A real estate portfolio is the collection of your tangible assets or a document that comprehensively details all of your real investment assets, both past and present. Think of it as a resume for your real estate investment history. The portfolio can consist of Real Estate Investment Trusts, flipped homes, and rental properties. A portfolio isn’t a legal term, just a concept, so you can reference it as you see fit.
Start Out Small
As is true for most ventures, it’s essential to start small. There’s a lot to learn when building a real estate portfolio, so you want to give yourself the space and time to understand the various nuances about increasing value, managing tenants, etc. You don’t want to get in over your head before you’ve even started.
Seek Exponential Growth, Not Linear
First of all, what’s the difference between exponential and linear growth? Linear growth is a slow and steady growth of the value of your assets in a linear fashion, whereas exponential growth refers to more significant gains over shorter periods. So, if you were to graph linear growth, it would be a straight line that goes up slightly while exponential would be reflected in an upward curve showing the growth rate increases as time goes on.
Learn Your Local Market
One way to start achieving exponential growth is to know your local market. You are more likely to know the ins and outs of your community versus an unfamiliar area. This allows you to use your knowledge about upcoming things that will affect real estate values, like a new highway or where an undesirable building like a prison will be built. Also, you most likely know which neighborhoods are more appealing and where the good schools are located. All of this helps find and procure valuable real property. If you purchase real property in your area, you can manage your investments hands-on.
Take Detailed Notes
Your portfolio should have notes covering everything you did about each investment, including what worked and what didn’t. Think of writing this as a research paper a scientist would write detailing every step along the way, including ideas you have that can be improved in the future. Discuss everything that went wrong and right to allow you to reference this going forward to improve your process.
Know your Financing Options
It can be challenging to finance multiple properties simultaneously, so make sure you know what options exist for financing your portfolio. Here are a few potential opportunities that exist for financing:
- Hard money loans. These are short-term loans and will use the property itself as collateral or other assets you may have. If you are struggling to get traditional financing, this can be a more viable option. A fix and flip loan would be one example of a hard money loan. This is a loan that you get to purchase, repair, and sell a property in a short amount of time. You then pay the loan back plus interest at the time of sale.
- Conventional bank loan. This type of loan is simply a traditional mortgage loan that most are familiar with and conform to Fannie Mae or Freddie Mac guidelines.
Determine what might work best for you and use whichever option is best for you or combine them if necessary.
Know the Numbers and Follow the 1% Rule
Numbers are the key to success in building your real estate portfolio. Every single expense that has anything to do with your investments must be meticulously tracked. It is here that you can see where improvements can be made and savings garnered. The 1% rule is also a key factor used to measure the property’s price versus the income it would generate. This rule simply takes 1% of the purchase price and ensures the rent you could reasonably charge is greater than or equal to this amount. Also, understand the financial implications of these factors:
- Economic occupancy. This factor is a percentage that reflects the potential earnings for your portfolio versus what you made. For example, if you have a collection of properties in a given month that could generate $50,000 in rental revenue, but you only actually make $30,000, your economic occupancy would be 60%.
- Return on Investment. As with any investment, the ROI is a critical factor. The difference here is that with real property investments, you can either gain cash flow or aim to appreciate the value of the assets. Knowing that you can figure the return on investment and make sure it is within your parameters.
- Improvement costs. The critical aspect of improvement costs is making sure they either add value or improve their usefulness for the tenants. Also, any improvements need to be figured into the 1% rule.
- Monthly operating expenses. Determine what costs are involved with maintaining and operating the property and compare it to the revenue generated. This should also figure into the 1% rule.
BRRRR Method Versus Conventional Path
Most people understand the conventional path, get a traditional mortgage, buy the property outright, and charge rent. However, another method is the BRRRR strategy, which stands for Buy, Rehab, Rent, Refinance, Repeat. The BRRRR method involves fixing up distressed property, renting it out, and then taking out a cash-out refinance to fund future rental property investments. This process is a great way to increase your portfolio constantly.
Use your Portfolio as a Resume
Your portfolio can be a great way to show lenders that you are a worthy candidate for financing. Think of it as a resume for a job interview. Your portfolio details every aspect of each of your real estate dealings and can show your creditworthiness.
Generating a real estate portfolio detailing your current real estate assets or detailed documentation of all current and past real estate dealings is an excellent way to show potential lenders your worthiness and learn from past mistakes and successes.
If you’re interested in learning more about building a real estate portfolio, or any of the financing options available, reach out to the knowledgeable team at Titan Funding. We are available by phone at 855-910-6436 or via secure online messaging. A team member would be happy to assist you with any questions you may have.