How to Build a Real Estate Portfolio

By Peter A. Elwell, CFA | April 8, 2024

City Buildings

As a real estate investor, you likely have a number of financial objectives and retirement aspirations. When expanding or diversifying your investments to grow your wealth, it’s important to be intentional with your property portfolio. A real estate investment portfolio is a collection of physical assets that you acquire and manage to achieve your desired results. Even if you’ve invested in real estate before or know someone who has, you might not be fully familiar with the concept of a portfolio.

Building a successful real estate portfolio takes time and planning. This guide covers how to build a property portfolio using specific strategies and key factors to consider to make the most of your investment.

Steps for Creating a Real Estate Portfolio

Investing in residential or commercial properties can help you build your portfolio and offer the potential to generate passive income. Here are some general steps on how to build a rental property portfolio and realize your goals.

1. Create a Real Estate Investment Strategy

Start by determining your investment goals and how you plan to achieve them. Gaining a long-term appreciation for your properties to help you reach specific financial objectives can be part of your goal. Create a list of clear objectives that align with your lifestyle.

Next, decide how to finance your investment properties. While you have various options to consider, most investors use funds from another investment or through a private money lender. To help you stick to your financial goals, factor in improvement costs and monthly operating expenses on your properties.

Finally, plan how you will reach your goals using your investment properties. What will you use your properties for, and how will you make a profit? Researching different strategies can help you design a path to your goals. One of these strategies is to retain tenants:

  • Tenant screening: A thorough screening process can help you find reliable tenants with good rental histories.
  • Competitive rates: Offer competitive rental rates to attract and retain tenants.
  • Offer longer lease terms: Longer lease terms can attract stable tenants, reducing your vacancy periods to ensure you have consistent rental income.

2. Research Your Local Market

Understanding the local market where you plan to buy can give you an edge when it comes to finding the right investment property. Before you purchase a rental property that seems to suit your needs and fits your budget, it’s important to get to know the area before deciding.

Learning details about the surrounding environment, the demographics, the economy, and the job market can help you identify various opportunities and possible shortcomings, which can make or break an investment decision. Keeping tabs on the market can help you get a better idea of the property’s true potential.

Understanding the local market where you plan to buy can give you an edge when it comes to finding the right investment property.

3. Buy Your Investment Property

You can better decide which property to buy with your real estate investment strategy and market knowledge. If it’s your first time acquiring an investment property, know that the first property can set the tone for your success as a real estate investor. The more successful your first endeavor is, the greater the chance you’ll have access to more fruitful opportunities in the future.

Some investors like to start small with a residential property like a duplex or single-family home that may be easier to manage. You’ll want to consider the location and associated fees on the property, such as:

  • Insurance
  • HOA dues
  • Property taxes
  • Management fees
  • Mortgage payments

Once you find the property you want to invest in, the purchasing process may involve these steps:

  • Secure financing: Secure your financing or mortgage pre-approval. This will give you an idea of your budget for the investment.
  • Due diligence: Conduct thorough inspections and property evaluations to assess its condition, legal status, and rental income feasibility.
  • Negotiation and offer: Make an offer based on the property assessment. Sign the purchase agreement or contract when your offer is accepted.
  • Closing: Finally, complete your purchase’s financial and legal aspects to finalize the property transfer.

4. Establish a Team to Oversee Your Portfolio

After purchasing your properties, you may want to work with professionals to help your investments succeed and mitigate any challenges that could affect cash flow. For instance, if you buy a small apartment building but can’t do the daily management responsibilities of a landlord, you should hire a property manager to find tenants and keep them happy.

Hiring a property manager and other real estate professionals can also help ensure your property stays in good condition since they oversee repairs and management issues.

5. Diversify Your Portfolio

Once you become more comfortable with the process of investing and feel secure in your investment property, start branching out. Diversifying your portfolio can help you allay risk. Investing in multiple properties in various locations can help you mitigate risk by having fewer opportunities for vacancies due to local economic fluctuations.

If you have several types of real estate investments, they can cover you by providing cash flow even if your other investments are underperforming. To diversify, invest in various locations and asset classes.

The BRRRR Method vs. Conventional Method

The BRRRR Method

The BRRRR is a real estate investment approach to optimize your property portfolio and potentially maximize returns:

  • Buy: The BRRRR method focuses on investors purchasing distressed properties that need to be improved or “flipped.” For example, properties that are in foreclosure or need some work may be priced lower than newly built or well-maintained properties.
  • Rehab: Next, the investors renovate the structure and aesthetic of the property to add value and prepare it for tenants.
  • Rent: Determine an appropriate rental price that could cover the mortgage and find reliable tenants. Investors can be more involved as a landlord or hire a property manager.
  • Refinance: Using a cash-out refinance, investors can use the property’s new value as security and convert the equity into cash. This cash can be used for purchasing another property.
  • Repeat: Start the process all over again by using the money made on the last property to fund the next investment property and renovations.

The primary difference between this method and the traditional property investment strategy is specifically targeting “fixer-upper” or distressed properties with the goal of renovating and refinancing them to purchase another property in the future.

