What’s the Best Way to Scale Your Portfolio
Renters Warehouse Blog
What’s the Best Way to Scale Your Portfolio
While by and large, most landlords own just one rental property, investing in multiple properties can be a great way to grow your wealth.
With multiple income properties, you’ll be able to experience all of the benefits of rental property –like appreciation, cash flow, and equity growth, but on a much larger scale; allowing you to increase your returns and grow your wealth at a much, much faster rate.
Consider the following scenario. You save up your cash, and buy one rental property. That’s great, and an excellent investment, but how long will it take you to reach retirement with just one property? How long will it take you to replace the income that you’re earning at your day job? Paying all-cash for rental properties means that you’ll be growing your wealth far more slowly than you would if you were to take advantage of leverage.
Leverage is the real estate investor’s secret weapon, and in many ways, is one thing that sets apart real estate from other traditional investments. With real estate, you can use other people’s money –namely, the bank’s or another lender’s, to grow your wealth far more quickly than you’d be able to if you were just using your own capital. Leverage allows you to make a down payment (usually 20% for investment properties) to gain access to a property that’s worth approximately five times as much as what you put in. With a relatively small initial investment, you can start benefiting from cash flow –and appreciation, at a much higher percentage than you would if you’d paid 100% cash for a deal. You can then start working towards purchasing a second property, and then a third, and a fourth; and will be able to achieve your goals far more quickly.
Try asking the bank for a loan for stocks and shares! It’s not going to happen.
If you’d like to start expanding your property portfolio but aren’t sure where to begin, here’s a look at what you should know about owning multiple properties, as well as some tips for taking the next steps toward growth.
The Benefits of Owning Multiple Income Properties
First, let’s look at some of the benefits of owning multiple rental properties.
- Increased Cash Flow
First up, the most obvious benefit –the chance to generate higher returns. Cash flow from one rental can help when it comes to paying the bills every month, but the cash flow from three, four –or more properties, can help to make a real difference; making it possible for you to find financial freedom, or accrue a decent amount of savings for retirement.
- More Appreciation
A key benefit of owning income properties is the benefit of long-term appreciation as the property, ideally, increases in value. And with multiple properties, you’ll be able to gain appreciation from the combined value of your assets. While different markets experience different rates of appreciation, nationally, housing prices have increased 18.4 percent between 1980 and 2016. Long-term, real estate has proven its value as an excellent hedge against inflation.
- The Ability to Spread Your Risk
Another advantage of owning multiple income properties is that it’s a great way to diversify and spread your risk –this is especially true if you’re investing in multiple housing markets. If there’s a localized downturn, or if a property experiences a higher than expected vacancy rate, you’ll be able to weather it far more easily. Think of it this way; if you have one property and it’s sitting empty, you’ll have no income is coming in. But if you have 20 properties and one’s empty, you’ll only experience a 5% loss of income.
Tips for Scaling Your Portfolio
Now, let’s take a look at a few tips for growing your portfolio.
- Get Yourself Financially Ready
Are you a strong borrower? Getting yourself financially ready will help you to be in a good position to securing financing for a second property, which will help you to qualify for the best loan terms possible. So take a look at your credit score –740 and higher is considered very good. You’ll also want to check your debt-to-income ratio; something the bank will look at before they approve you for a loan. Of course, you don’t have to secure a conventional bank loan; there are a number of different ways that you can finance investment properties. Be sure to do your research to see what your options are before you commit.
- Set Long-Term Goals
Many investors start out by saying, “I’d like to own multiple rentals.” But the problem with goals like this is that they’re far too vague. Getting specific with your goals can help you to increase your chances of success. Start by determining what you’d like to have in monthly cash flow and whether property appreciation is part of your strategy. Next, you’ll want to determine what type of returns you’d like to see each of your properties generate. While some investors are happy with 8%, others won’t even consider a deal unless it’s producing at least a 12% yield.
Some people find it helpful to connect each of their rentals with a life goal. So say you’d like to own one property to help pay for your child’s education. Or perhaps you’d like to have a property finance your boat, or three to pay for your living expenses during retirement. No matter what your goals are, working towards something specific can help to keep you on track and moving forward.
- Find a Good Market
When it comes to finding another investment property, one great place to start is by narrowing in on a promising location, then searching for a property that’s located in that area.
Try to locate emerging markets –and look for a place that’s expected to experience growth. Other factors to consider include population trends and job growth. New developments –such as an Amazon fulfillment center moving in, are especially good signs. You’ll also want to consider affordability and try to find an area with high absorption rates and low vacancy rates.
