You’ve got the landlord bug. You have one property, bringing in a steady income, and you’re ready to bring in some more real estate to build out your portfolio — but you’re not sure how.
In fact, you’ve even found yourself wondering, “What is a property portfolio anyway?”
What is a Property Portfolio?
So, what is a property portfolio, exactly? The definition of property portfolio is — technically, any collection of investment real estate is classified as a property portfolio, meaning at least two or more rent-to-own properties, homes you lease out, or places you use for short-term rentals (on sites like Airbnb or VRBO, for example).
Though one investment property can certainly bring in regular, consistent income, it likely won’t be enough to both cover your costs of the home, as well as provide financial freedom. However, multiple properties, especially diversified ones, can offer a healthy cash flow and potentially even allow for early retirement or other major financial benefits.
By the end of this read, you will be aware of the following:
- The more properties you own, the faster and larger the gains on your equity, and the more potential for profit. Use the “snowball” method: Save up the earnings from one property to use as the down payment on the next.
- Do your market research, and buy properties in places with growing populations, growing jobs and a low vacancy rate.
- Make sure you have a diversified property portfolio. This spreads out the risk should any one property fail to earn income.
- Take advantage of tax benefits. You may be able to write off property tax, mortgage interest and other expenses.
Starting a Property Portfolio
If you’re thinking of expanding your investments, you’ll first want to hone in on your property portfolio strategy. Ideally, it should be one that involves a diverse number of properties across different markets and locations.
The benefits of having a diversified property investment portfolio are many.
1. More equity – The more properties you own, the more equity you stand to gain as you pay off your loans and the homes grow in value. In the end, that gives you the freedom to borrow against the equity (via a refinance or cash-out loan) or sell the properties and take the profits. You can reinvest that in more money-making properties or put it toward retirement or any expenses you might have.
2. More profits (especially over time) – In most cities, rents are rising, meaning you’ll likely make more on each property every year you own it. Throw in that your mortgages will be paid down significantly (or maybe in full) in a few years, and that means serious profits in the long run.
3. Multiple sources of income – When you only have one property, its performance weighs heavily on your finances and cash flow. If it’s vacant for even a few months, that means serious losses and pressure on your household. With multiple properties, however, you enjoy income from several sources, protecting you in the event one is vacant or a tenant doesn’t pay up.
Diversifying your property portfolio essentially keeps you from having “all your eggs in one basket,” as the old adage goes. It protects you, opens the door to better cash flow and more profits, and gives you more opportunity for selling or cashing out down the line.
Deciding Where and What to Buy
To hone in on which areas and markets you should buy properties in, you’ll want to consider things like:
1. Population growth – Is the area expanding or shrinking? Your safest bets are places where the population is trending upward, indicating a larger demand for housing (including rental properties) is in the cards. You can look to U.S. Census data for this information.
2. The economy – Are jobs growing in the area? Are more companies and corporations putting down roots in the region? Anything that indicates more people could move to the area for employment means more reliable profits in the long-term.
3. Low vacancy rates – Make sure rentals are an in-demand and popular option in the area you’re buying in, and check listing sites to see how many open rentals are currently on the market. If rental vacancies are particularly high, you might want to steer clear. You don’t want to invest hundreds of thousands of dollars in a home that just sits vacant.
Be sure to consider individual elements of the homes you buy, too. Are they structurally sound? Are they up to date on building and electrical code? Do they have all the amenities renters in the area demand?
Finally, consider the incoming and outgoing costs of the properties. What will your mortgage, HOA dues, taxes and insurance cost on the home? What rent could you feasibly ask for in the area? How much do you stand to gain month over month and year over year? Make sure there’s a solid profit margin, or it may not be worth the effort — especially if you have 10 other properties to manage simultaneously.
Other Tips for Building a Successful Property Investment Portfolio
Don’t be afraid to ask for help. Get a mortgage lender’s assistance (or try for seller financing), if you can’t buy a home in all cash. Can’t find a tenant quickly? Enlist a local real estate agent’s help for a small fee. The fee will likely pale in comparison to months of lost rent, should the property stay vacant too long.
You should also:
A) Monitor your expenses and profits. Sell a property and cut your losses if it’s bringing down your overall portfolio.
B) Reap the tax benefits. Leverage any tax benefits you might qualify for, including those that let you write off your property tax, mortgage interest and other expenses.
C) Embrace the snowball method. Use profits from your first property to put the down payment on your second one, and so on and so forth. This keeps you from putting too much of your own money in the game, while also allowing you to grow and expand your portfolio over time.
Once your portfolio has expanded, you may want to invest in a property management company to take over the day-to-day repairs and other needs of your tenants. This is especially important if your properties are situated across different locales and markets.
Expanding Your Property Portfolio?
If you’re considering expanding your property portfolio strategy to include more real estate, consider seller-financing as part of the deal. Finding properties that offer seller-financing as an option to purchase will allow you to circumvent the tedious bank and lender processes and purchase properties faster and without stringent credit and down payment requirements. Of course seller-financing can be used to quickly sell properties as well, especially in a down market scenario.
Holding owner-financed real estate notes from the sale of a property could provide consistent income without all of the hassles of owning bricks as a landlord. Loan notes could easily be sold on the secondary market if you create the mortgage note correctly.