8 Ways to Grow Your Real Estate Investment Portfolio
8 Ways to Grow Your Real Estate Investment Portfolio
Real estate investments are one of the safest and most effective ways to build wealth. The real estate market may go up or down, but people will always need homes. Perhaps you’re just now getting your feet wet in real estate investment, or maybe you’ve already begun developing your portfolio. Either way, acquiring real estate is key to earning passive income and becoming your own boss.
There is no “one-size-fits-all” approach to investing in real estate. Variables include access to capital, the shape of the local economy, and intensity of competition. While remaining open to adaptation for your local market, here are eight tips to starting or growing your real estate investment portfolio:
1. Buy your first property.
It’s never too late to take the first (and most important) step in building your real estate investment portfolio. Don’t rush when choosing your first property. Don’t take too much time either — your first property purchase will be a learning experience no matter how good your decision. Remember, your intention is to flip the house, not move in.
For your first purchase, consider acquiring a property where potential improvements are easy to spot. Start with less expensive wholesale properties to become more knowledgeable about how real estate investment works. Once you’ve had your first successful experience, move on to larger deals.
2. Leverage your equity.
Now that you’ve acquired your first property, speed up growth by leveraging the equity of your portfolio.
For example, let’s say you snagged a property for $150,000 and, after making improvements, the appraisal value comes back at $250,000. You now have $100,000 in equity. You can access this equity by selling the property and reinvesting the cash profit, or you can borrow money against the equity.
Be aware that borrowing power is typically capped at 80% of property value. Be careful not to take on too much debt! You’ll need to maintain a positive cash flow to repay your equity loans.
3. Use tools to automate the research process.
If you want your real estate investment portfolio to grow quickly, find ways to quickly scan any market. There are undervalued homes everywhere that can be potential gold mines. However, it takes someone with their finger on the pulse of a local community to find them.
Tools like Mashvisor’s Property Finder and Point2 can alert you to potential investment properties. Investors can easily find nearby sellers who may be willing to negotiate a good price with great terms.
4. Find off-market properties.
“Off-market” is a real estate term referring to properties that are for sale but not advertised on the Multiple Listing Service (MLS) or other public resources. Brokers will occasionally try to create interest in a property through word of mouth or by listing it privately on their network.
These homes can sometimes be undervalued with extremely motivated sellers. Investors often find off-market properties by networking directly with real estate agents or attending real estate auctions.
5. Cold call motivated sellers.
Many real estate agents have stopped cold calling entirely because it can be time-consuming. Their loss could easily become your gain.
Cold calling helps you cut through middlemen and interact directly with potential sellers. It’s important to have a solid call scriptprior to cold calling, as first impressions are critical. But if you’re prepared with a confident introduction, you might be able to find a diamond in the rough.
6. Invest in rental properties.
There are several ways to make money with a real estate portfolio. Buying, upgrading, and flipping homes relies on the time-tested truth that property values increase over time and with improvements. But what about a rental property?
Monthly rental income can provide an additional passive income stream that you can reinvest into your real estate purchases. Passive monthly income also boosts your cash flow, enabling you to make improvements on properties in preparation for selling them later on.
7. Hire a property management team so you can keep closing new deals.
As your real estate investment portfolio grows, so will the amount of time it takes to manage your properties. You may have managed your first property by yourself, but any ability to scale your business will be limited by hours in the day. At some point, it might be helpful to outsource some of your management labor.
Many real estate investors hire a team of property managers, attorneys, and/or accountants. These teams typically handle daily operations, which frees the investor up to conduct research, network, and close additional deals. Be sure to study up on the differences between in-house management staff and a commercial team before you make your outsourcing decisions.
8. Don’t hesitate to cut your losses.
Sometimes, the single most important skill for growing your real estate investment portfolio is knowing when to walk away.
If you acquired an investment that isn’t profitable or takes up too much of your time, it’s probably not worth keeping. Don’t hold onto investments to save face. Accept a disappointing outcome and spend your energy on opportunities that have a better chance of success.
Measuring the Success of Your Portfolio
When assessing the value of your real estate portfolio, it’s important to consider each property individually. Doing so will help you uncover hidden areas for improvement. These are the necessary upgrades that might have slipped through the cracks had you looked at your business in the aggregate. Here are three metrics that can guide you:
1. Net Cash Flow
This is your income minus expenses. Remember to include all expenses when considering your net cash flow, including maintenance, utilities, and payroll. Are all your properties producing a positive cash flow? If not, do you have a plan for any properties currently producing a negative cash flow?
2. Cash-on-Cash Return
Now that you’ve got a grip on net cash flow, you can calculate your cash-on-cash return. Simply divide your net cash flow over your initial investment. This figure is helpful as it shows how an investment is performing over time. How does it compare to other properties in the local market? Are there improvements you can make to increase the value? Would it be a good idea to drop specific properties? Your cash-on-cash figure can help you decide.
Real estate appreciation refers to the value increase of a property over time. Compare the appreciation rate of your local market to the value of properties in your portfolio. This will help you make a decision on the long-term benefit of holding on to an individual property. If your property’s historical appreciation rate is greater than the local average, you’re on the right track.
It’s Worth Another Look
If you’ve held back on investing in real estate or had a bad experience years ago, take another look at the opportunities available today. Advances in technology have removed many previous barriers to entering this market, greatly reduced research time chief among them. Investing still requires property management, but nowadays most of the legwork can be done at your desk as opposed to traipsing all over town.
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California Buyers Still Can’t Afford Homes
The issue for California residential real estate remains the same. Poor affordability means that despite latent demand, buyers can’t afford the prices of homes in the Golden State. For that reason, many have left to find much cheaper homes in other states. Unemployment will likely be on the rise along with lower business profitability (tech sector continues to lay off workers) which means fewer buyers are likely for 3 to 6 months.
The stronger consumer optimism is running against sticky inflation and a likelihood the FED can’t lower interest rates. But will that discourage buyers in California? Demand is always intense in CA. No other place offers what California has, and buyers today do seem to put lifestyle at the top of their list.
The luxury housing market, like most other real estate sectors, is adjusting to a slowdown. Affordability and home size are every bit as much on wealthy buyers’ minds as other consumers. “The reality is we are coming out of one of the best real estate markets in history,” Gary Gold, a luxury property specialist with Coldwell Banker Realty in Beverly Hills, Calif., notes in the latest Coldwell Banker Global Luxury Trends Report. “But that level of demand and price appreciation wasn’t sustainable.”
Nearly 90% of respondents to the Coldwell Banker survey say they believe the real estate market will be better than or the same as 2022 for property investment. The following emerging trends were noted in the report.