Thinking of Scaling Your Portfolio? Here’s What You Should Know

If you’re looking to grow your wealth, real estate investing—and particularly rental properties, can be a great opportunity. 

In many markets, demand for rentals is sky-high and rents have been surging as well. When done correctly, investing in real estate provides some excellent opportunities for growth as well as a level of long-term protection from inflation. 

However, it’s important to ensure that you have a clear plan for success before you start out. Owning one or two rentals is one thing, but if you’d like to set yourself up for long-term growth and success, then you’ll want to ensure that you’re putting your capital to work for you and using leverage to grow more quickly than you’d be able to with cash alone. In this article, we’ll take a look at what you can do to get your real estate investment empire off the ground. Here are some things to consider before you take that next step in investing.

8 Tips to Help You Grow Your Real Estate Portfolio

1. Ensure You are Financially Ready

Leverage is essential if you are looking to scale quicker. Ensure you are in a good position to secure financing. First, you can use borrowed money from banks or other financial institutions. Just keep in mind that the type of loan that you’re able to secure, and the interest rate that you’ll qualify for, will depend on a few factors. For one thing, you’ll need to ensure that you have a good credit score. You also need to consider your debt-to-income ratio as well. Then there’s the down payment. For most fixed-rate mortgages, the lender will ask that you make at least a 15%-25% down payment for an investment property.

Want to know more about the loan options available when purchasing an investment property? Read this article.

2. Establish Your Team

Business success is highly dependent on the right relationships. When it comes to investing in rental property, it’s a good idea to work to assemble a team who can help. Try to form connections with real estate agents, mortgage brokers, and contractors as well. If managing the properties is also a challenge for you, you may want to ensure that a property manager is on your list of contacts as well. Be sure to find a good accountant and an attorney who you can run questions by as well.

Once you put together a team and establish relationships with them, your project will go much smoother and they will help you on your path to success. Ensure that everyone you involve is trustworthy and clearly understands your goals. They should also be ready and willing to help you when you need it.

3. Set Clear Goals and Objectives

Clear goals and objectives help to form the backbone of any successful project. When it comes to investing in rental property, your investment goals and investment strategy are tremendously important, especially once you start investing in multiple properties.

Start by determining the amount of monthly cash flow you would like to have from these properties. You can also consider how much property appreciation you’d ideally like to see as well. But don’t stop there. You’ll also want to determine the yield that you would like your property to generate. This is your annual rental income divided by the purchase price of the property. For some investors, returns of 8% are great, but to others who are pursuing a more aggressive investment strategy, returns below 12% just aren’t worth pursuing. Your goals are specific to your financial situation and your intentions for your properties.

You can also tie each investment to a specific life goal. For instance, you can decide to have a property whose main aim is to help you pay for your children’s education. You could have another property to supplement your income after retirement. Make sure you’re clear on your goals and objectives and then work backward from there, outlining the steps you’ll need to take to get there, what type of property you’ll need to invest in, and how many you’ll need. Your goals will also help to guide your decision when it comes to choosing a market to invest in as well. Some markets have properties that tend to produce better cash flow while others tend to offer higher rates of appreciation. Some markets offer opportunities for both. Make sure you pay attention to the local market conditions when assessing a potential investment property.

5. Generate an Investment Strategy

A real estate investor should also have an investment strategy. Your strategy will depend on your goals and whether you are targeting short-term profits or a steady income for many years.

 Among the strategies to consider are the following:

• Buy and Hold - Rental Properties: You can opt to buy a property and rent it out to generate rental income. In addition to cash flow, rental properties (in many markets) also experience equity growth thanks to appreciation and as you pay the mortgage down. They also offer some great opportunities for tax breaks as well. You can buy rental properties yourself by purchasing a single-family home and renting it out, or go with a turnkey rental: a property that’s already occupied by tenants and ready to go. With this approach you’ll begin to enjoy cash flow right away.
  
  
• Short-Term Rentals: AirBnB and Vrbo have become very common today, especially for investors whose properties are located in popular locations that see a lot of visitors each year. Coastal locations, bigger cities, and places that see seasonal demand, such as ski towns, can be good places to operate short-term rentals.
  
  
• House Flipping: Flipping is another strategy for real estate investors. As a flipper, you identify properties that are in need of repairs, purchase them, and then hire contractors to do repairs. Once that is complete, you then sell the house at a profit. Of course, there’s another element that will help to determine whether you’ll find success with house flipping: timing the market. Buying while housing prices are going up and selling before they go down is crucial.
  
  

When assessing different investment opportunities, make sure you choose the one that best aligns with your objectives; one that will help you to reach your big-picture goals.

4. Brush Up What Numbers You Should Run

As a property investor, having first-hand information on the performance of a potential property is very useful. There are a few calculations that you’ll want to run in order to determine whether or not a property investment is worth pursuing. Through careful calculations and projections and thorough research you will be able to get a detailed picture of the risks and opportunities of your property in question.

  In real estate, some of the numbers you’ll want to run includes the following:

• Capitalization Rate: Capitalization rate (cap rate) is a crucial metric that helps you to calculate the rate of return your real estate will generate in a year. You can calculate this by dividing the net operating income of your property by its current value. Any cap rate between 5-10% is generally considered good.
• Cash Flow: It’s the amount of money you have as an investor after deducting all your expenses from the income you get each month. Positive cash flow is something that most investors are after.
• Cash-On-Cash Return: Cash-on-cash returns is another metric that real estate investors often use to assess a potential property’s performance. With this metric, you’ll want to divide your net cash flow by the amount of equity that you personally invested in the property.
• After Repair Value (ARV): The ARV is the estimated market value of a property after it has undergone repairs and renovations. This is an important metric if you’re looking to buy a fixer-upper and need to determine whether the after repairs value will be high enough to ensure that you’ll be making a profit after factoring in the purchase price and cost of repairs and renovations.

