The Short Answer
Starting a real estate portfolio and then scaling it can be daunting, but there are a few steps that you can take to create a higher chance of success. A successful real estate portfolio can be very rewarding when it comes to building wealth and achieving financial goals.
Real estate portfolios allow investors to diversify investment holdings and generate rental income, capital appreciation, and use as a hedge against inflation. It allows real estate investors to spread their risk across multiple properties and market segments.
Tips for starting your real estate portfolio: Define your goals, educate yourself, choose an investment strategy, create a financial plan, secure financing, analyze properties, learn about asset allocation and decide on property management.
Tips for scaling your real estate portfolio: Explore avenues to access more capital, build a strong team, look for more value, expand into new markets, streamline property management, and consider partnerships and syndications.
Phase 1: How To Start Your Real Estate Portfolio
The goal of a real estate portfolio is to use multiple real estate investments together as a collection, to achieve a financial goal. Starting a real estate portfolio can be a rewarding endeavor, but real estate investors will need to know the ins and outs of real estate investing in detail, before heading down this road.
Here are 8 steps to start your real estate portfolio:
Step 1: Define your goals
The first step to any successful business is to determine what your goals are. Your investment objectives, financial goals and personal goals are all relevant and will form the basis of the path forward. Setting clear goals will guide your investment decisions and help you create a plan for how to achieve them. This plan will be instrumental in guiding your real estate portfolio forward.
Step 2: Educate yourself
Local housing market knowledge is a critical part of real estate investing. A knowledge of the general economic situation in the country, along with the nationwide real estate market trends are a must. Local housing market knowledge is the key to making more informed property purchase decisions. This will also inform your investment strategy, whether that be rental property that earns rental income, fix and flip or buy and hold properties.
Step 3: Choose an investment strategy
Once you understand the real estate market, you can get to work deciding on the type of real estate investment strategy that you’d like to use. You can ask yourself if you’d like to invest in residential properties, commercial properties, or a mix of both. You should also consider whether you’d like to focus on rental property where you can earn an income or look for fix-and-flip opportunities. These decisions will shape the rest of your journey towards building a portfolio.
Step 4: Create a financial plan
The next step is to create a financial plan, which factors in considerations like down payments, closing costs, ongoing expenses, cash flow, possible rental income and potential vacancy periods for rental properties. The financial plan should include an assessment of your finances, and which funds can be allocated to each real estate investment.
During this process you can establish your appetite for risk and decide how much you’re willing to spend on purchasing properties. This means creating a budget, sticking to it, and making decisions on what kind of risks you’re willing to take to get your real estate portfolio going.
Step 5: Secure financing
Before you begin finding properties to purchase for your portfolio, you should secure financing. Explore the financing options that are available first and understand how each option works. There are a variety of options to choose from, based on your goals and real estate investing strategy.
Understand the terms, interest rates, and repayment structures associated with each option. It will soon become clear which financing solution will be the right fit for your investing needs. For example, hard money loans can be a great solution for fix and flip properties, with short loan terms and balloon repayments.
Step 6: Analyze properties
Once you’ve explored your financing options and found a solution, it’s time to look at properties. Your first step is to conduct thorough market research to identify locations and properties that align with your goals. Once you’ve done this, you can analyze and perform due diligence on each property. The key is to choose properties that will help you achieve your financial goals and that fit into your real estate investing strategy.
For example, let’s say your aim is to have a diverse portfolio that includes fix and flip and rental properties to generate rental income. You may want to look for rental properties with solid, long-term tenants initially, so that you can get those up and running before starting any fix and flip projects.
Step 7: Learn about asset allocation
A key part of the real estate portfolio journey is learning about asset allocation. The idea is to select the right combination of real estate investments to reach your goals. Your risk tolerance and real estate investing goals will be the driving forces behind the allocation of assets.
For example, real estate investors with a lower risk tolerance may pass up good deals that are risky, to wait for deals that may not offer such high returns but are less risky. With the goal of achieving their investment goals without risking too much, even if it takes longer.
Step 8: Decide on property management
Lastly, you’ll need to decide on how your properties will be managed. You can either manage the properties yourself or hire a property manager. Property management involves tasks like tenant screening, rent collection, maintenance, and handling legal matters.
If you’re planning on growing your portfolio to a larger scale, you will probably need a property manager to help manage the rental properties. Rental properties can be very time consuming to manage yourself and the more properties you have, the less likely it is that you’ll be able to manage them all.
Phase 2: How To Scale Your Real Estate Portfolio
Once you’ve set up your real estate portfolio, the next step is to begin growing it. To do this, you’ll need to expand your holdings and increase the number and value of real estate assets in your portfolio. This can be a challenge, but the following steps should help you navigate the complexities of scaling your real estate portfolio and be prepared for what’s to come.
Step 1: Access more capital
The first step to building your real estate portfolio is gaining access to more capital. Consider the financing options available and pick the one/s that will allow you to leverage the existing capital you may have, and any other financing solutions to grow your buying power. There are a variety of creative financing solutions, such as crowdfunding, that should be considered.
