Many people want to create lasting wealth. However, not everyone understands the financial moves they need to make to get there. At RealWealth, we know the firsthand power of real estate investing and its ability to build wealth. If done right, it can help you attain the financial freedom you want so you can live life on your own terms. So, how do you build a real estate portfolio? To help you, we’ve rounded up tips and strategies for building a million-dollar real estate portfolio.
How to Build a Million-Dollar Real Estate Portfolio
1. Make a solid business plan
If you’re just starting to build a real estate portfolio, the first step is to create a comprehensive real estate business plan that covers strategies, goals, and financing.
You will also need a business plan to seek conventional or hard money financing.
2. Choose your primary real estate portfolio strategy
It is recommended that you have six months’ worth of mortgage payments saved up when buying for investment purposes. If you opt for conventional financing, lenders will require this. Additionally, having an emergency fund protects you from vacancies, especially when starting out as a landlord.
Regardless of your chosen strategy, you must be able to evaluate markets and potential properties. What makes a good deal? These are some of the factors you’ll want to consider:
- Population growth
- Job growth
- Occupancy rate
- Rent growth
- Location
- Cash flow
- Appreciation rate
- Expenses
- Property taxes
- Number of available homes
You must also decide whether to hire a property manager or handle property management yourself. There are pros and cons to each approach. Property managers add to your costs, but they also alleviate the stresses of property management.
3. Use leverage to build equity
Remember we said buying property requires a significant cash outlay? The good thing about real estate is that you can always use leverage. Rather than paying the entire purchase price yourself, borrow funds from a lender or people in your network to finance the deal.
Let’s say you put 20% down instead of 100% to buy a house using a conventional mortgage. For one, you can build equity easily if you have a cash-flowing property. You’ll start building equity if your rental income keeps paying down your mortgage (plus the interest). At the same time, you earn profit from the difference after paying your mortgage.
Leveraged investments are evaluated based on cash-on-cash return, which represents your return on investment after accounting for all expenses and loan payments.
4. Diversify your portfolio for both cash flow and appreciation
Historically, corrections and recessions happen in cycles, so if we are not in one now, we will be in one in the future. And after a correction, there will be a recovery. Since markets are hard to predict, diversification is necessary to maintain a healthy portfolio and reduce volatility.
Many people understand diversification in terms of reducing risk by having different asset classes, e.g., stocks, bonds, real estate, cryptocurrency, and gold. However, you can diversify your real estate portfolio by spreading risk across different property types and investment strategies. For example, you could use the buy and hold for a multifamily property and use the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy for a single-family property. This allows you to profit from both cash flow and appreciation as you grow your real estate portfolio.
5. Organize your team
Eventually, when building your real estate portfolio, the workload gets so big that you won’t be able to manage it yourself. At this point, it makes no sense to try to do everything on your own. Delegate to a team of trustworthy people.
Aside from hiring a property management company, you also need a virtual assistant, an accountant, and a lawyer. If you do not have a real estate license, it would be a smart idea to add a savvy, investor-friendly real estate agent to your team.
The property management company takes care of the day-to-day running of your investments. You can include some of the costs of property management in your rent so that you don’t hurt your cash flow.
Your virtual assistant takes care of small tasks like cold pitching and website management. Your accountant manages your numbers, like taxes and finances, and a lawyer handles contracts. Real estate agents can assist in finding properties and listing them on the MLS.
6. Know your numbers
These metrics are critical to evaluating a property:
- Price to Income Ratio: Ratio of median home prices to median household income for a given area.
- Price to Rent Ratio: Median home prices divided by median rent gives you the price to rent ratio for a given area.
- Gross Rental Yield: In order to determine an individual property’s gross rental yield, divide the annual rent collected by the total property cost and multiply that number by 100. When summing up the property cost, make sure to include closing and rehab costs.
- Capitalization Rate: Capitalization rate or net rental yield is more valuable than the gross rental yield because it includes operating expenses on the property.
- Generally, Cap rate = net operating income/current fair market value of the property.
- Your net operating income is the gross rental income (total rent revenue * 12) minus operating expenses. For most investment properties, a good CAP rate would be between 4%-10%.
- Cash Flow: In order to generate positive cash flow, make sure the rent covers the mortgage, taxes, and insurance. The amount of cash flow a property generates is the difference between its income and expenses.
How To Determine Your Goals and Strategies When Building Your Real Estate Portfolio
Investment goals should be specific, measurable, achievable, realistic, and time-bound (SMART). You may want to build a portfolio of five multifamily properties through syndication by XYZ date. It checks all the boxes.