 Want to see if an investment is worth it? See: How to Calculate ROI on Your Unit.

6. Pay Attention to Local Market Conditions

The local market that you invest in is crucial, and is one of the factors that will make or break the success of an investment. Before you think about expanding your portfolio, it’s a good idea to assess the local market conditions on a case-by-base basis, and find a place that will help you to reach your goals. For instance, if you’re looking for a cash-flowing property, you may want to consider the suburbs. Or, take a look at places in the Midwest, often properties in these markets tend to produce decent cash flow, although in some locations, they also tend to appreciate at a slower rate than they would in cities or major metropolises. This varies considerably depending on the location, but keep your goals in mind and find a market that offers what you’re looking for. Likewise, if you’re looking for a good place to buy a rental, you’ll want to consider whether the market is oversaturated. Falling rental rates, and properties that stay on the market for a long time are good indicators of oversupply. Besides supply and demand, consider investing in a property in an emerging market, one that’s up-and-coming and offers good access to things that renters value. Proximity to good schools and job opportunities is important. Emerging markets could mean future growth so pay attention to emerging population trends and job growth. Be sure to check out the Renters Warehouse Market Research Center for a look at granular data on housing markets across the U.S.  

Thinking of investing in a different state? Here are some practical tips on how to go about Investing Outside Your Home City.

7. Diversify Your Investment Portfolio

Diversifying your investment is key to scaling your portfolio and attaining stability. Diversifying helps to minimize losses by spreading the risk. If the market experiences a downward trend, you can reduce your losses and still be able to earn income. You can diversify by investing in different markets or in different types of properties. That way, if something were to happen on a local level, the rest of your properties would be unaffected.

8. Take Things Slow

Don’t feel that you have to buy multiple properties in rapid succession to quickly build your portfolio. Aside from being impossible financially for many of us, it may not even be the wisest investment move. Instead, it’s a good idea to start small with just one property and work your way up to multiple properties. Starting small lets you learn the ropes and become familiar with investing along the way.

What Type of Rental Investments Are Best to Add to My Portfolio?

The property investment market is vast. There are many options available for investors, no matter where you sit financially. Whether you are looking to purchase your second, third, or fiftieth rental property, there is always something available to meet your needs.

Here are some rental property investment options you could consider adding to your portfolio:

• Single-Family Rental Homes

A single-family home is your standard rental house. Such homes often have a front yard, backyard, and garage for maximum privacy. They are often the easiest to own and a popular rental investment. They’re usually the easiest to manage out of all the rental properties as well, and also tend to have a high occupancy rate.

With SFR, vacancies can impact your cash flow and slow your portfolio growth, so try to invest in an area that’s experiencing strong demand for rentals. Likewise, keep the rent competitive to help generate interest and keep vacancy rates low. 

• Small Multi-Family Buildings

Small multi-family homes include duplexes, triplexes, and fourplexes. As an investor in a multi-family building, you can buy a small multi-family and rent all of the units out or live in one of them and rent out the rest. If you have a large single-family property, you may be able to subdivide it into a small multi-family home. This way, you can essentially double or triple your revenue without having to acquire a separate property. Just make sure you check zoning laws in your area first. You’ll also want to check with a contractor or architect to see how the house could be divided.

• Multi-Family Property

These buildings accommodate multiple renters. They include condos and townhouses. When scaling your portfolio, a multi-family property investment can promise more stable cash flow. If one unit is vacant, you’ll still have the others generating income. However, you need to be prepared for the added responsibilities of being a landlord and dealing with higher operational and maintenance costs. Likewise, the cost of a multi-family property is usually far higher than a SFR.

• Vacation Rentals

Vacation rentals usually target vacationers seeking short-term rentals. They’re usually found in popular tourist destinations. Vacation rentals are characterized by high turnover rates and seasonal earnings. Additionally, they have substantial operational costs, and the competition is usually high. However, they often bring in cash flow during the peak season since they are usually more expensive to rent.

• Commercial Properties 

Commercial properties are rented to businesses and often will have extended lease agreements. However, while this type of investment can produce decent returns, it can also be risky. Single-use single-tenant buildings come with the most risk. Commercial properties are mainly located in prime locations and are often characterized by steep upfront costs and high operational costs. 

• Real Estate Investment Trusts (REITs)

REITs offer you an opportunity to invest in rental-like entities. The law requires that these entities give 90% of their returns to the investors. The advantage of this is that REITs offer you a steady flow of income with zero involvement and minimal upfront costs.

 Consequently, these are among the most passive rental property investments. Additionally, with REITs, you have an assurance of liquidity since you can sell quickly in case of an emergency. However, you cannot use REITs to leverage acquiring new property as you’d be able to when you own your own property. You also don’t have any control over the performance of the REIT that you’ve invested in.

Looking to know more about Passive Real Estate Investing and its benefits? Read more here.

For any investor, investing in multiple properties is a great way to expand your portfolio and earnings, allowing you to grow your wealth more quickly for the future. 

 If you take advantage of leverage, clearly understand real estate calculations that you should run, and pay attention to the market conditions, then you’ll be off to a great start. Just remember to outline clear investment goals from the start and ensure that you invest in the right property in the right location that’ll generate the returns that you’re looking for.  

Are you ready to grow your investment portfolio? Download your FREE guide: So, You Want to Grow Your Investment Portfolio? Packed full of helpful tips and strategies that you can use to scale your investments, it’s the next best step that can take on your way to financial freedom.