Benefits and Considerations of Building a Real Estate Investment Portfolio

Creating a real estate investment portfolio takes dedication and strategy that can produce multiple benefits. However, it’s always best to be properly informed about an investment’s potential benefits and risks. Here are the top advantages and disadvantages to keep in mind as you explore the real estate market:

  • Tax benefits: Building your real estate portfolio can help you access various tax incentives, such as write-offs, pass-through deductions, tax deferrals on capital gains, and depreciation deductions.
  • Passive income: One of the top reasons individuals invest in real estate is to generate cash flow from investment properties. Depending on your property and expenses, you can offset the expenses of your property while earning a profit. If you have a property manager, you can often reap this benefit without having to do the hands-on work and upkeep yourself.
  • Mitigate inflation risk: Though no investment is completely protected against market risk, investing in real estate can help you hedge against inflation. Unlike other assets, like stocks, real estate properties react proportionately to inflation. This means as the price of goods and services increases, so do property values and rents.
  • Build equity: When you invest in properties and improve them for rental and business purposes, you can boost their value and build equity. You can also build equity as you pay down the loan that you took out to purchase the property, creating wealth in the property over time.
  • Property value appreciation: Properties tend to increase in value the longer you own them, which is why investing in real estate can provide long-term benefits. Real estate owners may generally see an increase in rental rates as the property’s value increases over time.

While there are numerous benefits to enjoy in building a real estate investment portfolio, it is important to be aware of the risks involved. Some of the common challenges include:

  • Maintenance: Buying properties means you also need to keep them maintained, pay for renovations, and stay on top of problems like leaks or damage. This can be a timely endeavor if you choose to take on the task without the help of a property manager.
  • Long-term investment: If you pursue real estate investing, know that success doesn’t happen overnight. Investing in and seeing profit from real estate properties takes time. Though you may have a steady cash flow down the line, you might not see ROI for a while.
  • Potentially high costs: Compared to other income-producing strategies, investing in real estate can be expensive. While there are many ways you can leverage funds to purchase property, such as taking out loans, be sure to do your due diligence to determine whether the property you’re purchasing can be profitable. You will also need to cover the costs of damage and repairs.
  • Tenant risk: Dealing with tenants who do not pay rent on time or at all can put a huge dent in your cash flow. In some cases, tenants may even damage your property or leave it unsuitable for the next tenants. Be sure to choose tenants that have a good history to protect your investment.

Dealing with tenants who do no pay rent on time or at al can put a huge dent in your cash flow.

Mistakes to Avoid When Investing in Real Estate

You can take steps to potentially reduce your risk when investing in real estate. Here are some costly mistakes to avoid in your endeavors.

  • Not considering operating expenses: While an initial price on a property may seem like a great deal, be sure to consider the operating costs. This includes insurance, property taxes, HOA fees, miscellaneous repairs, utilities, and tenant screening fees.
  • Failing to recognize when to work with professionals: Some investors prefer to be more active in their investments as it can save money when you do the maintenance yourself. However, it’s impossible to keep up several properties as one person. This can lead to a build-up of issues that lower the properties’ value and, therefore, your income.
  • Ignoring due diligence: Without conducting thorough research on locations, property tax rates, civic amenities, average rental income, land value, and nearby facilities, you could be deceived about the profitability of a property.

How a 1031 Exchange Can Help You Develop a Real Estate Property Portfolio

A 1031 exchange is a common real estate strategy investors can use to defer capital gains taxes on their properties. This approach enables you to diversify your portfolio by selling and acquiring new properties without paying taxes on your sale proceeds. In a 1031 exchange, investors must identify a like-kind replacement property or properties within 45 days of selling their previous property and must close on the property or properties within 180 days.

Additionally, all sale proceeds must be put into an escrow account through a qualified intermediary (QI) who oversees the exchange for the investor. The QI acts as a third party and helps the investor complete the transaction correctly to ensure they receive the tax benefits of deferring capital gains tax.

Capital gains tax can be a large portion of your profits when you sell a property, depending on its value. Using a 1031 exchange, you can reinvest your proceeds into another investment property of equal or greater value and keep more money in your investments.

You can continue trading one investment property for another as long as you follow all the rules. There is no limit to how many times you can do a 1031 exchange. You can use this strategy repeatedly to defer taxes and diversify into new properties until you decide to sell them for cash.

How a Non-Traded REIT Can Help You Develop a Real Estate Property Portfolio

A non-traded real estate investment trust (REIT) is one of the easiest ways to start investing in real estate. REITs are an alternative way to diversify and develop your real estate property portfolio. Rather than owning properties directly, you own shares in the REIT. Non-traded REITs pool investor funds, allowing the group to acquire various real estate assets that may be challenging to get independently.

You will also benefit from the professional expertise of the REITs management team. REIT managers handle the administrative tasks of property acquisition, management, and disposition. REITs also offer consistent income distribution from these rental income properties or the sale of these properties.

It is important to note that non-traded REITs are illiquid and do not trade on an exchange. This characteristic poses some challenges for investors when it comes to selling shares easily. Non-traded REITs also have more complex structures than their counterparts. They often come with higher fees and expenses, which calls for careful consideration from investors. These REITs come with stringent holding requirements that span a few years before you can consider selling.

View 1031 Exchange Deals With 1031 Crowdfunding

Building a solid real estate investment portfolio is vital to your success. Whether you want to generate more passive income or learn about alternative investment strategies, diversifying into real estate can help you meet your personal goals. At 1031 Crowdfunding, we help our clients complete the 1031 exchange process by offering an extensive online marketplace of vetted properties.

1031 Crowdfunding has handled more than $2.4 billion in combined real estate transactions. Our professional and experienced team can guide you through the transaction and help you make informed investment decisions. We’re here to answer your questions and create customized investment blends to enhance your portfolio and help you achieve your goals. Register for an investor account today to view our investment properties eligible for a 1031 exchange.

Register For An Investor Account

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities are offered through Capulent, LLC Member FINRA, SIPC.

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