Goals can be big or small, depending on your previous experience and net worth, but strategies are not as flexible. You can use any of these strategies to build your real estate portfolio:
1. Buy And Hold
This is probably the preferred strategy when building a real estate portfolio for cash flow. In this approach, a real estate investor purchases a rental property, rents it to a tenant, and collects rental income. Apart from the possibility of receiving consistent positive cash flow, the investor can also benefit from appreciation in the right market.
So, using the buy and hold strategy, an investor might start out with one property, manage it for some time, then sell or use cash out refinancing to invest in other properties.
2. Short-term and mid-term rentals
With websites like VRBO and Airbnb, short-term rentals are popular.
Both tenants and landlords appreciate the flexibility that short-term and mid-term rentals offer. If you are a landlord, you may decide to use your property for a month as a vacation getaway, while you make money from flexible leases for the rest of the year. Renters like it because they are not locked into one-year contracts. Typically, renting a property for 30 days to three to six months.
In a way, the short-term and mid-term real estate portfolio strategy is similar to buy and hold in that you can invest your profits into purchasing another property for short-term renting.
3. Fix and flip strategy
If there’s a booming real estate market in your city, then you may be able to get some good deals if you check out houses that need repairs. You’ll usually have to spend money, time and effort to restore these properties to good condition.
Within a few months, you can sell it off and make a profit. Invest your profits in a second run-down house, then fix and flip it for profit. This is called house flipping. It’s one of the fastest ways to make money in real estate.
4. Real estate investment trusts (REITs)
Since REITs are true passive income generators, investors usually include them in their portfolios. REITs offer you the chance to receive dividends in the same way as investing in the stock market. You don’t have to manage properties, buy or sell.
They offer a convenient way to diversify your portfolio if you can’t devote time, money and effort into building a real estate portfolio on your own. And they can be very profitable too. However, you’ll need to do your due diligence when shopping for REITs. The only problem is that dividends you receive from REITs will be taxed at a higher rate.
5. Real estate syndication
A real estate syndication is a type of partnership among investors. Usually, it involves combining capital to buy multifamily apartment buildings and having an experienced property manager handle their operations.
As with REITs, you reap the benefits of owning multifamily properties (cash flow, tax breaks, appreciation) without having to deal with daily property management stresses. If you want to know how to scale a real estate portfolio fast, then you should learn more about real estate syndication. The properties you can buy through syndication are usually larger than what you can afford on your own. Also, you can expand your portfolio to include land, mobile home parks, and self-storage units.
6. Wholesaling
Of all real estate investing strategies, wholesaling requires the least capital to start. Wholesalers find distressed or outdated properties and get them under contract. Then, they assign that contract to a buyer, who fixes it up and sells it.
Essentially, it is a legal form of reselling a contract for a house so that a flipper can rehab it and add value to the community. To succeed at wholesaling, you’ll need to have above-average sales and negotiation skills.
How to Build a Real Estate Portfolio: Your Financing Options
- Cash Financing: Investors with access to significant capital, either personally or through their network, should take advantage of this.
- Hard Money Lenders: You can use a short-term loan to purchase properties when you have low credit.
- Private Money Lenders: Can any of your connections offer you a loan? Then use this option. Ensure you work out the terms of the loan – interest rate and payback period.
- Self-directed IRA Accounts: Self-directed IRA investors may decide to tap into their account for access to capital. A self-directed IRA also offers tax savings
- Seller Financing: When the seller owns the property outright, you can avoid the bank altogether through seller financing. The seller finances the sale, while the buyer maintains the agreed-upon payment schedule. Seller financing allows for a faster transaction. However, both buyer and seller might need to hire attorneys to draw up contracts and the promissory note.
- Traditional Financing: If you qualify for a conventional loan, you should consider going this route. Even though interest rates on traditional real estate investing loans are usually higher, you might be able to use the equity in your current home to secure a favorable loan.
What is the Fastest Way to Build Wealth in Real Estate?
The BRRRR method is a great way to build a rental portfolio without running out of cash, but only when executed correctly. When done right, this strategy lets you pull out all the money you put into a property when you refinance. Learn more about the BRRRR strategy.
However, you’ll need to keep your risk small at the start. Your portfolio grows as you gain knowledge and experience.
Want to hear how others built wealth with real estate? Listen to these success stories.
Scaling Your Real Estate Portfolio with RealWealth
Scaling a real estate portfolio is not easy, regardless of how fast or slow you do it. Creating a plan will help you invest more strategically. Learn as much as you can about real estate investing and be prepared to put in the time and energy it takes to build a real estate portfolio. It’s a good practice to reassess your goals every year or two and make changes if needed.
If you need help help with building a real estate portfolio, or if you want to add more investment properties to an existing portfolio, we can help. Join RealWealth and get access to exclusive inventory in top markets and our list of preferred industry pros, and connect with an experienced investment counselor who can coach you on your journey.