Step 2: Build a strong team
A solid team is the key to successfully scaling your real estate portfolio. Your team may include real estate agents, property managers, contractors, attorneys, accountants, and lenders. They will all need to work in sync, to help you build your portfolio, streamline the process and ensure that your properties are managed effectively.
Without a strong team, scaling your real estate portfolio would be very difficult, if not impossible in some cases. It’s important to surround yourself with knowledgeable and reliable experts, who can give you professional advice to achieve your scaling goals.
Step 3: Look for more value
In your current portfolio, and when you begin purchasing more properties, you should look for more property value and how you can improve your cash flow. For existing properties, this means looking at the cash flow and figuring out to make sure it’s positive and going further into the positive range.
For existing real estate assets, this may involve improvement, renovation, or repositioning to increase the property value and sending them further into the cash flow positive zone. For new properties, this involves looking for opportunities with greater value, to maximize your returns and ensure that they are cash flow positive.
Step 4: Expand into new markets
Consider expanding your portfolio into new geographic markets. Research markets with strong growth potential, favorable economic conditions, and attractive investment opportunities. Diversifying your portfolio across different markets can mitigate risk and enhance your growth prospects.
Step 5: Streamline property management
Make sure that your property manager or management company has a good handle on all your properties. Scaling your real estate portfolio requires a streamlined and effective property management process. You can use property management software and tools to automate processes and create smoother operations as your portfolio expands.
Step 6: Consider partnerships and syndications
Expanding your real estate portfolio may require collaborating with partners or joining a real estate syndication. Both allow real estate investors to partner with other people in order to grow their portfolio.
Partnerships allow real estate investors to pool their resources and gain access to larger deals and more resources. Along with this comes a shared risk and joint expertise that can be used to make decisions. Syndication involves raising capital from multiple investors to fund larger real estate projects.
Common Mistakes That Real Estate Investors Make When Buying Multiple Properties
Some common mistakes that are made by most real estate investors who are attempting to expand their real estate portfolio for the first time are:
Ignoring due diligence
Failing to conduct thorough due diligence can lead to costly mistakes. Investors should thoroughly research and analyze properties by looking at financial records, market conditions, potential risks, and growth prospects. Skipping or rushing through due diligence can result in overpaying for properties, investing in undesirable locations, or underestimating costs (both renovation and maintenance).
Lack of diversification
Focusing on a single property type, location, or market segment can be detrimental to a real estate portfolio. The portfolio is then at risk if there are any fluctuations in the real estate market in this area, or within the demand for these property types. A lack of diversification is limiting for investors as they won’t get exposed to other, potentially more profitable markets and property types.
Poor financial planning
From overleveraging to insufficient cash reserves to inadequate budgeting, poor financial planning is detrimental to any real estate portfolio. Scaling will be almost impossible without accurate financial planning and budgeting, which includes the right cash flow.
It’s a common mistake for investors to overleverage themselves once they have built up some equity in their real estate investments and try to purchase too many new properties when scaling. It’s important not to overleverage, and to accurately project cash flow, expenses, and potential vacancies.
Failure to adapt to changing market conditions
Keeping up to date with changes in the market is crucial, and along with this come adjustments to your investment plan. Many investors make the mistake of not keeping up to date with changes in the local real estate market, and/or not adapting their real estate investing strategy to these changes.
The real estate market is ever-changing, and investors need to adapt and adjust their strategy to keep up with these changes. Investors should stay informed about local market conditions, economic indicators, and emerging opportunities to avoid missing out on good deals. These changes can also impact rental properties significantly.
The Importance of Learning From Successful Investors
Success Story – Donald Bren
Donald Bren is one of the most successful real estate investors in the US. He began investing in real estate in 1958, with a $10,000 loan and he now owns almost 20% of the properties in Orange County. He owns about 500 office buildings, 125 apartment complexes, hotels, golf courses, and marinas. He also has a 97% stake in the MetLife Building in Manhattan.
Diversifying into various types of real estate including rental property, along with many years of hard work and changing with the times, have resulted in Donald Bren’s immense success as a real estate investor.
Success Story 2 – Stephen Ross
Stephen Ross is a self-made real estate investor billionaire who began his journey as a tax attorney sourcing good returns for investors through federally subsidized affordable housing in 1972. Now, he is one of the largest landlords in New York, for high end rental property, and the primary developer of Hudson Yards. His diversified portfolio includes residential, office, and retail real estate assets.
His advice for developers is to put the city’s needs first and focus on diversifying your assets.
For a real estate investor look to scale a real estate portfolio, there are a few considerations to be aware of. These include careful planning, diligent execution, and a long-term perspective. It’s important to maintain a focus on your investment objectives, assess risk, and make informed decisions as you expand your portfolio. It’s also important to adapt your strategy as market conditions change and to seek professional advice when needed.