, and other relevant details.

What is a real estate portfolio?

A real estate portfolio is a collection of real estate investment assets. A typical portfolio may include rental properties, flipped homes, and real estate investment trusts (REITs).

Real estate investors curate their portfolios to meet their financial objectives, whether that's maximizing cash flow, achieving long-term appreciation, or securing tax benefits.

Of course, geography and the types of assets in a market can have a significant impact on what you can add to your real estate portfolio.

There also is a difference between managing a portfolio and owning one. Portfolio managers take on more work for the potential of greater rewards, while passive investors opt for a hands-off approach by outsourcing day-to-day operations to a property manager.

Types of real estate portfolios

Here are the most common types of real estate portfolios:            

• Residential portfolios. These consist of single-family and multifamily properties.
• Commercial portfolios. Includes office buildings, retail outlets, and hotels.
• Industrial portfolios. Includes factories and warehouses.

How to build a real estate portfolio

Now that you know what a real estate portfolio consists of, you can start to build one.

Outline your objectives and goals

First, set investment goals.¹ For example, do you want to own a certain number of rental units within a year? Are you targeting a specific benchmark for return on your investment? Defining clear goals lets you curate a matching portfolio.

Remember to consider your risk tolerance. A high return target can be appealing, but it may also require you to take a greater risk and implement more effective risk management. Only take on a level of risk you are comfortable with.

Choose a starting point

Buying your first investment property can be intimidating, but there are low-barrier ways to break into the market.

For example, you can house hack your primary residence. This means renting out part of your home, whether it’s a spare bedroom, a basement apartment, or an accessory dwelling unit (ADU). You also can buy a home with more than one unit, live in one unit, and rent out the rest.

Alternatively, you could buy shares in a REIT for relatively little money. This provides you with exposure to the real estate market without requiring hands-on work.

Whatever you do, start out small so you can learn the ropes before moving on to bigger and more complex property investments.

How to diversify a real estate portfolio

Diversification protects you by spreading your risk across multiple assets. For instance, you can diversify across housing markets, investment strategies, and property types.

Here are some common real estate asset classes to consider including in your portfolio:

• Single-family homes
• Multifamily units
• Vacation rentals
• Commercial properties

Real estate portfolio pros and cons

Owning a real estate portfolio has benefits and drawbacks. Carefully weigh both before choosing to build one.

Pros

• Builds wealth: Real estate values tend to go up over time, helping you build wealth.
• Generates income: When you rent out your properties, you can earn passive income.
• Provides tax incentives: Rental owners often can deduct property expenses, mortgage insurance, and depreciation from their taxable income.
• Long-term returns: Rental owners can expect consistent long-term returns on their investment.

Cons

• Subject to market volatility: Rental returns can fluctuate in response to the state of the housing market.
• Costs can be high: Some real estate investing strategies, such as house flipping, can involve high up-front costs.
• Difficult to diversify: Becoming versed in different asset classes, markets, and investment strategies can be challenging.

The bottom line: Start your real estate portfolio today

Building a real estate portfolio is a proven path to generating passive income and long-term wealth. Success requires careful planning and ongoing learning and development.

From understanding your local market and mortgage financing options to leveraging strategies such as diversification and the BRRRR method, you can minimize your risks and maximize your returns.

Ready to take the first step? Speak to a Home Loan Expert at Rocket Mortgage^® today to explore your financing options and find the right mortgage for your first property.