Tip: Take a look at the Renters Warehouse Research Center to view data on individual market conditions.
Once you’ve found a promising market, you’ll want to dial in on specific neighborhoods. What are local schools rated? What are other, similar homes in the area renting for? Try to remember that vacancy rates and turnover can take a bite out of profits, so try to identify an area with good potential.
After you’ve identified an area that you’d like to invest in, get in touch with local investor-friendly real estate agents to learn as much as you can about the place. Ask your Realtor questions about the local neighborhoods, prices, and rental demand. You should also inform them that you’re looking for properties that are priced below market value. If they’re an experienced, investor-friendly agent, they should be able to advise you of properties that fit your bill, and may even be able to help you find some properties that have been on the market for a while; meaning you may be able to negotiate a better deal. Of course, you’ll also want to ensure that you do your own research and conduct your own due diligence when it comes to buying a property. Always back up your research with numbers, and make sure you only invest in property that meets your investment criteria.
- Create a Plan for Management
While many landlords start out managing their own properties, once you add two or three –or more properties to your portfolio, outsourcing property management starts to make a lot of sense. This is especially true if you’re investing in areas that are outside of your own local area. Additionally, when it comes to investing in multiple properties, outsourcing enables you to grow your portfolio much larger than you’d be able to if you were overseeing each property on your own. Even if you plan to manage your own properties for a while, it’s still a good idea to budget in property management services when calculating your expenses. That way, should you choose to enlist help at some point in the future you’ll have options.
- Determine Turnkey or Fixer-Upper
Next, you’ll want to determine what type of rentals you’re going to buy. Are you looking for a value-add property? A value-add property is one that may be priced below market value but will require some repairs and upgrades before you rent it out. This is the approach that many investors take; however, you’ll want to exercise caution when taking this route. Often, repairs can end up costing more than estimated, so make sure you’re careful to factor in unexpected expenses when running your numbers. You’ll also want to ensure that you have the skills necessary to carry out the work needed, or know a good contractor who will be able to do the work at a reasonable price. If you’re just starting out, it may make more sense to go with a property that only needs minor repairs –nothing too extensive.
Another option that some investors are taking advantage of today is purchasing turnkey properties. Going turnkey allows you to buy a property that’s ready to go –complete with tenants. This means that it’ll be cash flowing right away, allowing you to benefit from immediate revenue. The other upside of going turnkey is that you’ll be able to tell, at a glance, exactly what a property’s renting for, and what type of returns it’s producing every month. You won’t have to guess, or base your projections on other, similar properties –enabling you to make more accurate investing decisions. See turnkey rental properties that are available right now on the Renters Warehouse investment marketplace.
- Run the Numbers
Finally, before you invest in another property, you’ll want to calculate your returns to see if they’re in line with your big-picture goals. Be sure to tally up your expenses, and weigh them up against your projected income.
- Utilities (If you’re paying for them)
- Maintenance and Repairs
- Vacancies (one month per year)
- Professional Services (attorney, accountant, property management)
Next, run the numbers to see how your property will perform as a rental.
- The 1% Rule
The 1% rule is a fast and simple way to quickly determine whether a property’s worth pursuing further. With this rule, take the initial cost of purchasing the property along with any repairs costs –and calculate 1%. The figure should be your estimated rent. If you’d be unable to rent the property for this price, then the property isn’t worth your time.
- The Cap Rate
The cap rate is the return that you’d generate if you paid for the property in cash. To calculate your cap rate, find your net income –your income after expenses, and divide it by the property’s cost –to find out what the resulting percentage is.
For example: 5,000/100,000 = .05 or 5%
Annual income / purchase price = Cap Rate
- Cash-on-Cash (CoC) Returns
Finally, CoC returns looks at the returns that you’d generate if you’re financing the property. If you’re paying all-cash, then this amount will be the same as the cap rate. If you’re financing, you should use the amount that you invested yourself, rather than the total purchase price of the property.
Annual Income / Money Invested = Cash-on-Cash Returns
When it comes to investing in multiple properties, the benefits are clear. And the good news is that it’s something that gets much easier each time.
By establishing investment criteria, finding a solution for financing, creating a plan for management, and having a way to vet potential properties –you’ll be able to ensure that the properties that you invest in will perform well as rentals, and will be well on your way toward finding financial freedom!
Are you ready to take the next step and buy your second –or third property? Be sure to take a look at our FREE guide: So, You Want to Grow Your Investment Portfolio? See how you can scale your portfolio, and start making your goal of financial freedom a reality.